You Idiots Deserve To Be Poor

May 25, 2012

"I want to be young, smart and successful! So I'll do it vicariously through these people."

From Bloomberg:

Ryan Cefalu, who lives with his wife and two kids in Baton Rouge, Louisiana, saw in Facebook’s much-anticipated initial public offering a chance to buffer his retirement fund. His expectations fizzled along with the stock within the first minutes of trading.
“It’s disheartening to know that things get over-hyped,” Cefalu, a 34-year-old data-systems manager who spent about $4,000 on the stock, said in an interview.

Let’s assume that quote isn’t taken out of context, although it’s hard to imagine what context it could be taken out of. The most overhyped IPO in history, and Mr. Cefalu is expressing surprise at what, exactly? He’s implying that he bought the stock before it was overhyped, or that said hype has something to do with his losses.

Here’s another fool who deserved to soon be parted from her money:

“I thought it would be fun to get in on the initial frenzy,” said Linda Lantz, an online marketer in Granite Bay, California, who bought 100 shares. “Now it makes me think ‘Oh God, should I bail or is it going to come back?’”

Fun? Where is the fun? Is it inherently “fun” to have a line in your E*Trade account that reads:

100 FB NASDAQ 5-17-2012 $39.84?

If you want fun, go target shooting or buy a kitten. (If you want lots of fun, combine the two.) More to the point, if you’re investing for fun, you’re in even worse shape than a guy who goes into debt to film a movie and then begs for people to cover the expenses.

You invest to make money. Sweet feathery Jesus, how much more obvious a point could this be? Look, we get that an iPad or a Birkin bag conveys something about your status and tells passersby that you want them to think you have disposable income. But Facebook stock? You do know that corporations no longer issue physical certificates, right? You can’t literally show your stock purchase off to people unless, again, you invite them to look at your computer screen while you’re logged into your brokerage account.

Michael McClafferty, a freshman finance major at Michigan State University, saw his “first big investment” turn into a $3,000 loss when he sold the shares at $35.
“I didn’t want to lose more,” McClafferty said. “I didn’t know what to do.”
The 19 year-old student estimates he spent $8,000 more than he wanted to while repeating orders that wouldn’t go through on the first day, and failing to cancel them because of the technical problems.

Anyone want to bet on whether Mr. McClafferty has incurred any student loans? We hope to God that he has rich parents financing the education that he’s getting but that isn’t taking. This would be slightly more forgivable if he were majoring in sociology.

Some out-and-out lying doesn’t hurt, either:

Pat Brogan, a Yahoo! Inc. manager who trades on sites run by E*Trade and Fidelity in her spare time, called the experience of buying Facebook stock the “biggest fiasco” in her 30 years of day trading.

Two points from Ms. Brogan’s debacle. Number 1, no one day-trades for 30 years, for the same reason that no one plays day-Russian Roulette, day-wrestles grizzly bears or day-shoots up heroin for 30 years.

Also, risking your own money in the hopes of returns isn’t something you do “in (your) spare time.” It requires a little more intellectual commitment and wariness than do quilting or playing Gran Turismo 5.

Alright, a 3rd point. What was she expecting? Of the thousands of equities she could have chosen to purchase last week, she picked the one with zero history as a public company. If you’d asked her “Why’d you buy Facebook today, instead of Hewlett-Packard or Time Warner?”, what do you think she would have answered? Or any other sheep who thinks investing is about status and internal feelings of hipness rather than making a mother-loving profit?

Because they thought they could beat the system. They’d be the ones to buy Facebook at (its opening price + x), then sell it hours later at (its opening price + x + y). Which is to say, they had to know they wouldn’t be the absolute first in line, right? And that the people who did get in earlier were entitled to their own profit, right? Still, Ms. Brogan and her compatriots had it all figured out. They’d get in early enough to allow those preceding investors their profit, then enjoy their own as they cashed out to the next round of lemming/piranha hybrids on the horizon.

Oh, who are we (and they) kidding? The day traders and speculators who tried to buy Facebook stock as early as possible would have held onto it had it risen. Fortunately for them, or at least for us, it didn’t.

But no, the alleged “30-year day trader”, the college kid, and the Louisianan looking to settle his retirement in one day know more than the insiders do.

The chance of you purchasing Facebook stock at the appropriate minute on the day of its IPO, then selling it within a day or two at a substantial profit, is nonexistent. First, you don’t know as much as the stock’s underwriters do, and second, if you’re greedy enough to try and time the market like that, you’re not going to be satisfied with a modest $4 or $5 gain. You’ll want that baby to rise to hundreds of dollars a share, just as AOL (now around $28) and Yahoo! ($15 or so) did. Otherwise you’re alleging that the avarice that got you there in the first place can be kept in check at certain points. Come on.

