The Investment Scientist

Top 10 Reasons You Can’t Get Rich Buying Facebook Stocks

Posted on: May 18, 2012

Facebook IPO

1. Facebook is a great service to help you keep in touch with friends and family. But a great service does not equal great investment.

2. When was the last time you clicked on a Facebook ad? I can’t recall when I ever did. The click-through rate for Facebook ads is 10% that for Google ads, for good reason. Google ads are delivered at the moment you have actionable intent, while Facebook ads are delivered when you don’t want any distraction.

3. As more and more people use mobile devices to access Facebook, this will present a big challenge since it is nearly impossible to display distracting ads on tiny mobile screens.

4. Facebook faces steep competition from Google+. Within one year of launch, Google+ already has 170k members, about one fifth the number of Facebook members. That number is expected to go up to 400k by year-end.

5. Facebook currently has the network effect on its side. People don’t migrate to Google+ because their friends are all on Facebook. But the network effect could come back to bite Facebook. If people do migrate to Google+, they will migrate en masse.

6. With Google+ being a better alternative to Facebook, this will limit Facebook’s options to monetize its users. For instance, Facebook can’t charge even a $1 membership fee per year now. This could cause its users to defect to Google+

7. Google has a powerful search engine. In fact, it is much easier to search for interesting content and people on Google+ than on Facebook. In the short run, this search capability is no match for the network effect; in the long run, it’s a strategic advantage that Facebook can’t match.

8. Google has the Android mobile phone and controls half of the mobile market. The future of social networking is through mobile devices.

9. The Wall Street money machine has been busy at work creating a mini-bubble surrounding the Facebook IPO. It has been so successful that Facebook shares will be sold at around $38, valuing the company at $100b, half of Google’s valuation, with less than 10% of Google’s profit. The more successful the Wall Street money machine is, the less likely you will get rich.

10. If you could get rich with Facebook stocks, Zuckerberg would not have allowed his company to go public.

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9 Responses to "Top 10 Reasons You Can’t Get Rich Buying Facebook Stocks"

Okay, I agree… that perhaps FB may not be a long-term AWESOME fund to invest in… but it’d be wise for people to get in on the stock during it’s first few days during & after the IPO… and ride the short-term speculation wave… and then sell of their share of stocks & make their money by cashing out quick.

Just my 2 cents. -Daniel

First of all Daniel, FB is not a fund. The lockup period for FB IPO is only 3 months, an indication all of the insiders want to get out before too late. I expect a wave a selling in three month …

Michael,
It is easy to see that Daniel wants to be a speculator, not an investor. He is talking about going for the quick profit in his comment. Why else would his username be an outdated marketing slogan “How to Flip Houses” with a URL and website designed to stroke his own ego? Forget it, Michael, it looks like he’s not here to learn from you. Let him learn the hard way that if he jumps into the Facebook IPO to make a fast buck, he’ll be a guppy swimming with the piranha venture capitalists and barracuda banks who designed the deals, wrote the contracts, got cheap stock pre-IPO, and set the initial stock price way before any public investors saw the offer. If he thinks this deal is “too good to be true”, then he deserves to get in at the top and ride it down. Is it correct that most IPOs get bid up quickly to over-valued levels, then drop off to a more sane stock price after a few months? regards,
Jerry

Jerry,

Thanks for the reminder. I must say flipping is not my specialty.

Buying FB at this level is foolish, but it’s not illegal to hope there are more foolish people who would buy at even higher prices.

Michael

@Michael: Thanks for the correction. In hindsight it is good I didn’t buy any FB stocks 🙂

@Jerry: To each their own, friend. Flipping houses is “outdated”? I make anywhere between $4,000-$10,000 on an average house flip… without risking any of my own personal funds.

As for “a website that is designed to stroke my own ego”? In the past 6 months since I started that site… I have personally coached 4 students who had no previous real estate knowledge whatsoever… into flipping their first deal… and have built a list of over 600+ hardcore newbie RE investors who use my tips on a daily basis. What have you done lately??

Before you start throwing personal attacks @ people… remember that everyone is entitled to their own opinion. Have a good night.

Reblogged this on The Investment Fiduciary and commented:

It has been one year since Facebook IPO. Most of my top 10 reasons last year arguing against buying FB stocks are still true today. Remember the hype leading up to the IPO, then ponder this line of mine: “The more successful the Wall Street money machine is, the less likely you will get rich.”

I avoided FB. My daughter, who puts her life on FB took the plunge. My observations of IPOs is that the insiders take a position before the big day, then sell at a profit when the masses rush in. If a company is strong enough in their activity, cash flow, monetization, product, etc… they may be a money maker ever for the IPO investor. But, and this is a big but, you can find opportunities in proven companies everyday without the distortion caused by the hype of an IPO. My view is FBs basic product is gossip. That’s what draws the client to them. Flash ads and other monetization schemes are just a distraction from what draws people to FB. There is little intrinsic value in gossip. So I put my investments in guns, ammo, 3D, digital streaming, and other proven things.

Michael, what happened? You usually offer non-biased advice that I respect and appreciate, but this piece seems full of bias as well as strange time references (a little “cut and paste” from older articles?). If I didn’t trust you all ready, I’d think you were a short seller trying to drive FB stock price down.

Sounds like you love Google+. You offer numerous old or inaccurate reasons of why Facebook is in danger. Your point #1 is true, but everything else you offer is less absolute, debatable, or old and inaccurate.

What’s up with point #9? Written 1 year ago? And attack point #10? Zuckerberg wouldn’t have let it go public if it was a money maker? Come on – I thought you were more knowledgable than that – there are many reasons and driving forces for a company to go public.

There is room for careful investment in small cap or individual stocks, including a small investment in a social media stock that has a huge user base and continues to modify and adapt.

Regards,
David
Long both GOOG & FB, but in small reasonable positions

David,

I agree some of the assessments are not accurate, I wrote the piece right before FB IPO when everybody was going hoo haa about FB. I just wanted them to think about potential risks.

At the time, I had more than a few clients who want to devote a big chunk of their money to FB. This just shows how successful the Wall Street machine was in hyping it. When there is so much hype, you know people will almost surely overpay.

#10 is also true, not just for Zuck, but for all business owners. Academic studies show that IPO stocks underperformed in the market in the first three years. Even secondary issue stocks underperformed the market. This is for a good reason: business owners are primarily motivated to share risks, not rewards.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



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