Facebook Really Was the Worst IPO of All Time

I can't count how many times I've heard some version of the line, "Facebook's IPO was the worst of all time" in the months since it went public.

After all, Facebook (Nasdaq: FB  ) shares are down more than 50% since hitting the market in May. Andrew Ross Sorkin of The New York Times put the drop into context last week. "Facebook's market value has dropped more than $50 billion in 90 days," he wrote. "To put that in perspective, that's more market value than Lehman Brothers gave up in the entire year before it filed for bankruptcy."

But that's not why I consider its IPO a failure. My issue can be summed up with two news headlines.

This one, from three days before the IPO: "Facebook IPO has individual investors lining up."

And this one, from two weeks after the IPO: "Lawyers Line Up to Sue Facebook over IPO."

If there's a better two-line summary of why so many people fail at investing, I can't think of it. Here was a sensationally hyped company trading at a mind-numbing 100 times earnings that investors around the world were tripping over themselves to get their hands on. And when shares didn't make them a fortune in the first 90 days, they concluded that the whole game is rigged, stomped their feet, and sued everyone in sight.

Facebook's IPO was the worst of all time because it was a perfect display of the short-term-minded, oblivious-to-risk, valuation-be-damned culture that has overtaken public markets.

All kinds of blame has been thrown about for this debacle, including allegations that Wall Street tipped off select clients. But no one forced anyone to buy overpriced, overhyped IPO shares to begin with. No one forced you to pay 100 times earnings for a company that had just disclosed that its growth was slowing.

If you bought Facebook shares, you (or your advisor) did so on your own terms.

If there's one investment line you should never forget, it's that you are your own worst enemy. Benjamin Graham, Warren Buffett's early mentor, used to say that "Mr. Market is there to serve you, not to guide you." It's a simple yet powerful statement. All it means is that the market occasionally delivers wild and irrational opportunities. To be a successful investor, you have to be able to choose how to react to those events. If stocks are expensive and the public is going gaga for something, it's usually wise to stay away. History teaches this over and over again. When people panic and valuations plunge, that's when you want to be ready to buy. This also repeats itself again and again in history.

When people lose money on a company like Facebook, it doesn't mean the market is rigged, broken, or unfair. It means they forgot or ignored Graham's simple lesson about how to deal with Mr. Market. Every debate about the causes of Facebook's 50% decline can be appropriately summed like this: A bunch of investors let their emotions get the best of them and overpaid for a stock. It happens.

This goes well beyond Facebook. After the S&P 500 (INDEX: ^GSPC  ) had a miserable decade of low returns, we've heard countless stories from investors fed up with the market in general. There's little evidence that people are actually fleeing, but we know that tensions are high and confidence is shot. One recent poll of those with more than $100,000 to invest showed that one-third have become less confident in stocks over the last year.

But we also know that the biggest reason individual investors have performed poorly in recent years is that so many of them began investing during the dot-com bubble a decade ago and either sold or did nothing when stocks plunged in 2009. Just like Facebook investors, they have become their own worst enemy, buying during bubbles, selling during panics -- and then concluding that the market doesn't work anymore.

Adjusted for dividends, the market is at a new all-time high. The period from 2009 to 2012 was one of the best three-year intervals in the history of the stock market. S&P 500 dividend payments are at record highs. Buying good companies at good prices and holding them for a long time works as well today as it ever has. Buying overhyped companies at 100 times earnings and counting on them to rise over a 90-day period doesn't work. But it has never worked before -- and it never will.

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. Motley Fool newsletter services have recommended buying shares of Facebook. The Motley Fool has a disclosure policy. We Fools may not 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 (24) | Recommend This Article (58)

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 September 06, 2012, at 3:07 PM, sien1234 wrote:

    The worst IPO that i remember was Pacific Internet.The stock started trading at 87(FB started at 42) and dropped to 25 within 24 hours.

  • Report this Comment On September 06, 2012, at 3:10 PM, rhealth wrote:

    This one, from three days before the IPO: "Facebook IPO has individual investors lining up."

    And this one, from two weeks after the IPO: "Lawyers Line Up to Sue Facebook over IPO."

    LIKE! Finally something sensible about Facebook and unrealistic expectations.

    "Grannies in a one house town pool their pennies and lose it all in FB" is getting old.

  • Report this Comment On September 06, 2012, at 4:57 PM, wchumney wrote:

    Isn't one purpose of an IPO to raise as much money as possible for use by the corporation? In this regard, FB has been wildly successful. I am constantly amazed at companies who beleive a post IPO "pop" is a good thing. It really means management and their advisors failed to price the offering properly. This is my first indication the company has bad decision makers.

