The common stock of Facebook, the social-networking Web site, was sold to the public for the first time five days ago at $38 per share. Today the stock ended the trading day at $32 per share, down 16 percent from the initial public offering price. Anyone who bought $5,000 worth of Facebook at the offering price now has only about $4,200 worth, and not even a week has elapsed. That is very unpleasant for our hypothetical investor, whom we shall call John Shmoe.
I am going to try to head off the inevitable protest from the ragamuffins of Occupy Wall Street, who will point to John Shmoe’s paper loss as another example of capitalistic greed, of how the Big Boys, the One Percenters, take advantage of the Little Folks, the 99 percenters. They sold poor Mr. Shmoe a stock at an inflated price (knowing that the price was too high, naturally), tucked his money in their accounts at the evil Bank of America, and are now sitting back drinking champagne and laughing at poor Shmoe’s gullibility.
First of all, John Shmoe is more likely to be a One Percenter than a 99 Percenter. The 99 Percenters generally do not speculate in the stock market, buying iffy stocks, such as Facebook, that are extremely difficult to evaluate. When they own stocks at all, it is apt to be indirectly, through the pension funds and 401(k) funds where they work -- if they even work.
Secondly, nobody forced John Shmoe, or anyone else, to buy Facebook stock. The underwriters set a price of $38 per share on the assumption that the price was at least realistic, based on Facebook’s financial prospects. John Shmoe, and anyone else interested in the stock, was free to study Facebook’s finances and decide for himself whether it was worth $38 per share.
With a stock like Facebook, which depends primarily on something as volatile and uncertain as Internet advertising, evaluation can be almost impossible for even the keenest financial minds. That in itself is a good reason not to buy the stock, unless you have surplus money that you are willing to subject to high risk in the hope of large rewards.
It appears that $38 may have been too high an offering price, based on what has happened in the past few days. But not necessarily. Stocks, as Pierpont Morgan said, “will fluctuate.” The stock market in general has been a bit soft in recent weeks, mainly because of the European financial crisis, so perhaps this was not the best time for Facebook to go public. It is entirely possible that next year at this time, Facebook will be selling for $500 per share, and it is also possible that it will be selling at close to zero.
Close to zero, in case anyone cares, is about where it belongs, in my humble opinion as a longtime market-watcher.
The Facebook episode is an illustration, if we need yet another one, of the fact that stocks are not foolproof investments. They can go way up, they can go way down, they can remain stagnant. There are no guarantees. We are not talking about an FDIC-insured certificate of deposit here. Stocks are about as speculative as you can get, and anyone who buys them, whether Facebook or some other stock, should come to terms with that fact before he risks his money.
So good luck, John Shmoe. Our hearts and prayers go out to you, as hypocritical politicians like to say. But if you wind up losing money, don’t bitch about Wall Street. It’s your own damn fault.