An Honest Chat With Facebook Investors

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Facebook (Nasdaq: FB  ) shares fell nearly 10% yesterday and are now down 33% from their highs on IPO day two weeks ago. Some are blaming the Morgan Stanley (NYSE: MS  ) bankers who took the company public for the plunge. Others say this is a classic case of hype and euphoria catching up with reality -- investors, in other words, got what they deserved.

Who's right?

The answer is complicated and subjective. To get a clearer view of what happened, I spoke with four investors who purchased Facebook stock when it went public. We'll call them Mark, Tyler, Cameron, and Sheryl (not their real names.)

"I first learned that Facebook was going public through a CNBC alert," Mark told me. "My first reaction was simply 'wow,' and I started to ponder over what this means."

"My second reaction was, 'Wow, some of my friends are going to get rich soon,'" he said. "And third, I Googled on how I can buy Facebook stock."

Sheryl's story was more disturbing: "I bought because my broker told me to," she put it simply.

Another investor, Tyler, was the most experienced of the bunch. "My reaction to it was, 'Well, it's going to be a good opportunity to invest in a company that's already popular and still has a lot of potential in the long run," he said.

That was months before the IPO. What kind of research and due diligence did you do in between? I asked.

Tyler said he read the company's prospectus, but just briefly. "I breezed through it quickly," he said. "I was buying this particular stock based more on my personal experience with their product and the belief that it will be around and growing for a long time. Every friend I have who has 'quit Facebook' has eventually reactivated their account, at least half of my logins to other sites and services are now done through Facebook Connect, and all my pictures both public and private are stored in Facebook. I think it's an incredibly sticky product for anyone around my age (28), and with time Facebook will only come up with better ways to monetize that."

Mark was more open to the hype. "I did not read Facebook's prospectus. But I was actively following all the Facebook coverage on CNBC throughout these 3.5 months," he told me.

What about Facebook's lofty valuation? "This is Facebook we are talking about, not Groupon or Pandora," Mark said when I asked. "This product has changed the way we interact, communicate, and share information. I bought ads on Facebook, Google, and Bing for my projects quite a few times in the past, and Facebook ads always performed the best for me."

"Valuation was high for sure," he conceded. "I was definitely a little concerned."

Tyler didn't seem to mind. "Yes I think their valuation is high right now, but I definitely see their potential to grow into it."

Another investor, Cameron, was brutally honest when I asked about valuation: "I figured it would pop on the first day like many other tech IPOs this year, but unfortunately that was not the case," he said. "My plan was to buy and sell after the first few days or so regardless of the valuation, hoping it would pop 10% to 15%." After that didn't happen, "I'm going to hold my position in it for the long run," he said. "I paid $41 per share."

Sheryl didn't seem to have an opinion. She acted on her broker's advice, she said.

Perhaps most importantly, I asked how the Facebook saga has changed these investors' attitudes toward investing.

To my surprise, most weren't phased.

"Not at all," said Cameron. "I don't feel cheated or misled," he added. "However, I will definitely avoid IPOs henceforth."

Tyler agreed. "Especially in the current market, with so much instability and wild market swings over the past year, nothing was really going to surprise me with the way the Facebook IPO was going to go."             

And through it all, Sheryl still trusts her broker.

I think there are a few takeaways from this ordeal.

  1. Don't overdose on Peter Lynch
    Legendary investor Peter Lynch preached to "invest in what you know." That's great advice, but it can be taken too far. Part of the allure of investing in Facebook is that it's a company that touches nearly all of us, often several times a day. We understand its power. But no company, regardless of potential, is worth overpaying for. Investing in the right company is only half of the successful-investing equation. The other is getting the right price.
  2. Take your time; do your research 
    People spend weeks planning a vacation, comparison shop when they buy refrigerators, test-drive cars, and stand in line racking their brains over what to order at McDonald's, but they often buy stocks on a whim with little thought or reason. That's dangerous. How ironic it is that investors are willing to take money that took them months, perhaps years, to earn, but won't find a couple hours to research how to invest it?
  3. Be fearful when others are greedy 
    It's the best investing advice you'll ever hear.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter, @TMFHousel. The Motley Fool owns shares of Facebook and Google. Motley Fool newsletter services have recommended buying shares of Google and McDonald's. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (4) | Recommend This Article (20)

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 May 31, 2012, at 1:45 AM, MikeMiloserdoff wrote:

    "Tyler didn't seem to mind. "Yes I think their valuation is high right now, but I definitely see their potential to grow into it."

    When you have to see an investment go down steeply quickly, then wait for it to (hopefully) rise again to the point that you paid for it, then see it rise more in order to turn a profit from the point that you bought initially into it at, you have to wonder about the opportunity cost of putting that same amount of money into a "working" investment from the start, and seeing it grow right away. To me, growing into something it not hardly as factual as buying into good valuation from the start.

  • Report this Comment On May 31, 2012, at 4:04 AM, kyleleeh wrote:

    I think Peter Lynch's comment would be of better service to investors if it was rewritten from "Invest in what you know" to "Invest in something in which you understand how they make money and how good they are at doing it"

    Many people who are familiar with a companies product have no clue how the company makes money...this is doubly true for an internet company that doesn't charge people to use it.

  • Report this Comment On May 31, 2012, at 1:55 PM, Borbality wrote:

    Cool insight. As usual, most people are just interested in the result rather than how or why.

    Let's hope the whole FB thing will send some people onto sites like this one. My investments might still suck, but I'll at least understand why.

  • Report this Comment On June 17, 2012, at 10:32 PM, alicek0419 wrote:

    I did not buy FB, although, I did give it some thought, however, the Media Hype, and it's starting price looked just too good to be true.

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