We do way too many sports analogies on this site, but that’s not going to stop us from doing another one. If you sink a half-court shot to win a Kia Sorrento at halftime of an NBA game, even if you hit nothing but net, the home team’s general manager is not going to offer you a contract. Not even at the league minimum. You got lucky. The ability to consistently hit half-court shots is as rare, and as practically useless, as the ability to time when to get into and when to get out of IPOs. We say “practically” useless because you can’t build an offense around 3-point attempts taken 47’ from the basket, any more than you can build an investing strategy around knowing when to board and disembark the IPO train.

Twitterer @DubaiAtNight, who was one of the most insightful commenters on Control Your Cash back when we allowed comments, put it best:

Imagine if had been Koch Industries that went public. (As if. The Koch brothers aren’t stupid.) The biggest private company in the world then opens itself up to general investors, and a combination of nefarious underwriting and technical glitches leads to a bunch of unprepared dilettantes losing their money. The U.S. Senate, the President and the SEC wouldn’t be able to land on Koch management fast enough. The 1%, keeping the 99% down, etc., etc. Meanwhile, if a tousle-headed 20-something with an affinity for hoodies is at the helm, and if the product in question is something commonplace, benign, and beyond most people’s technical understanding, no big deal.

Investing isn’t a freaking game. It can be fun and rewarding, but a) not over the course of an afternoon and b) it takes work. Here, read this and step back from the maelstrom. You can thank us when you’re rich.

Filed Under: Bad Examples, Investments Tagged With: , , , , , ,

IPOs for Beginners

March 21, 2012

 

You mean a site where people give their opinions about restaurants is worth billions? Sure, sounds good to me.

This article appears in drastically different form on Investopedia.  

“IPOs for beginners”. As a concept, that’s similar to “International Space Station repair for beginners.” No less an authority than Benjamin Graham, author of the definitive investing guide The Intelligent Investor and mentor of Warren Buffett, believed that initial public offerings were way beyond the neophyte investor’s level. He was largely right, but why?

Who wouldn’t want to be among the first to enjoy a promising new stock, one that no one else at the cocktail party had the privilege of investing in as early as you did? IPOs are tempting, if you’re the kind of person who loves shiny new toys and the general feeling of exclusivity that accompanies them. But at least you can physically show off your iPad 3 or PlayStation Vita and receive tangible oohs and aahs. That’s considerably different than telling everyone you meet that you hopped aboard the Groupon bandwagon when the rest of the world was still showing their IDs at the ticket counter. There’s little that’s conspicuous about a particular new entry in an online brokerage account.

Graham thought IPOs were only for seasoned investors for several reasons, one of them being that the previous private owners are often looking to cash out much of their holdings. The underwriters set the price of the typical IPO at a premium specifically to take advantage of a seller’s market. With limited supply, and highly publicized if not unlimited demand, what would you expect to happen to the price of a stock when it’s first offered to the public? (It’s a rhetorical question, and if you really need the answer, you shouldn’t even be considering investing in an IPO.)

Graham died a quarter-century before the original dot-com bust, and everything that’s happened since would only reinforce his position regarding who should invest in an IPO. Almost by definition, most initial public offerings are of companies that haven’t been around a long time. Lately, the companies haven’t even needed healthy records of revenue growth and profit, either. But with a proliferation of aggressive venture capital firms looking to back winners, and the financial media having ever more reach among amateurs looking for an exciting place to put their money, one thing is certain: the next Pets.com or eToys won’t be hurting for investors on its opening trading day.

Last November, Groupon “finally” went public after endless rumors. (“Finally” is in quotes because while most of Groupon’s existence as a private company was spent anticipating the IPO, that existence was only three years. The company was founded in November of 2008.) The company was on top of the collective consciousness as the hottest of all possible IPOs, at least until the day that Facebook goes public. Groupon acknowledged in SEC documents that it was on pace to lose half a billion dollars a year, and investors still kept coming. Once the institutional investors got paid, and GRPN finally became available to the ordinary public, the stock had fallen from its introductory price. A scant 4 months later, Groupon stock has lost almost a third of its value, which is fairly impressive seeing as earnings are about a negative dollar per share. Groupon’s never reached its IPO level after a couple of weeks of trading, and might never again.

Of course, all IPOs aren’t Groupon. VISA went public after decades of renown and profit, but even its IPO wasn’t available to anyone but institutional investors at the start. The same will go for Facebook. The company’s primary stockholders will profit the most – the very day it goes public, in fact. The initial lenders will get on their knees and thank the God of their parents’ choice. After a few more iterations, the most anticipated stock in recent history will trickle down to average investors at a price that could be a bargain, or could be a local maximum. There are more prudent ways to invest.

Take an example of a company whose stock is about as far removed from an IPO as possible – United Technologies. The Hartford-based aircraft engine and elevator conglomerate has been a component of the Dow since before World War II, and probably hasn’t been above the fold in any story in The Wall Street Journal since then. Most people have never heard of United Technologies, and the company brass prefers it that way, thank you very much. Nothing, not even a fire alarm, will clear out a room faster than telling people you recently went long on UTX stock. But an interesting thing about United Technologies’ performance is that you can examine its price movement over almost any arbitrary period,  and the graph will consistently move up and to the right.

