Facebook – Cry Me a River

Do you seriously want me to feel bad for anyone who participated in this Facebook ($FB: no positions) IPO process?   Huh?  Why?

Let me retreat just one step:  I feel bad for one group of people: the traders whose orders got lost in limbo due to NASDAQ systems issues on Friday morning, and spent hours not knowing their actual position in the stock.   That sucks, and it’s impossible to manage risk and PnL when you don’t know your positions.   I guess I was lucky that this didn’t happen to me on Friday – I both bought and sold Facebook after the opening, but my orders miraculously avoided NASDAQ.   I have, however, had this happen to me before, so I know how much it sucks.

But to everyone else – all those complaining that Facebook traded down 15% from the IPO print in short order in the days following the IPO – cry me a river (Justin Timberlake version, obviously)… Actually, let’s talk about that Timberlake masterpiece (/sarcasm) for a minute:  JT wrote Cry Me A River after breaking up with Brittany Spears, probably because she was a whiny brat – kinda like all of the greedy get-rich-quick dreamers who are angry that they paid an astronomical valuation for Facebook and didn’t get the 100% Internet-Bubble-1.0-Circa-1999-first-day-IPO-pop they felt they were entitled to.   For the past several days we’ve heard nonstop chatter about how much of a disaster this IPO was.   Well – it was a disaster from a technical trading side: the NASDAQ systems issues – but I have no problem with the price.

Morgan Stanley and the underwriting syndicate increased this deal both in share number and in share price in the weeks preceding the IPO.   What started out as a clearly not-cheap offering was without a doubt an expensive offering by the time the details were set.  But you know what?  You wanted the shares anyway.  Ya know why?  Because you’re a greedy pig.   And do you know what happens to pigs?  Pigs get slaughtered.

But I’m not just hurling invectives here, see, I know firsthand – I am one of the greedy pigs.   I put in for the Facebook IPO also!  I put in for a HUGE amount of shares – way more than I actually wanted.  Why?  Because I was greedy, and I knew that I wasn’t gonna get what I asked for anyway.   See, if you want 1000 shares, you don’t ask for 1000 – you ask for more – so that when your order gets shaved back in the allocation process, you might reach your desired position.    I actually tweeted last week that I had put in for the IPO and that I was now worried that I might actually get some.   When the deal size was increased in terms of shares and then in terms of price, I contemplated canceling my order.   My expectations for a huge first day pop were already tempered, but I kept my order for two reasons:

1) I was curious as to how retail investors would be treated, given the fact that the Syndicate seemed to be upsizing the deal to satisfy more demand  and

2) I was a greedy pig clinging to the hope that I might get some free money shares – allocated IPO shares that would get a nice first day pop.

And here’s why this IPO was successful:  because all of us greedy, ignorant retail investors who were willing to buy Facebook at any price STILL had every chance to escape with our hides intact.   There is a huge difference between the stock opening at $38 and trading straight to $32 (that would be the mother of all clusterfucks – a true hosing by the underwriters) , and the scenario which actually happened: over half a BILLION shares traded above the IPO price on Friday.   You had your chance to throw in the towel on your greed trade.

There’s another thing:  hindsight.  Remember how on this VERY blog I wrote a post on Friday complaining about the crappy allocation I got in Facebook?  Yeah – I didn’t hear a single story of a single trader/investor/speculator etc complaining that they got too many Facebook shares.   When everyone thought that the thing was gonna trade at $70, they were happier than pigs in shit.   Oh yeah – but AFTER the fact, suddenly it turns into “We got plugged with shares, it’s not fair…”  Come on – you can’t have it both ways.

I’m well aware that I wanted more shares on Friday morning, and if I’d gotten them, I would have been fine with it.  I had every opportunity to sell them.  I actually sold my big fat 100 share allocation after 3pm on Friday when it looked clear to me that the stock was acting horribly.   Earlier in the morning, I bought a sizable position as the stock fell from $40 to $38, and sold it out as the stock rallied back on its way to $42.

Now maybe someone will say “Kid Dynamite, I have a job, I’m not sitting at my desk trading all day – I didn’t have a chance to sell on Friday.”  Ok fine – you were still the one who said you wanted to buy shares at $38 on the IPO.  As Jeff Matthews puts it, no one put a gun to your head.   And as Cassandra puts it, “Yeah, well, what did you expect ? Paying stratospheric prices for something more or less impossible to value on any model is a mugs game. I have little sympathy for any involved.”

Next, someone will say “Kid Dynamite, this was another typical case of the big clients having all of the information and the retail clients lacking it.   Didn’t you hear about how Facebook might have told Morgan Stanley some stuff about their lowered revenue forecasts – information which MS only shared with top clients?”

Yeah – I heard about that.  It seems likely that Facebook may have violated some disclosure laws, and we’ll see what happens with that – but ya know what?  It wouldn’t have made the slightest difference if Facebook had put that information in the prospectus (never mind that they don’t have revenue estimates in the prospectus, and that they did include the info about the declining rate of ad delivery relative to daily users) – it doesn’t matter because the greedy ignorant retail pigs who tried to feed at the Facebook free-money trough don’t read the prospectus anyway!  You’re claiming that if MS had given you revenue estimates that were 5% lower that you wouldn’t have been left holding the bag in Facebook?  I say bullshit.

Look, I’m sure some people will read this and come away with the typical victim conclusion, which is “Kid Dynamite, you’re an asshole.”  Yeah, you know what?  I am an asshole – but I take this “hardline” approach for a very specific reason.  I’ve used this explanation before, but I’m gonna repeat it because it’s a good one:   I could coddle you,  a la Robin Williams’ character in Good Will Hunting and tell you it’s not your fault.

I could repeat it over and over: it’s not your fault.  It was those evil banksters.   They always rip off the little guy.  It’s not your fault.

But if I tell you that it will guarantee that you avoid taking responsibility for your own decision to buy shares of Facebook, and you’ll repeat your same mistake again.   Take this post as tough love.  Take responsibility for your actions.

I don’t think I read a single piece of analysis, research, commentary, punditry, etc in the weeks leading up to the Facebook IPO that said that Facebook was going to be priced at a bargain level.   People got hosed on Facebook for a very simple reason:  greed.  Everyone was chasing the free-money huge first day pops from IPO days of yore.  Hopefully, a lot of people learned a valuable lesson from this Facebook IPO, including that of adverse selection, which I have harped on before:  if you’re not a top tier client, do you think that you’re going to be the one getting the “insta-double” shares that will see a huge first day pop?   In general, you should expect to get big allocations of the bad deals, and poor allocations of the good ones.  Again, a reason that I think this deal was not a disaster is that from what I’ve heard it sounds like most retail investors didn’t get much at all in the way of allocations to this deal, and everyone had their chance to get out before the grenade blew up.


StockSage:  Sheared

Cassandra:  OMG!  They Killed Zucky!

Jeff Matthews: Nobody Put a Gun To Their Heads

Kid Dynamite: Did You Put In For the Facebook IPO?


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