A day before Facebook’s initial public stock offering (IPO), an acquaintance asked if he should buy Facebook stock. My tongue-in-cheek response was “Sure, buy a little… but only if you are worth over $20 million!”
So far, the Facebook IPO has been a perfect illustration of why most individuals should be wary of, if not avoid completely, buying individual company stocks. As of this writing, Facebook stock is down about 18 percent from its debut.
Of course the stock price could rebound, but consider the drama surrounding the aftermath of the Facebook IPO. The Nasdaq stock exchange has been blamed for a “woefully” executed first day of trading. Facebook’s lead investment bankers, Morgan Stanley, significantly lowered their revenue forecasts for Facebook shortly before the IPO; they are now under scrutiny, as some question whether only their top clients were told about the revised forecasts. Facebook management is being accused of being overly-aggressive in directing the IPO. My favorite story is the securities analyst who referred to Facebook stock as a “falling knife” while maintaining a buy rating on the stock (MarketWatch). Now lawsuits are being filed and the SEC is promising to look into the debacle.
We at Perspective Financial have no opinion on the value of Facebook stock. That is not what we do. We develop, implement and monitor diversified investment strategies to meet the financial goals of our individual clients. For most investors, those strategies include broadly-diversified long-term exposure to global stock markets through the best professionally-managed mutual funds we can make available to our clients.
Our investment strategies rarely, if ever, involve the purchase of individual company stocks, like Facebook. Why? The answer is simple: risk. As Facebook clearly illustrates, individual company stocks — no matter how well-managed or hot the company — are extremely volatile and thus much riskier than the broad stock markets. For the vast majority of investors, the expected return on individual company stocks does not justify the added risk of holding individual stocks.