Investing should have one solitary, overarching objective – to make money. Getting excited about an IPO for its own sake isn’t investing so much as it is flamboyance. The people who got in on Google’s ground floor, you can count on both hands. It’s tempting to think that you could have been one of them, or that you could be in a similar position when the next IPO comes available, but building wealth doesn’t have to be that capricious. Find an established, undervalued, temporarily wounded stock, and you’re far more likely to turn a long-term profit than someone starry-eyed over the latest company to be listed publicly.

This article is featured in:

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Filed Under: Investments, Investopedia, Making Smart Choices Tagged With: , , , , ,

Beware of IPOs Wearing Bright Colors

December 16, 2011

Dolly was a sheep AND a clone. Sometimes, one visual metaphor can do the work of two.

 

This was the easiest bet on the board.

First, read this genius post that we wrote back in January. It’s about Groupon, the 2011 equivalent of Pets.com or Atari. Unfortunately, there’s no such thing as shorting the stock of a privately held company, or we’d soon be sipping mai tais on the Moon with all the money that we’d have made by predicting Groupon’s demise.

Groupon went public on November 4, finally trading on the New York Stock Exchange after a long courtship period as the new initial public offering darling of the decade. Like LeBron James’ The Decision, only if it was the precursor to a brief honeymoon, followed by an intractable period of anxious consumers waiting patiently and wondering if they’d ever see a return on their investment or if it would crater to zero.

(The 2011-12 NBA season, everyone!)

Six weeks in, Groupon has fallen 10% from its IPO value. The company’s market capitalization is $14.72 billion. That’s more than the market cap of Bed, Bath & Beyond, which is the largest retailer of its kind; a 40-year old company with 1000 stores that actually sells something tangible and turns a healthy profit.  Some Groupon stockholders are holding shares in the hopes that someone more naive will eventually take them off their hands. And presumably, some stockholders think Groupon will permanently increase in value and become a blue chip. These people are buffoons.

Groupon went from local (Chicago) player to international media subject last year. The company’s point of differentiation was groundbreaking, and it was hard to believe no one had thought of it before. Unfortunately for Groupon, plenty of people have thought of it since. You can’t patent the concept of temporary mass discounts, thus Groupon has watched its market share get eaten away by Living Social and other competitors; EverSave, GroupBuy, YourBestDeals, and more combinations of everyday words featuring medial capitals.

As if competition from other startups wasn’t enough, part of getting featured in the business media is having established companies take notice and then try to crush you like a bug. AmazonLocal and Google Offers joined the party in the last few months, as did similar sites from AT&T and American Express, each offering a service indistinguishable from Groupon’s. Unlike Groupon, the others can withstand heavy losses.

And lose they do. Last year Groupon took in $713 million in revenue, the most ever for a company so young. If you think that’s impressive, you’ll be equally impressed to discover that there’s a quantity called “expenses” that’s exactly as important as revenue is.

If you’re unfamiliar, which many people seem to be, here’s how Groupon works in two sentences. Its sales staff hits up a local business, promising it a minimum number of customers if the company temporarily offers a huge discount on some item (a “group coupon”, if you will.) Customers download the coupon from Groupon.com, the catch being that the promised minimum number of customers have to download the coupon or the discount won’t activate.

Sounds great in theory. Why doesn’t it work in practice?

To be kind, most of the businesses aren’t what you’d call sophisticated. Plenty of them refuse to do the math and end up giving away the store, and those are the ones for whom Groupon works best. (As for those businesses which Groupon doesn’t create any new customers for, if no one wants your discounted product via Groupon, at least it didn’t cost you anything to discover that.)

Continuing with our sexist observations, visit Groupon.com and see what most of the deals are for. Spa treatments. Hair coloring. Tapas.

(Aside: Here’s advice for anyone looking to enter the retail business. Sell a product that only men buy. Time is money, and you’ll reduce expenses on every sale. Men, or at least all the men you’d want to associate with, don’t bog down the process with an endless series of questions. They pays their money and they gets out. Meanwhile, most women can’t make it to the counter without seeing how long they can make the transaction last. “Is this low-fat?” “What’s your return policy?” “Didn’t you have this on sale last week?” “Was it made in a factory where they have peanuts?” “Are these ‘blood’ diamonds?” “Will this shrink if I put it in the dryer?” [Read the freaking label.])

What does a merchant learn by partnering with Groupon? More than anything else, where to find the price-sensitive buyers. Which is to say, the worst customers imaginable. The ones who will be loyal to your brand only if you continue to provide the best loss leaders.

Groupon is advertising, not sales. Not that there’s anything wrong with the former, but it should always be secondary to the latter. Remember that next time you invest in a company with negative earnings and a business model that’s easy to copy.

**This article is the pick of the week of the Top Personal Finance Posts of the Week – Merry Christmas Edition**

Filed Under: Capitalism, Education, Finance, Investments Tagged With: , , , , ,
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