Lessons and Opportunities from the Facebook (NASDAQ: FB) IPO Stock Disaster - Mike Swanson (05/27/12)

I got a free surprise for you at the end of this post.

Two big things have been happening over the past month. We've seen the Facebook IPO disaster and suffered through a pretty tough stock market correction. There are lessons to be had from both of these events and huge opportunities to actually profit from them.

Right before the Facebook IPO I received several dozen emails from people asking if they should buy into it or consider buying other "social networking" stocks to buy. In my private answers I said no. But I felt compelled to give a public warning too. So I made a post before it opened telling you and the whole world to stay away from it. Of course once it started to trade and turned into a broken dud IPO this opinion became common place all over the Internet and I added my two cents to the conversation in a follow up "post in which I explained how ridiculously overvalued the stock is from an investment standpoint and how it is really worth around $18 a share.

The stock is trying to build support at $31 a share. But if it closes below that I can easily see it fall to $20 or even my $18 target over a month or two. It's a mess.

People have already started to play the blame game. But as Bradley Willett who runs the website www.fallstreet.com notes, "there is a budding theory that individual investors got suckered with FB – that they were somehow victimized by a Wall Street machine able to hypnotize them into handing over their hard earned dollars. Rather than lend much credence to this utter nonsense let me plainly say that if anyone wanted to buy Facebook and they didn’t have a clue about the company’s book value and/or some of the more basic valuation matrixes (i.e. forward P/E multiples, everything cash-flow related, etc) they are not ‘investors’. To be sure, buying stocks is not something that should be undertaken by someone that doesn’t have a basic understanding of corporate worth. Feeling sorry for someone that bought the insanely priced Facebook IPO is like going to the casino and patting the player that splits 10s on the back."

There is a big lesson to what Willett is saying here that I'm going to follow up on with you in a second. But first I want to say that as far as an investment standpoint goes even if Facebook were to fall to $18 a share of $10 a share I still do not think it would be a good investment. I talked with a friend of mine who reads my work on the phone the other day that is hooked into the Internet marketing world and consults with online businesses around the world and realized that Facebook isn't really a great business when it comes to making money.

He told me that according to Facebook's corporate website "Facebook's mission is to give people the power to share and make the world more open and connected." Well it has succeed in accomplishing that mission - and in doing so it has also demonstrated that this mission does not result in the creation of a massive money making operation. Facebook has proven itself to not be a great medium for advertisers. The problem is they charge advertisers to create "fan pages" by having them pay to put ads on their site to "like" pages. From a business standpoint though this doesn't really result in meaningful revenue results for the advertisers. Facebook is not like TV. Big companies like GM have pulled their Facebook ads off the site after experimenting with them for a year.

The problem is if you are a company it doesn't really mean much if some dude on Facebook likes you "fan page." I advertise on the Internet for this website and run banner ads. I've even done a little advertising on Facebook to bring traffic to this website. But the idea of paying Facebook money to send traffic to a "fan page" on Facebook to me is a stupid waste of money. Why should I pay Facebook to have its own users click some page on its site? I rather pay Facebook to send traffic to my own website. And on those counts I have found that when you pay Facebook to do this you end up spaying twice as much and getting half the clicks per banner impression than you do elsewhere on the Internet. And studies show this is the typical result all advertisers have on Facebook.

So as an advertising medium Facebook itself sucks.

What is even worse for Facebook though is that some studies also suggest that Internet advertising as a whole is losing effectiveness and getting cheaper. That means even less money for Facebook in the long run. Put it all together it's no surprise that Facebook saw its earnings shrink by 12% in the last quarter.

Like my friend said Facebook has succeed in achieving its mission statement, but where does it go from here? Now that it is a public company the street will demand that it make more money. Facebook will be under pressure to find new ways to grow earnings. The danger is that in doing so it may actually detract from its success in achieving its mission statement.

