"If you’re taking investment advice from me you really are a dummy"
Of the many self-help books I’ve perused in my lifetime, one that sticks in my memory is a Canadian paperback publication called “Investing For Dummies.” As you might have guessed, it’s a basic, beginner’s guide to personal finance and investing.
It’s still on the bookstore shelves after multiple printings so obviously it’s connecting with its target market. But the question remains why anyone – and I include myself in that category - would see a book proudly labeled “for dummies” and think that it’s speaking directly to them.
Maybe I should write a book called “Raising Your Self Esteem For Dummies.” That could be a million dollar idea.
When it comes to investing money though, I do think identifying yourself as a Dummy is probably a good start. As a reluctantly self-confessed Dummy, it seems to me that to be a successful investor, the first thing you have to accept is that there are people who know a lot more than you do. They’re not necessarily smarter, they’re just in a better position to profit from any given situation.
Take Facebook, a company whose stock went public about 3 weeks ago and in that time has lost about a quarter of it’s value.
This is where the dummy in me takes a more prominent role. I see the names Goldman Sachs and JP Morgan (two of the big banks involved in underwriting Facebook’s debut as a publicly traded stock) and I just assume the deck is stacked and those big banks are going to win.
By underwriting the Initial Public Offering, these big banks are getting paid to drum up interest in a stock while selling it to select clients before it goes on sale to the general public. At the same time, another department of that same bank could also be making big profits by shorting the stock (betting that it will go down).
There are also a number of lawsuits currently being filed claiming that these banks had prior information about lower than expected earnings for Facebook just days before the IPO date, yet they only made that information known to their largest institutional investors who would have been able to dump the stock at its peak price the moment it went public.
Starting to feel like a dummy?
Maybe you feel like a “muppet.” You should, according to a former senior executive at Goldman Sachs. In a public resignation letter published in the New York Times earlier this year, Greg Smith said that Goldman Sachs had “lost its moral fibre” and was sacrificing its own clients to increase profits. He also revealed that managing directors would regularly refer to clients as “muppets.”
Warren Buffett, one of the most successful investors of all time famously said “Be fearful when others are greedy, and greedy when others are fearful.”
The greed comes naturally. Whether it’s tech stocks, ballooning real estate values, or billion dollar internet ideas that help us keep tabs on people we used to date in high school, we are constantly made to feel that an overnight financial fortune is out there, waiting for us to simply grab it. And if we don’t grab it we’re suckers, missing out on a sure thing.
Cue Facebook, a phenomenon that most of now use on a daily basis but probably didn’t know existed 5 years ago. The company’s founder, the billionaire wearing the hoody, is everywhere. They even made a movie about him and the billions of dollars he created for himself out of thin air. Who wouldn’t want a piece of that?
Now throw the greedheads on Wall Street into this mix and you have plenty of reasons to be afraid. Very afraid. But instead of seeing the potential pitfalls, all we see is easy money. Suddenly, people who know next to nothing about investing in stocks turn into 1950’s cartoon characters with dollar signs ka-chinging in their eyeballs.
Perhaps the dust has settled a bit in the Facebook story, and you may be asking if now is the time to swoop in and buy some stock in the company? Well, you’re going to have to ask someone else – in fact, if you’re taking investment advice from me you really are a dummy. But I will say this: Just because we waste half the day on Facebook doesn’t mean we have to waste half of our retirement savings on it as well.
- post by Marty Strong
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Facebook went down because it was way overvalued.
Two things to look for in stocks.
The P/E ratio, aka the price to earnings ratio. Usually they should be between 10-20 for a dividend paying stock. Of course ones without dividends that are reinvesting that money for growth should have 10 or less in the ratio.
Facebooks currently at 26 bucks a share and even at this lower price it’s P/E is 66. It’s still way overvalued. Does anyone actually think it’s going to triple it’s earnings in a reasonable time frame to justify that price?
It’s also have no dividend. Many, many stocks will pay you 3-5% a year in dividends (which are taxed at half the rate of other income) and with the depressed market there are plenty to go for at that price.
They might have fudged the earnings number but not by the magnitude that would justify the crazy price. Until it starts paying dividends or shows some sort of massive increase in earnings it’s price should be 5-10 dollars.
