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Facebook Flop, Too Big To Succeed

May 23, 2012
Facebook fell flat on the first day if its highly anticipated initial public offering (IPO). The stock opened at $42 per share and then quickly rose to $45 - before dropping like a hot rock to a dismal first day close of $38.23. That was Friday, May 18th. On Monday, day two, facebook closed at $34 - only to finish its third day at $31. After all the hype, and all the fanfare, facebook's introduction turned into a total flop.  
 
And then there's today. News broke early that investors have filed a lawsuit against facebook and its IPO investment bankers, in what has become the most recent example of Wall Street disgrace. 

As mentioned in my award winning book, IPO’s aren’t right for most investors because of the high-risk profile. The IPO price, for instance, has always been a speculative bet. It’s a preset price-value judgment call made by a company’s management team and their investment bankers before the free market activity has a chance to correct it. If their pre-market assessment is wrong, investors instantly lose money. And that’s what happened in this most recent Wall Street scandal, called the facebook IPO.

Just a few days before facebook's first public trade, both the shares being offered and the price per share were raised amid two major downgrades by Morgan Stanley and Goldman Sachs. The downgrades were kept secret. The valuation remained high. Both companies, Morgan Stanley and Goldman Sachs, are major stakeholders and investment bankers for facebook. That’s the reason for the lawsuit.  

Morgan Stanley was the lead underwriter for facebook and Goldman Sachs was involved long before. In fact, Goldman Sachs wasn’t the least bit shy about what they were going to do at the time of IPO: if facebook was priced to the high-side of $38 they were selling 50% of their investment position. That’s Goldman Sachs calling facebook a "sell" at the IPO price. Call me a cynic, but I’d place an odds-on-bet that they were the ones selling out at $45. Wouldn't be shocked.  
 
And that’s why so many people think the Wall Street establishment is corrupt and that investing is an insider’s game. Every time you turn around Wall Street is making money on inside information while selling their customers a phony bill of goods. Just today another illegal inside information story hit the press (see: Another Alleged Goldman Source Emerges in Gupta Trial, Wall Street Journal on-line). It happens all the time. 

That’s why I say, Lose Your Broker Not Your Money.

Some large institutional investors like Harvard University’s endowment, Canada Pension Plan, and Abu Dhabi Investment Authority, have discarded pooled investment products like mutual funds and REITs in favor of direct investment. "When we control what we buy, and how we mange it, our results tend to be better," said Jane Mendillo, head of the company that manages Harvard’s endowment fund (see: Large Investors Choose to Swim on Their Own, Wall Street Journal on-line). Tom Arnold, Abu Dhabi’s investment chief, agrees, "funds have more risk than investors are being paid for."  

Indeed.
 
The minute you hand your money over to someone else to manage you lose a piece of it. Brokers make money from your money. Your loss is their gain. Besides, you can’t trust them. It’s in plain view everyday. 

Now more than ever it’s time to Lose Your Broker. 

You can do better! – without inside information and absurdly priced high-risk IPOs. By the way, IPO's commonly find their way into mutual funds. So if you own a mutual fund you might have lost a few bucks on facebook and don’t know it. That’s another hidden cost of pooled investment products and over-hyped IPO’s: They’re too big to succeed.  
 
 
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