After a slew of investors writing for advice as Facebook (NASDAQ:FB) edged down toward $32 a share, I weighed in on May 29 with my assessment of the social media giant post-IPO.
Says it all, right?
Well, now that Facebook has indeed moved lower — to around $26 a share as of this writing — a lot of investors are asking if I really meant what I wrote. Some of these are bargain hunters, but for the most part are FB stockholders who bought on the first day and now are wondering whether to get the heck out of Dodge or hunker down for the long haul.
So I feel the need to circle back to Facebook — not necessarily to kick around the stock some more, but to highlight a common psychological problem that all investors face: the tough decision to lock in a loss and move on with your life.
First, let’s briefly recap the reasons I’m bearish on Facebook:
Lock-Up Dates: FB insiders are contractually obligated to hold their shares for a minimum period of time — 90 to 180 days. The first opportunity for Facebook’s paper millionaires to sell will be Aug. 19. In the 90 days after that, more than 1.7 billion shares will become eligible for insider selling. Considering that Facebook floated 421 million shares in its IPO, that’s the equivalent of four Facebook stock offerings.
Funny Fundamentals: For any company that goes public, there aren’t enough quarterly filings to plot a trend. And with the scandal surrounding Facebook’s earnings estimates at the time of the IPO, you have to wonder how honest growth predictions really were. The proof will be in the first FB earnings report — which could be as much as three months away. That’s a long time to be in the dark.
Ad Trouble: Biggest of all is the practical question of whether Facebook can actually monetize users. A recent report says 80% of FB users have never clicked on an ad. The challenge of serving ads on mobile devices is well-documented. And anyone who thinks they know of a “sure thing” in the tech sector better read up on Webvan and MySpace.
Based on the current environment, I think this stock is too risky — and I think the chance of any upside movement from the current prices is slim in the near term.
But hey, that’s just my two cents as an impartial observer. The real question is what your take is as an impartial observer.
Notice I didn’t say shareholder. Because impartiality is the key.
A huge issue for investors — myself included — is the ability to assess a stock without factoring in your entry point or previous history. Sometimes we are overly pessimistic or optimistic based on our emotional baggage.
Case in point: If you rode Facebook from $40 to $26, like some have, you might be thinking “I just want to get back to $30 or $32 in the next week or two … then I’ll get out.” But if you acted like you didn’t own shares, that same argument would sound like “Wow, Facebook is a steal at $26! It’s going to pop to $30 in no time and give me a quick 15% profit!”
If that second argument sounds insane to you, the first should sound insane, too.
But if you like Facebook at $26? Then by all means hold on.
You see, whether Facebook jumps 90% in the next year and makes day-of-IPO investors whole again or whether those investors sell out now and get into some microcap gem that delivers 90% returns in the next 12 months … the portfolio is the same. You don’t get extra bonus cash for sticking it out in FB as opposed to moving your money around.
So please, try to forget your history if you bought Facebook. Simply ask yourself if you think FB is a better buy than other stocks at current valuations, with the current headlines and current market sentiment.
That’s what self-directed investors, at the core of it all, must do: assess the options in the market and decide which ones are the best places to park their cash and make it grow.
Incidentally, the Facebook emails illustrate the trouble some investors have with letting go of a loser … but it’s worth noting the mental barrier is equally troublesome for those holding a big winner, too. Sometimes folks say, “This stock has been good to me, so I want to let it run.”
A better course of action is to ask yourself the same question I asked about Facebook. Namely, is the winner a better buy than other stocks at current valuations, with the current headlines and current market sentiment?
If so, let it ride. If not? It’s time to take your profits — not stick around out of sentimentality.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the aforementioned securities.