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What's blue and white and red all over? Shares in Facebook (Nasdaq: FB ) , naturally. The social media site is trading at just $29.13 as of 1:45 p.m. EDT. That's nearly a 9% drop, and continues what thus far has been a disastrous IPO process. Once again, Facebook is bucking the larger trend in technology. The Nasdaq (INDEX: ^IXIC ) is up 0.45%. Big tech stocks are generally seeing gains as well. Tech stocks make up four of the top 10 Dow Jones performers as of this writing.
There's obviously a lot of negativity surrounding the company right now. Its first day was marred with trades not being filled, and shares spent most the day fighting against plunging deep into the red.
As more details emerge around Facebook's IPO, a picture develops of a process where institutional investors with the most money to throw around were cooling on its prospects just as retail investor demand hit its peak. I detailed Facebook's IPO process and how it was stacked against individual investors last Friday, and it has quickly become one of the most-shared articles in the Fool's history. Clearly, there are a lot of individual investors who have lost a lot of money, and not all of them knew what they were getting themselves into.
The unfortunate truth to Facebook is illuminated by my colleague Morgan Housel in an article today. As he puts it, "Investors love speculation, but hate losses."
The first step if you're a Facebook investor is figuring out whether you were buying Facebook because you believe it's a great business with huge potential to grow revenue at outsized rates for years to come. To answer that question, you probably need to understand the display market that Facebook functions in, and the opportunities it has to continue growing that stream. Second, you need to be aware of what opportunities Facebook could further take advantage of. That's not just its already-growing payments stream, but also how it could potentially increase the effectiveness of the ads it serves. Here are two articles taking opposite sides on Facebook
- "Why We're Buying Facebook": A view that Facebook will be able to continue expanding its share of the advertising market and be a long-term winner.
- "3 Reasons Facebook Isn't Google": Taking the angle that Facebook is overpriced and not a good investment.
In the end, if you don't have a good feel for Facebook and are purely speculating, the worst way to play the company is to hold on hoping for a bounce back. I can't say for sure how Facebook will move in the coming weeks, but I can say becoming emotionally invested in the shares and anchoring on getting back to even will provide losses more than it provides happy endings.
The truth to investing is that huge gains are created by returning 11% year in and year out. Sometimes, those gains come at the expense of wild swings between.
That 11% figure is the average return since 1980 of the S&P 500 (INDEX: ^GSPC ) (including reinvested dividends). Holding the index during that time would have increased your money by 30-fold. That huge increase also comes with a past decade of middling returns.
Unfortunately, the allure of "buy-and-hope-for-the-pop" will always be stronger than buying and holding a basket of excellent companies for the long term. If you're a burned Facebook investor, the loss is unfortunate, but don't let it put a chip on your shoulder about investing. The reality is buying stocks is still the best way to build long-term wealth. It just requires a long-term focus and avoiding emotional tie-ups that lead many to chase illusionary "can't-miss" deals or to sell at periods of panic, when the market often sees its strongest gains.
Those are tough lessons to learn -- and many never will -- but those who do will end up that much better off.
A better idea in the space
If you're still intrigued by the social media space but have been turned off by Facebook's IPO, check out the Fool's newest free report: "Forget Facebook: Here's the Real Tech IPO You Should Be Buying." To grab a copy, click here now.