Quick lessons from the Facebook IPO

It was hard to find a financial issue that got more attention recently than the Initial Public Offering (IPO) of Facebook (FB). Whether you bought any of the stock or not, there are many lessons to be learned from the events leading up to and since FB went public on May 18.

Chasing what’s hot can get you burned. It has never been a high probability way to make money, but losing money by doing so is almost a cliché. FB came to market with a market capitalization of $100 billion and will need to grow exponentially to justify such a lofty valuation. The people most likely to make money when a company goes public are the insiders who took on the substantial risk in funding the company before it became successful enough to go public.

Much of the financial news is really entertainment. With today’s 24/7 media, the press can go bonkers on just about any issue. Business and finance are not exciting subjects for most people, so when a cultural phenomenon such as Facebook meets big money, media frenzy is almost inevitable. Hype and urgency don’t make for good decisions, but they can make ripe ground for fraud, as we saw several scams aimed at getting the unsuspecting “in” on the IPO.

The IPO didn’t matter to real investors. Many people use the term “investors” to describe anyone who takes any position in securities, but a more precise definition describes behavior that bears no resemblance to the people trying to trade FB on opening day. Most dictionaries include terms like “commitment” and “long term” to define investing, but use terms like “short term,” “trading” and “risky” to describe speculating. Real investors are diversified, disciplined and patient, and smart ones would never make their financial success contingent on answering a question like “should I buy Facebook stock?” To real investors, the fate of any one company or its stock should be irrelevant.

American capitalism is beautiful, warts and all. As headlines appear regarding how the IPO was “botched” or “failed,” and the usual slew of lawsuits arises, it can be easy to forget that a kid with an idea about a new way to communicate started this enterprise in his dorm room. With some financial backing and a lot of hard work, that kid made many of his backers rich and has given many of his employees a chance to be financially secure. America’s financial system has flaws and our economy has its struggles, but it is still a place where people can start businesses, compete, and if people find value in what the business provides, improve their standard of living and provide jobs that help multitudes of people beyond the company.

Ron Tamayo, CFP, is a founder and partner with Moisand Fitzgerald Tamayo, LLC, a wealth management firm based in Maitland. He has been a financial planning practitioner for 25 years and currently serves on the Editorial Review Board of the Journal of Financial Planning. He can be reached at [email protected]