@Ron:
Some of the analysts I’ve spoke with gave Facebook $10 – tops.
It will be interesting to see how the various class actions play out.
Thought of The Day
“Facebook is the biggest affront to democracy.”
I am not going to explain that. You’ll have to decipher it yourselves.
In the past ten years groups of charlatans backed by powerful lobbies and old monies have basically defrauded the global economy.
Shysters. Usurers. Confident men.
I said it before. Facebook was not only overvalued, Facebook was a Ponzi from before Ponzi was a Ponzi.
Here:
18May2012
“Much Ado About Nothing aka #FacebookIPO Z Crappiest Fantesy Debut Since #JohnCarter ! After #Ponzi & #Madoff Now #Zuckerberg …1 Born Every Minute!”
We live in Vancouver and this keeps us busy.
re: “Facebook is the biggest affront to democracy.”
In some ways, Facebook and Google are a method of democratizing state surveillance, engineering the consent of those surveilled, and transferring the workload of dossier creation to the target individuals themselves. Rationally ethical? Of course not, but neither is democracy/mob rule.
We ought to get a tax credit based on how much money we’ve saved the government by surveilling ourselves.
At some point in the not to distant future there is likely to be a series of law suits on “who owns data that is collected about me.” Should I have the right to require, say Google or Amazon but also Safeway and Costco, to (i) provide me with a machine readable copy of all data that they have collected about me or (ii) delete all information they have collected about me? And what are my rights to data the government has collected on me? This will be a lot of fun to watch.
Birdy and Steven,
Exactly right!
I’ll link a video that I hope everyone will watch.
Even if you do have kids or not, the Firefox add-on that is recommended in the short clip is a must have.
I installed it on my laptop and it is amazing to see how your digital data is traced, followed and shared without your consent.
Plus the beauty is, you find out who they are!
Here:
http://www.ted.com/talks/gary_kovacs_tracking_the_trackers.html
BTW, Marty Strong, good call on the post. Complete agreement.
Martin,
Although Greg Smith’s infamous “muppet” reference could easily apply to many firms that deal with the average investor, please do not lose sight of the clients he was actually referring to.
His reference to muppets was actually about large government and institutional “expert” investors. The clients were highly educated, highly paid, professionals task with running endowments, mutual funds and pension funds. That doesn’t mean they do not make bad or lemming like decisions.
Markets have humbled even the best and brightest over the years.
If it was easy, we would all be on a beach.
Investors who are paying an ongoing fee for a service, where future compensation of the advisor is tied to performance….it’s much easier to have ones interests alligned properly with the advisor.
The clients that Goldman were referring to were clients who were paying a transaction cost or were “sold” an investment. Anyone who believes they are exempt from simple “Caveat Emptor” logic should have few else to blame but themselves.
If I had a dollar from every blatantly risky, greedy, hopeless investment that clients are proposed by the investment world……I’d be on a beach too.
I had many clients call wanting to buy Facebook. I swore in the lead up that I was not going to argue with them and simply let them do it. Some wanted to throw a 1/4 of their portfolio at it! It’s such a lose-lose for the advisor. Everyone advisor knew it was expensive but that doesn’t mean it can’t get more expensive.
If you say no- don’t do it- and then they don’t and it goes up…..you’re just the idiot who said no and would have cost them money.
If you say – go ahead – and it goes down…..the client loses money. That’s a lose for both the client and the advisor.
I’m always puzzled by the mindset of those trying to make quick money and then blaming ‘the system’ of ‘the fat cats’ when it doesn’t work out or they end up looking foolish.
Since when was anyone entitled to a free lunch?
And since when were economic outlooks not “uncertain”? It’s always uncertain!
The ability of the public mindset about investing to expect easy money without setbacks will always baffle me.
Investing is hard. It’s supposed to be hard.
When interest rates were 7%, it wasn’t easy either. Inflation was chomping at your purchasing power every day and we were reminded constantly.
It will always be hard.
Investors constantly ask me questions that I believe have a common theme about the future.
The common theme is that they want to know;
-”what investment decision can I make right now that will result in me not having to worry about the future or make any more investment decisions in the future?”
