In the rush to pile on a hyped IPO, there are some serious lessons.
Editor’s Note: Fisher Investments MarketMinder does not recommend individual securities; the below is simply an example of a broader theme we wish to highlight.
Facebook has had a tumultuous time in its first few days as a publicly traded stock. At least, certainly, in the press. A variety of news stories target the Facebook stock price—which closed nearly spot-on its opening price on its first day but has since fallen or gone sideways.
Other stories purport this is a sign of a social media bubble about to burst—Facebook’s stock price is just the first of many dominoes in this industry. Another angle is the IPO itself was botched, either because it wasn’t fully above board—information may have been withheld, too many shares issued than were planned on, there a technical glitch.
Our view on this is, it’s simply par for the course for an IPO—and another reason to avoid them. Early trading is often tumultuous—even for firms without the major spotlight that’s been shining on Facebook.
A few trading sessions are never predictive of future returns. However, IPOs often lag broader markets for the first few years after their debut. This isn’t a comment on Facebook and whether it—or any other IPO—is or isn’t a good company. Three or five or ten years from now, it might very well be an excellent firm with good earnings growth prospects.
But when a private firm decides to access capital markets, they usually don’t want to do it when they think they’ll be valued at a discount. The point is to raise money—and why not do it when you think you can get the most bang for your buck? Otherwise, why grapple with the additional requirements that come with being a publicly traded stock? (At Fisher Investments we say, “IPO means, ‘It’s Probably Overpriced.’”)
Whether or not that’s true for Facebook remains to be seen. But another key factor to remember is the portfolio level impact of a single stock in a well-diversified portfolio should be, intentionally, muted. Even if a single stock rises by a factor of 10—as thrilling as that may be—modern portfolio theory says you don’t want that kind of concentrated risk—not if you’re working with long-term . Why? Stocks that boom can also bust—just as big. And if you’re totally or even heavily allocated to single security—regardless of whether it IPO-ed last Friday or last century—you may want to reconsider your risk management strategy.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.