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Facebook Frenzy Is About Separating Fools From Their Money: News Analysis

By Gil Weinreich, AdvisorOne

May 18, 2012 • Reprints

Investing is an inherently long-term endeavor, not a way to make a quick buck

As Friday’s Facebook frenzy approached, the clamor for shares of the IPO was so great that it guaranteed one outcome and almost guaranteed another: that Facebook’s founders would be even richer than they thought and that “investors” would wind up with mediocre results.

On Wednesday, Facebook expanded by 25% the number of shares it was offering the public, adding enormously to the wealth of Facebook founders who got in on the ground floor, but diluting the value of shares bought by retail investors. While ordinary folk were buying, Mark Zuckerberg, together with the other founders of the social networking site, were selling, adding many billions to their already sizable net worth. Facebook closed its first day of trading on Friday, up only 23 cents, at $38.23.

It is worthwhile at market-history making events like the Facebook IPO to pause and consider how easy it is even for financial professionals to fall into the trap that the investment industry lays for those with money to spare and perhaps a bit more greed.

The hype, excitement and hoopla swirling around Facebook is part of the plague of short-termism that dominates Wall Street, CNBC financial broadcasts and the overall excessive focus on immediate gratification and the quick buck. Facebook and social media more generally are a societal phenomenon, so the public smells money. But every market transaction has both a buyer and a seller, and the long run-up of hype has blinded people to the fact that it is the sellers who stand to make the big money out of this, or most any IPO.

Investing, in contrast to speculation, is all about the long term, and while that is hard to assess with any company, a business’s long-term prospects are nowhere more difficult to understand than in the case of a one that has no history as a public company.

True investing, as opposed to speculation, is long term because it inherently must be. That is because commercial enterprises are innately risky. In a few years, people may regard Facebook in the same way as they do AOL: an antiquated model that could not defend its early command of an emerging new field that was attracting a myriad of aggressive new entrants. In other words, an investor can lose everything in a stock, and most particularly a hot stock in a hot and therefore competitive market segment.

True investors would be wise to maintain a segment of their wealth in assets like land that cannot lose all its value; in a diversified pool of risky assets like stocks that offer a high potential for return; and in ready cash that can be used for emergencies (such as home repair) or opportunities (such as a business venture with long-term prospects). Facebook may or may not be a good long-term investment, but that will be easier to assess only after Wall Street has separated a large number of fools from their money.