It's a paradox. Facebook has succeeded in its objectives, but those objectives do not create a wonder company when it comes to profits. Now to try to become one I fear will result in it mucking itself up and eventually alienating its users. This is heresy to Facebook fanboys, but Facebook is just another website and websites rise and fall in terms of popularity. Ten years ago neopets.com, excite.com, aol.com, and go.com were among the top 20 websites in terms of traffic. Now neopets.com and excite.com have fallen into the top 4,000+ and go.com is barely functional. Aol.com was once one of the biggest sites on the Internet, but now maintains its traffic by having interests in hundreds of other high traffic sites and itself fluctuates in the top 50-100 of sites.

It is one thing to trade a stock, but another thing to invest in a company for the long run. Facebook just doesn't make sense to me for an investment. It's an Internet fad.

And now for the hard lesson to take away from Facebook - a lot of people, like Willett said, simply bought Facebook without doing any home work at all. They didn't look at the valuation of the stock or study it from a business and earnings standpoint. They just saw all of the media hype and became afraid of missing out on it. They knew a lot of people were buying it and other Internet stocks like Google have done well over the years and were more afraid of missing out on potential Facebook gains than buying and losing money. They put no real study or thought into what they were doing.

People who do no homework when it comes to investing end up losing money.

Statistics show that only 25% of the people who buy stocks beat the market and only 5% make life changing returns. That sounds like bad odds, but the good news is that the reason why these figures are the way they are is because 75% of the people don't know what they are doing and don't spend anytime thinking about what they are doing. They literally throw money at the market. When you enter the stock market arena that is what you are competing against.

There is a huge opportunity coming in the stock market right now. And I mean it. Last summer in my monthly newsletter I said I was pretty much out of the market and thought it would be dead for sometime and tough to make money in. I had even taken most of my money out of my account and invested it in some real life brick and mortal business I'm involved in. Now I think some big opportunities are on the horizon to make money in the market. Now I've been taking money out of some of my other business and real estate investments and putting it back into my brokerage account to get ready.

First there is the Greece default, which in my view will provide a great opportunity to buy stocks in Greece that are trading at less than breakup value. That is the kind of investing John Templeton and Warren Buffett used to do - buy stocks at super cheap valuations that have stable and good business models - and pay beefy dividends.

Then we have a market correction that will provide a great opportunity to buy into sectors that are holding up and poised to outperform the rest of the market on the next rally. Gold is one of those sectors, but there are a few more worth watching.

I think the correction is likely to continue for at least several more weeks, but those that know how to take advantage of it and buy the right stocks will make a killing. Now is the time to get ready and pay attention to the market. I haven't been as excited about the market now as I have been in several years.

I am going to help you take advantage of the opportunities to come.

Two years ago I published a book titled Strategic Stock Trading that spent a week as one of the top 100 best selling books on Amazon. Tony Blair published a book the same week that was being pushed all over TV land and there were days in which my book was outselling his on Amazon.com. It has tons of great reviews and still sells lots of copies every month.

I have just put an electronic ebook version of the book up on Amazon for sale. From now till midnight Wednesday though you can download this book for free by clicking here.

I just want to give the book to you. If you already got the physical copy you might want a complimentary free version for your ipad, kindle, or just to look at on your computer. Or you may want to tell friends about it.

If you never have read the book before now is the time to read it. It won't take you long. It's just over 100 pages and it details my strategy for buying stocks and investing in them - especially identifying the best sectors and stocks to buy into after big market corrections like we are going through right now. So it's the perfect first step preparation for this market. My goal in writing it was make it the best one hour of educational reading on the stock market possible. I really can't give away the physical version like this, because it wouldn't be fair to the people who bought it and frankly I don't want to pay to mail off thousands of free physical books to people, but this I can do this one time for you.

To grab the book click here.

Secondly, I'm going to put out a series of videos on what is going on in the market and how to take advantage of things over the next few weeks. I should have the first one ready for you by Tuesday so look out for it. I plan on giving you a big overview of how I think things will play out in it.

Today you can get ready by getting my book free by downloading it right now before Wednesday. Just click here.


Thank you, Mike, for the book!


thanks, Mike, for all your effort, clear thinking and sound analysis. i got the book when it first came out and it has been really wothwhile.


Thank you very much, Mike! this is an outstanding article!


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