  • Report this Comment On September 06, 2012, at 5:37 PM, Seanickson wrote:

    Im surprised only 1/3 were less confident in stocks. The market has gained 23% during the last year, i liked my odds better last year as well

  • Report this Comment On September 06, 2012, at 6:12 PM, RichKenn wrote:

    The usual process is for the stock to jump up wildly after the issue so that a few insiders who get the issue price become obscenely richer. It didn't work this time so ha ha. The company still got their money so what do they care? Of course the inside stockholders will have to wait a while before they can make their killing.

  • Report this Comment On September 06, 2012, at 6:16 PM, EvanBuck wrote:

    Excellent article. You highlighted a reason why Facebook's IPO has not been successful which I hadn't thought of before.

    Check out my perspective on the Facebook IPO here: http://beta.fool.com/evanbuck/2012/08/03/dislike-7-reasons-w...

  • Report this Comment On September 06, 2012, at 6:21 PM, copadomundo wrote:

    wchumney is correct. For most offerings, the proceeds go into the company treasury. In the FB case, a portion of the proceeds went directly to previous investors who offered some of their shares alongside the newly issued company shares. Either way, the investment bankers' duty was to gain as much cash as possible for the shares offered. A huge drop post-IPO means the bankers did a fabulous job for their clients because they, apparently, were overpaid for their shares (I wish I had a REALTOR that would do so well).

    Unless, that is, you define "clients" as both the IPO sellers (the legal client) AND the IOP buyers (the people the banks want to keep happy for future transactions). It's only people that work both sides of the fence (namely every single investment bank on the planet) that consider this deal a failure.

  • Report this Comment On September 06, 2012, at 6:23 PM, indyjoneses wrote:

    Love the article. Favorite part:

    "If you bought Facebook shares, you (or your advisor) did so on your own terms"

    Along the same lines, I cringed when I got the lawyer note in the mail seeking Class action status against Wal Mart... The whole lack of personal knowledge, combined with the lack of personal responsibility, is often overwhelming...

  • Report this Comment On September 06, 2012, at 7:02 PM, papamikekilo wrote:

    The bottom line is that dishonesty, marketing hype, and general lack of discernment allowed a company whose stock price should have been in the low single digits to sell for an order of magnitude above its true worth. Shades of the 90's internet stock bubble - history does repeat!

    Contrary to the title of this article (and as previously noted), the Facebook IPO was extremely successful because it provided lots of money for early investors, insiders, and for the company, which is exactly what an IPO is supposed to do. That many sheep were sheared in this process has no bearing on whether the IPO is a "success" or "failure".

  • Report this Comment On September 06, 2012, at 7:55 PM, NonnoDoug wrote:

    The worst IPO of recent times was probably REFCO, the commodity trading company based in Chicago.

    It declared bankruptcy and was liquidated within about 2 years, due to criminal malfeasance. I think this may be a modern record for time from issue to death.

  • Report this Comment On September 06, 2012, at 7:59 PM, tkell31 wrote:

    Bottom line for the average retail investor if you have the opportunity to buy an IPO at the IPO price go running in the other direction because if institutions arent buying it and driving the price up you can be pretty sure it will tank. Sure look at the fundamentals, but when I saw FB at $38 the day of the IPO I knew it was doomed. Of course knowing MS would prop it up at $38 for the day allowed for some pretty nice quick trades.

  • Report this Comment On September 06, 2012, at 10:01 PM, occamstockrazor wrote:

    "The worst IPO of recent times was probably REFCO, the commodity trading company based in Chicago.

    It declared bankruptcy and was liquidated within about 2 years, due to criminal malfeasance. I think this may be a modern record for time from issue to death."

    Not even close. The recent BATS IPO saw the shares driven from $15.25 to fractions of a penny in about 1.5 seconds. The company was public for a mere 1.5 seconds. What really makes this scary is the fact that they are a stock exchange and it appears it was a malicious attack that blew up their IPO. http://www.zerohedge.com/news/skynet-wars-how-nasdaq-algo-de...

  • Report this Comment On September 07, 2012, at 3:13 AM, Jay456 wrote:

    Amazing. This guy is the Jimi Hendrix of financial journalism. He never fails to capture my attention and consideration.

    I'd read his wisdom 25 hours a day if only the rotation of the earth would decelerate by 3,600 seconds a "day". What relevance.

  • Report this Comment On September 07, 2012, at 3:15 AM, depsee wrote:

    Everybody was trying to play the momentum game on this one (remember the dot com days). The idea being you jump in fast, ride the hype wave up, then bail out at or near the top. Problem is its not the dot com days anymore. All those suckers lining up to buy couldn't until the stock was on the open market. Fat cat Wall Street got their hands on shares early and realized the company was over-hyped, then dumped as much stock as possible in the initial run up on the first day of trading. Its been down hill since.

