On Thursday, we ran two polls here, one in the Yahoo! Canada newsroom, and one on the Finance front page, asking people where they thought Facebook's stock would close at the end of its IPO, on Friday. I said $58. My two colleagues with the deepest backgrounds in business journalism both said over $60. Well over. And like just about everybody else, we were well wrong.
Here are three reasons I didn't buy:
I had no inside information
Of course, not everyone blew it, as we now know. A lawsuit filed in New York yesterday, alleges that Facebook's lead underwriters — Morgan Stanley, JP Morgan, Goldman Sachs and Bank of America Corp — gave a heads up to some of their key clients that Facebook's Q2 profit and revenue forecasts were going to come in lower than expected. The underwriters got that first-hand from Facebook execs during their IPO road show.
The underwriters weren't legally allowed to publicize that information in advance, not in written form at least, but they can communicate it orally. Over the phone, for example. It's an antiquated yet very convenient loophole that traditionally benefits only the banks biggest clients.
In short, if you were a Facebook insider or a valued client of one of the underwriters, you would have known that there were dark-ish clouds about ready to dampen any big opening pops on the stock price. But if you weren't, you could have reasonably assumed Facebook would come out of the gate soaring like LinkedIn on its first day, opening at $45 and closing at $94.25, a 109% leap; or Groupon, which was initially priced at $20 and opened at $28.
If you were like me, or the editors on the Finance team here, who have followed many tech IPOs in the past, use Facebook regularly, have read tons about it, and even have friends who work there, then sadly, you would have known nothing. But at least you would have known you knew nothing and confined your gambling to the office pool.
I didn't have $10,000 (to lose)
Few people do. Likely many who rushed to buy on Friday don't. Elias Fiani likely didn't. According to the New York Times yesterday, the 53-year-old New York City transit worker bought 1,000 shares at $42 on midday Friday, only to see the price immediately slip in the afternoon and then plunge first thing Monday. Panicked, he sold at $33, taking a $9,000 loss.
Fiani's miscue was repeated across the markets Friday and early this week. It's those investors, the lunch-pail retailer kind, that can least afford four-digit haircuts. And it's many of those ones who are now suing. Fiani is quoted in New York Times calling the Facebook launch "another stock market rigging."
That may be harsh, but if Fiani means that not all investors are operating with same information at their disposal then he's very, very right. Which is why....
I don't mess around with individual equities
What Fiani and the other retail investors on Friday should have known is that when transit workers, colleagues and the guy next door is all rushing in to buy a sure thing, then it's guaranteed that the smart money is heading the other way. Always. Without exception.
They should also have known what financial planners and investment gurus have repeated over and over for years: Don't plow big dollars into a single equity unless you've got that money to lose. And definitely don't do it when the equity happens to the star of the most heavily hyped IPO in recorded history.
Whether the countless litigators all rushing in to sue ever recover their losses — very doubtful — is beside the point. The lesson here is that one that never changes: Mom and pop retail investors will never know more or be able to trade faster than the insiders. That doesn't mean they can't get lucky on a stock, but if they do, it's just that, luck.
Those who bought at $38 may well see big returns in the months ahead. I and many others now doubt it but I was wrong about the price on Friday and could easily be wrong going forward. Much can and likely will change in the markets. However, one thing never changes: If you can't be an insider, be very careful betting on individual equities. Better yet, be diversified. Maybe less gain in the short term, but way less pain as well.
Noel Hulsman is managing editor of Yahoo! Canada Finance.