The $1.6 Trillion Behind Facebook's "Pop"

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Facebook (NASDAQ: FB  ) was up 8% during the last two days of the week, following S&P Dow Indices' announcement late Wednesday that shares of the social-networking company would be added to the S&P 500 (SNPINDEX: ^GSPC  ) following the close of trading on Dec. 20.

The addition validates the growing economic heft of social networking, Facebook's prominence in that space, and its exit from the market's doghouse following a poorly executed initial public offering. (As of Friday's close, the shares had doubled this year!) However, being added to the S&P 500 has no impact whatsoever on the Facebook's intrinsic value, so why the pop?

In the following video, Fool contributor Alex Dumortier sizes up the amount of Facebook stock index funds will need to buy to account for Facebook's inclusion in the S&P 500. Furthermore, he explains why individual investors shouldn't try to anticipate or mimic index funds' behavior -- where the latter are insensitive to price, valuation ought to remain a paramount consideration for the former.

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  • Report this Comment On December 15, 2013, at 8:27 AM, Ghurley wrote:

    Please note AUM indexed to SP 500 were estimated at 1.6 T at end of 2011 Since then SP 500 has appreciated 45% Therefore current AUM would be 1.6 T x 1.45 or 2.32 T assuming no increase in indexed $. Based on Fridays close FB market cap was equal to V at .66% of SP 500 So, 2.32 T x .0066 = 15.32 B worth of FB to be purchased 15.32 B divided by price if FB (53.2) = 288 million share if FB to be bought. This assumes no copycat or closet indexers. This is a significant increase over what your analyst mentioned. Tremendous demand for FB over short period.

  • Report this Comment On December 15, 2013, at 12:52 PM, TMFAleph1 wrote:

    Thanks for your comment, which is useful. Note, however, that the S&P 500 is based on float-adjusted market capitalizations.

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