    Momentum trading can be profitable if your timing is right. In this case people holding shares before opening day and dumping fast timed it right. I prefer a longer term approach which steered me away from this situation.

  • Report this Comment On September 07, 2012, at 5:55 AM, skypilot2005 wrote:

    Morgan wrote:

    "Buying good companies at good prices and holding them for a long time works as well today as it ever has."

    Fools that are "new" to investing; This is all you need to know about being / becoming a successful

    investor.

    Sky

    + rec

  • Report this Comment On September 07, 2012, at 6:09 AM, TMFMorgan wrote:

    <<the Jimi Hendrix of financial journalism>>

    A first. Thanks!

  • Report this Comment On September 07, 2012, at 10:23 AM, mikecart1 wrote:

    What people are confused with in this thread is that 'worst IPO', 'worst stock', and 'worst company' are all different. Facebook is FAR FAR FAR from the worst IPO of all time. It is just that many investors skip over all the other IPOs that are done every year because they don't have a cool cat name Mark Zuckerberg ruling the world and cutting ribbons on national TV to a packed house. What is the real WORST IPO of all time? That goes to SMART Technologies - ticker SMT for you home gamers (lol Cramer talk) - and it has done NOTHING but drop 90% from its opening price back in July 23, 2010. Maybe it is because they are Canadian or because they produce something many never heard of - a smart board. Anyways, SMT is 10x worse than FB because FB actually has a customer base LOL!

  • Report this Comment On September 08, 2012, at 11:24 AM, bcummi5779 wrote:

    Mikecart1 - almost every teacher on the planet would love to have a Smartboard. And school systems are buying them as fast as they can. Not all from Smart Technologies, but buying just the same. The major problem is that everyone thinks schools will pay ridiculously high prices (and they do) so quantities of sales are low. SMT has other problems, the product is highly desirable.

    Many people have never heard of fracking fluid, either...but companies providing it are highly profitable now, and will remain so as long as crude is being pumped from three miles down.

  • Report this Comment On September 08, 2012, at 11:27 AM, bcummi5779 wrote:

    Maybe SMT has dropped so preciptously because of home foreclosures and the high numbers of unemployed people who can't pay their school propety taxes, as well as decreased school revenues based on loss of real estate values.

  • Report this Comment On September 09, 2012, at 3:45 PM, MarkEvans24 wrote:

    Just like Options Express won't accept overly risky orders from me, I don't think brokers should be selling IPO's to the average investor.

    It saddens me to see my friends buying during the bubbles and selling during the recessions. I tell everyone who will listen about The Fool. I share articles on Facebook and try to give away every paper Stock Advisor newsletter I get to someone interested, but as far as I know, only one person has subscribed. My sister buys green-washed mutual funds for her 401K. It's sad and I can do nothing about it.

  • Report this Comment On September 10, 2012, at 2:05 PM, fool3090 wrote:

    I'm thinking more like a buck seventy-five before I'd purchase shares of Facebook. But that's just me. Maybe if it paid a dividend...

  • Report this Comment On September 14, 2012, at 11:42 AM, 88melter wrote:

    The Game WAS, and IS rigged! Speculation has replaced investing. Dividends are an afterthought, when they ought to be the ONLY thought. In Victorian times, speculators were viewed, rightly so, as parasites on the markets. They still are.

    As for Facebook, the IPO did exactly what Zuckerberg wanted. Now they are using both the piles of cash and the lower stock valuation to their own advantage, having monetized a free website on the backs of SUCKERS! Yes, P.T. Barnum is alive and well, and living in California.

    Investments pay a dividend. Venture capital starts new companies. Everything else is speculation, with the average investor caught between constant financial news, advice on how to profit from disaster or success at the same time, and global economic forces, all the while never being told these three basic truths. Why? Because the professional stock advisors cannot make any money telling people this fact. Thus the Game is rigged, and Gypsies, Tramps, and Thieves, to quote the old Cher song, are running the show. Remember. markets are for the raising of capital, and the compensation from same, not the rampant squeezing of every dollar out of manipulating things with computers. Check me out on this stuff, don't take my point of view for it.

    MBB

    p.s. sorry if the gypsy reference is not respectful, it's only a song...

  • Report this Comment On September 14, 2012, at 3:14 PM, whyaduck1128 wrote:

    I bought FB shares at a low price well after the IPO, with funds from the speculation part of my portfolio only. Anyone who bought otherwise is either smarter than me (easy enough!), privy to information I haven't seen, or small-f foolish.

    No...IPOs...ever!

  • Report this Comment On September 14, 2012, at 10:42 PM, Maerzie wrote:

    So happy I heeded great advice and didn't buy any!

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