What Bad Math and Impatience Can Do to You

There’s stupid, and then there’s Harvard stupid.

Give credit to Motley Fool funds lead advisor Bill Mann for coining the term. In 2008, he used it to characterize the sort of smart-guy stupid that had overrun Wall Street, creating a system so bankrupt it raised questions about the future of free market capitalism.

But Harvard stupid doesn’t begin and end there. Sometimes, it manifests itself as audacity. Call it the I’m-too-special-to-be-stupid brand of stupidity. For this, I give you exhibits A and B: Tyler and Cameron Winklevoss.

Yesterday, a federal appeals court ruled the twins could no longer seek to toss out a settlement reached in 2008. At the time, Facebook paid $20 million in cash and $45 million in equity to settle charges that Mark Zuckerberg stole the idea for the social network from the Winklevosses when all three were classmates at Harvard.

The twins have since sought to undo the settlement -- now worth more than $160 million, Fox News reports -- claiming they were duped when the company didn’t volunteer a richer valuation for the stock.

Translation: “Um, we were told there would be no math for this quiz. Please pay us what we were supposed to be paid.”

I’ll grant that valuation isn’t an easy art to master, especially when it comes to pricing early stage companies that trade for outrageous multiples to negligible revenues. But the Winklevosses majored in economics. They went on to attend business school at Oxford. They’re supposed to, you know, have some expertise valuing companies that aren’t easy to value.

With that sort of background, it takes a special sort of audacity to claim you were too stupid to know you were being offered a bad deal. Specifically: it takes Harvard stupid audacity.

There’s an investing lesson in all this, Fool. If you have neither the time nor the patience to understand early-stage growth businesses such as Facebook, stay away. Don’t buy. Don’t short. Don’t even get within spitting distance.

The same holds true for high-priced tech stocks such as salesforce.com (NYSE: CRM  ) and Acme Packet (Nasdaq: APKT  ) . Both stocks have seen more than 5% of their current shares outstanding sold short, often to the detriment of those shorting. Value investor Whitney Tilson knows the feeling. He paid the price for shorting Netflix (Nasdaq: NFLX  ) .

In the end, what this means is that the Winklevosses had no business accepting Facebook stock in the original settlement. They didn’t know what they were getting. If they did, there wouldn’t be a suit. The deal terms would have simply been better.

Do you agree? Disagree? Let us know what you think about the Facebook settlement, the rise of social media, and the art of valuing tech stocks using the comments box below.

Acme Packet and salesforce.com are Motley Fool Rule Breakers recommendations. Netflix is a Motley Fool Stock Advisor selection. Motley Fool Alpha LLC has purchased Netflix puts. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He didn’t own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy is willing to wait for its coffee. For a few minutes, anyway.


Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 12, 2011, at 3:36 PM, Gonzhouse wrote:

    Aren't you being a little hard on the Winklevoss'? I'm certain that if Facebook had fallen on its face they would have voluntarily offered to refund money back to Zuckerberg.

    It's incredible this suit got past the filing stage. They claimed "that Mark Zuckerberg stole the idea". They got (considerable) consideration; that's not theft, that's negotiation.

  • Report this Comment On April 12, 2011, at 3:57 PM, TMFMileHigh wrote:

    @Gonzhouse,

    >>They got (considerable) consideration; that's not theft, that's negotiation.

    Wait. Is this Bill Shatner writing? (Grins.)

    Maybe I'm being harsh but I think the case offers an important lesson for investors. There;s no such thing as a do over in public equities.

    If you buy in ignorance -- which, essentially, is what the Winklevosses did -- then you're likely to forfeit huge sums of money that a judge won't give back. Trust me, I'm speaking from experience. I've made plenty of stupid bets -- and I didn't go to Harvard.

    FWIW and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On April 12, 2011, at 10:47 PM, vidar712 wrote:

    $20,000,000 invested in VFINX, (1.6% yield) would generate $320,000 per year.

    That would be enough for me.

    Sounds like they are just being greedy. (Either that or they've blown all the money and now need more.)

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