Following Facebook

Lessons to Learn

The recent Facebook IPO not only fizzled but went on to arouse considerable skepticism in the public about investments in the stock market.  That’s probably a good thing.

Recent history has led some investors to conclude that latching on to IPOs – especially in technology and social media ? is a sure fire path to profit.  And that, in turn, has lulled investors into a false sense of complacency about the market.

To be sure, a new offering from a successful, hot company is alluring.  And one can feel euphoric in following the crowd, because the crowd is always right – at least for a short amount of time.  Reinforcing its own convictions, the crowd forgets that the market is fickle and that its own certainties are short-lived.

It also forgets the extent to which market prices are driven by huge institutional investors with vast resources of information, as well as by computerized trading programs operating with the speed of light, not to mention insiders with privileged access.  It forgets this until it is, of course, too late.

Reflecting on the Facebook disappointment, Ron Leiber, the financial correspondent for The New York Times, wrote:  “The real lesson here is how hard this stock-picking game is.”  He added “it can take decades of sustained investment in individual equities for your bets to really pay off.”

Doing some research with the help of Wilshire Associates, an investment firm, they tracked the performance of companies over the past 30 years and found “the best investments are often the ones that few people have heard of, and sometimes the companies like it that way.”

Third on the list of high and consistent performers was Danaher, a conglomerate that started out manufacturing precision dental equipment.  Ask how they managed to amass such a record of success, a former executive commented:  “There was little value to sharing this knowledge and your people with companies you might acquire and improve, as opposed to them acquiring your people and improving themselves.”  Good point, and not particularly helpful to any of us, investors and competitors alike.  The point, after all, was making money, not building up their image.  (See “Picking Stocks After Facebook.”)

Leiber concluded that “Many of the people who crunch these numbers for a living, like Robert J. Waid, the Wilshire Analytics managing director who oversees its indexes, look them over and do the same thing that an increasing number of people are doing. They simply buy indexed mutual funds and treat the Facebook spectacle for what it is — an opportunity for rubbernecking and bemusement.

“I haven’t owned individual stocks in 25 years,” Mr. Waid said.