On my weekly radio show, I’m always talking about how “slow and steady wins the race.” The Facebook IPO debacle is a perfect example of how buying the hottest stock is rarely your best bet. I had lots of clients and friends call before the IPO, asking if they should buy Facebook stock. I told them all “no.” Why? Because Facebook hasn’t been around long enough, nor has it proven itself as a consistent revenue generator, to warrant the high values. Simply put, it was overpriced. On the day Facebook went public, GM – Facebook’s largest advertiser at $10 million a year – pulled their advertising, but that wasn’t announced until the IPO had begun.
If you saw yesterday’s headlines, you know that Mark Zuckerberg, Goldman Sachs, Morgan Stanley, JP Morgan Chase and others are being sued for that IPO. Why? Because shortly before the IPO, revenue projections for Facebook were reduced, yet only a handful of investors were informed, the lawsuit claims.
So the everyday consumer like you and me who bought into Facebook paid too much for their shares and the price continues to fluctuate – below its initial offering price of $38 per share. As of Tuesday morning when the stock market opened, the price dropped to $30.98 per share, 18% below its offering price. At the time I wrote this post (May 24, 10:45 a.m. PST), the price per share was $32.42.
In tough economic times like these, businesses and consumers are looking for the home run. It’s like taking a little bit of money to Vegas for fun. You hope to make a killing while you’re there, making the risk of gambling your money away worth it. But it rarely is. In fact, it’s dangerous.
The Facebook news isn’t all bad though. There’s an important lesson to be learned from the Facebook IPO. Get quick rich schemes don’t work. You can’t count on buying into a company like Facebook to make your fortune. If you want to ensure that you don’t run out of money when you retire, you need a solid, personalized financial plan that depends on a mix of investments with dependable returns (6 to 8% on average).