Why I Didn’t Buy Facebook Stock

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G&G Associates
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Why I Didn't Buy Facebook Stock

Karibu (Welcome) G&G Readers,

Would you pay $880,000 for a rental home?

You might… if it returned you $100,000 in rental income. With that yield, you'd make back your original investment back in less than nine years.

But what if the house paid you just $10,000 in rental income? At that low yield, it would take you 88 years to make your original investment back (provided you didn't finance the home).

It sounds insane that anyone would pay that much and agree to wait so long to get their original investment back. Yet that's what tens of thousands of people did last month when they piled into the Facebook stock.

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Over the past couple weeks, I've talked to nearly a dozen friends and family members about this. They know my about my business and how it involves investing and "the stock market." Facebook's initial public offering (IPO) was the first thing on their minds. Why? Because a lot of them are T.V. junkies who almost fell for the 'hype' … or better yet the 'okie doke.'

I'd like to say that the majority of my family and friends are not full of great investors and the greater part of them are not familiar with investing at all. In reality, they're normal folks who own a few mutual funds. They've read the headlines about the Facebook disaster. To them, asking me about it is like talking about a car accident they saw on the side of the road.

What shocked me was how complicated they thought it was. Someone asked me if Facebook was going bankrupt. Another friend wondered if the company is a fraud.

I said, "No… It's just an overpriced stock."

It was overpriced because thousands of people were suckered by the Facebook hype. While paying attention to the hype, they ignored one of the golden rules of investing: Don't overpay… for anything.

It's an odd thing about the stock market. Rational, intelligent people will agonize over the price they'll pay for a home or a car. They'll do a huge amount of due diligence. They'll look at a bunch of "comparables" to ensure they get a good price. They know not to overpay.

But that same person will run into the stock market and put $10,000 into a stock he hasn't researched at all. He won't pay a bit of attention to the price he pays for a slice of that company's assets and cash flow.

So he ends up getting soaked… because he doesn't focus on getting a good price.

Of course, there were other things involved with the Facebook debacle. But the BIG reason most folks lost money was because they overpaid. After losing money buying the most-hyped IPO in history, they've got no one to blame but "THEMSELVES."
"Inflated" is the perfect word to describe Facebook's valuation on its first day as a public company.

In 2011, Facebook earned $0.43 per share. Its opening share price on the day of its IPO was $38. That means investors were willing to pay "88" times earnings for Facebook. Put another way, they were willing to wait 88 years go get their original investment back (assuming no growth).
Now … you tell me does that make sense to you? Hopefully, not.

Granted, Facebook has plenty of growth ahead of it, but that's an absurd price to pay for a stock. If Facebook grew earnings by 15% every year (an astounding feat)… it would still take an investor more than 32 years to make their original investment back.

Facebook is a nice piece of "real estate," but not nice enough to wait that long.

As I mentioned, there was, and still is, a lot of complicated discussion about the Facebook IPO debacle. But the reason investors lost money is very simple: They overpaid. They paid a ridiculous price for the stock … plain and simple. If an investor would have stopped for five minutes to consider the valuation – like he/she would with any other purchase – he/she would have passed on the stock… and saved a lot of money.

The lesson is clear… and it's thousands of years old: Whether it's Facebook… a rental property… or any other asset, if you overpay, you'll get burned.

If you want to know how to protect yourself portfolio and learn how do achieve double digit returns, then you need to become a GGIS Subscriber. I will share many of these ideas here in the weekly G&G e-newsletter but if you want the meat, you need to become a paid GGIS Subscriber. Remember, if you sign up you get a free one hour financial consultation (a $200 value).

So … Sign up today!!!

Remember … "if you fail to plan, then you have planned to fail."

As always…feel free to pass this information on to anyone you think is interested in increasing their tax & financial IQ.

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Meda Ase p (Thank You Very Much),

Asar Maa Ra Gray
Tax & Financial Consultant, RFC
G&G Associates
757-251-3757 office
866-361-3872 toll free fax
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LEGAL NOTICE: This work is based on what I've learned as a financial researcher and analyst based SEC filings, current events, interviews, corporate press releases and what I've learned as a financial consultant. It may contain errors and you should not base investment decisions solely on what you read here. It's your money and your responsibility. Nothing herein should be considered personalized investment advice.



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