And there lies in the problem. A great Investment Manager is ,simply put, a professional decision maker. Your job is to make constant decisions about what to do and what no to do. You make those decisions everyday, especially on the days you do not do anything. Do nothing is a decision. Doing something is a decision. Doing more of something is a decision. Doing less of something is a decision.
People pay investment managers so that they do not have to spend all day making decisions.
If you have one that is making consistently bad decisions, you fire them.
What really needs to happen is more people to buy that book. (I actually did back in the day).
What are more important concepts than what an option is or future is or even what a stock or mutual fund is the all important concept of paying down debt.
Even in this low interest rate enviroment if you have even a 3.5% loan paying that back is a guaranteed 3.5% rate of return, tax free.
What’s more important than whether the market goes up or down is how much you scrutinise your own net worth. You should be at the point when the TV ad says “You’re richer than you think!” you can respond with “I know exactly how rich I am, I evaluate and graph my finances monthly!”.
If an IPO pops (goes up sharply) the company and its early investors got screwed. Zuckerburg out played the iBanks here, but was too smart for his own good. I never invest in IPOs. I am either in earlier or wait until I understand how the stock is being valued. Trefis is a great way to get insight into this. On IPOs, as Martin shows, there is too much information asymetry for the average person to invest.
Fb is a great company, but it has a lot of uncertainty on its long term revenue model. I also wonder how many multi billion dollar companies advertising can support – but then there are all those struggling main stream media companies, lots of dollars to harvest there.
Longer term, the Fb flop (I can think of a ruder term) will dampen the tech market and impact Vancouver. Companies I am tracking that have filed S-1s are now slowing down and will not go out till the fall if this year. That slows everything down.
So a combination of greed and over confidence on the part of Fb and its investors, greed and incompetence on the part of the iBanks (they seem to be doing that a lot lately for a bunch of people who think they are very smart), and some technical screw ups on NASDAQ (I heard two CFOs in the past week say that they are switching their IPOs – if/when they happen – over to the NYSE) have caused everyone in the innovation community, including Vancouver, additional uncertainty and delay. But then we pay ourselves to deal with this sort of thing and life goes on.
Thanks for this Steven. Quite compelling. I for one am with Marty on investing – DummiesRUs.
I draw my conclusions and my views on companies like Facebook and many others, using a different approach, from a different angle, not from the investing as an action, but from observing human and corporate behavior, prior to the action being taken.
There were signs of warning long before the IPO
- Privacy concerns overlooked
- Goldman Sachs the “paragons of integrity” pumping the stock, LOL
- The Product itself, you may have millions of users,yet they the information is personal in value, moving in very small circles, having 2000 followers means exactly nothing when you think of it, we as individuals move in circles of 12-20 with this kind of information.
Hey, I could go on and on…
- The initial group of angel investors in Facebook… very cloudy.
- on principle – any person that started and grew a business knows that is all a matter of inspiration, genius, hard work and luck aka your preparedness at the opportune time, and it doesn’t happen overnight.
Facebook is a very sophisticated tool of manipulation, because it plays on the vanity of the people…
“my name is, I live at, my interests are, I like Bieber, I am so smart, oh, look at the baby, yeah, my son graduated from Harvard – Summa Cum Laude, see I eat right, I exercise, I always liked to go to Rome, so nice biking in Amsterdam, I’ll send you a picture with me in the jacuzzi…”
Gullible, these people, I’m telling you!
I wonder how much Yuri Milner made on this IPO?
For a VC’s take on the Fb Flop see http://venturebeat.com/2012/06/05/facebook-flop-means-hard-times-ahead-for-startups-y-combinators-paul-graham-is-worried/ This problem will only be multiplied in Vancouver where we have a thin VC community.
I happen to use and enjoy Fb a lot. I have been spending a lot of time away from Vancouver and it keeps me in touch with my kids and grand child. I also have a very distributed gtoup of close friends and it helps us all keep in touch. Excllent value. I personally don’t mind having a lot of personal info about myself out on the web so the privacy issue is pretty much a non-issue for me. I understand how Google, Amazon, Fb, Safeway, Air Canada track my data. What I want is access to and owenership of that data! I may also want some editing rights but access is a good first step.
Consumer companies are getting very high ROIs on Fb marketing, but Fb marketing does not just, or even mostly mean Fb advertising and it will be interesting to see if and how Fb monetizes this.