The Rise of Facebook and the Fall of the Far East

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

On this day in economic and financial history...

At the tail end of 1989, the Nikkei 225 (NIKKEIINDICES: ^NI225  ) reached its all-time high of 38,915 points. That same day, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) closed at 2,753. It seemed inconceivable to market watchers then that the two indexes would ever exchange places. The Nikkei, with 7.5 times as many stocks in its roster, had not closed below the Dow since 1957, at the earliest stages of its postwar economic revival. But when both indexes closed on Feb. 4, 2002, the Nikkei found itself looking up at the Dow for the first time in nearly half a century (the Nikkei had traded below the Dow on Feb. 1, but American exchanges were closed). The Dow finished that day at 9,687, and the Nikkei closed at 9,631.

In many ways, the Nikkei's collapse was inevitable. In 1989, its aggregate valuation was well into the triple digits as growth-starved investors chased after fewer and fewer available shares. Japan in 1989 was like the Nasdaq chasing dot-com fly-by-nights during the tech boom, while the country's banking sector mimicked its American counterpart during the housing boom, making for a wild ride of irresponsible spending. Unsustainable valuations and lending practices created the perfect bubble-storm, and the Nikkei wound up spending decades falling off of its peak as the entire economy struggled to recover from what economist Ian Shepherdson called "a gigantic Ponzi scheme." The Dow, on the other hand, was buoyed by a decade of tech-driven economic growth, and its attendant bubbles managed to stagger themselves out long enough to avoid a complete meltdown. A more accommodative central bank didn't hurt, either.

The Nikkei quickly rebounded from its humbling fall and spent the rest of the spring and summer months ahead of the Dow. However, the Nikkei fell behind the Dow at the end of 2002 and once more in the winter of 2003 before enjoying a multiyear run at the top. This ended for good in the summer of 2010, and since then the Dow has remained in the lead.

The first day of the Nikkei's 45-year winning streak was Aug. 6, 1957. From that day to its peak in 1989, the Nikkei grew at an annualized rate of 14.6% versus the Dow's 5.5%. Then, from its peak to Feb. 4, 2002, the Nikkei lost 11% per year while the Dow gained 11.1%. In the end, the two indexes had remarkably similar performances over a 45-year period -- they just took dramatically different paths to get there.

Mark Zuckerberg wants to be your friend
On Feb. 4, 2004, a college student at Harvard created a little website that would later inspire an Oscar-winning film. It's called Facebook (NASDAQ: FB  ) -- you may have heard of it. It has more than a billion members now.

When Mark Zuckerberg brought online that day, Friendster was the dominant social-networking site. MySpace, which was created in the same month as Facebook, took off quickly but also peaked quickly, just more than a year after it was bought by News Corp. (NASDAQ: FOX  ) in the fall of 2005. Facebook remained exclusive to college students with a ".edu" domain for more than two years, but once everyone could join, everyone did. The site grew from 20 million members in the spring of 2007 to 200 million two years later, and then it was onward to 650 million members by early 2011. By this point, the market was clamoring for Zuckerberg to take the company public, as its existing shares had been sold on SecondMarket (a trading place for illiquid assets like pre-IPO shares) for some time. The company was valued at $70 billion on SecondMarket in early 2011, and by the time it was ready for a mid-2012 IPO, Facebook was valued at more than $100 billion.

The Facebook IPO was one of the most highly anticipated and closely scrutinized public debuts in history. With an IPO-day market cap far exceeding any other company's in the long history of American stock markets, Facebook had a nearly impossible task in justifying its worth. Weaker-than-expected demand, compounded by technical errors at the exchange, ensured that Facebook's debut was a dud. Six months after its IPO, Facebook had shed 40% of its value.

However, Facebook's story as a public company is only just beginning. In time, it may rise beyond its IPO price. What will it take to get there? Our top tech analysts have outlined both the bull case and the bear case for Facebook in our newest premium research report. There's a lot more to this social network than meets the eye, and with our help you can discover whether Facebook truly deserves a place in your portfolio or if it's time to unfriend this volatile stock. Access your exclusive reports by clicking here.

Read/Post Comments (2) | Recommend This Article (8)

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 February 04, 2013, at 11:43 AM, Biloxi8 wrote:

    One must be completely insane investing into company making 1% profit on $1.6billion especially when it derives 84% of its income from advertising.

  • Report this Comment On February 04, 2013, at 1:23 PM, nofoolingforme wrote:

    The Facebook IPO was based on corporate greed and speculative greed on the part of those that paid twice as much as the price should have been. It settled into a reasonable price range of around half the IPO, then speculation and empty hype over a surprise announcement sent it skyward. Now it is falling like a rock, or should I say Apple. It should bottom out at around $19 in a couple of weeks after the earnings season enthusiasm wanes and the market corrects from it early year run. Don't buy any of it at these inflated prices.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2233349, ~/Articles/ArticleHandler.aspx, 9/26/2016 6:28:47 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/23/2016 4:55 PM
^DJI $18261.45 Down -131.01 -0.71%
^NI225 $16544.56 Down -209.46 -1.25%
Nikkei 225 CAPS Rating: No stars
FB $127.96 Down -2.12 -1.63%
Facebook CAPS Rating: ***
FOX $24.49 Down -0.25 -1.01%
Twenty-First Centu… CAPS Rating: ***