Facebook gold rush: Fanfare vs realities

It's an old on Wall Street: If you can get your hands on a hot new stock,you probably don’t want it.

Written by New York Times | New York | Published: May 21, 2012 1:13 am

It’s an old on Wall Street: If you can get your hands on a hot new stock,you probably don’t want it. This bit of Street wisdom came to mind last week,as Facebook went public amid so much fanfare.

The stock eked out a 23-cent gain on its Day 1,to $38.23. This suggests that many professional money managers viewed all the hype as just that. Whatever the long-term prospects of this company — an issue over which reasonable people reasonably disagree — the idea that small-time investors might get rich fast struck the pros as absurd.

It is true that initial public offerings have increasingly become a game for early investors and their Wall Street enablers. Since the 1980s,average first-day gains on new stock issues have risen steadily. According to one 2006 study,the average first-day return on IPO’s in the 1980s was 7 per cent. By the mid-1990s,it was 15 per cent. In the 1999-2000 dot-com boom,it was 65 per cent.

We all know how that last one turned out.

Why did Facebook get a relatively slow start out of the trading gate? One possibility is that the investment bankers who priced the stock considered the history of private trading in the shares before the offering. Facebook was unusual in this way,Laszlo Birinyi of Birinyi Associates pointed out last week. “There was trading before the IPO,so many investors have some feel,some idea of pricing,” he noted. Most offerings are priced based upon what the company and its bankers guess the stock will fetch. Indications are that Facebook was bought primarily by individual investors,not institutions. Indeed,institutions that had invested early were big sellers in the IPO. To many market veterans,this showed that the smart money was getting out while the getting was good.

With investors still believing the advice of Peter Lynch,the former Fidelity fund manager who told individuals to buy stocks of companies they knew as consumers,it is easy to see why Facebook’s offering resonated with the public. But now comes the hard part: operating as a company that returns its investors’ favours with actual earnings.

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