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Mark Cuban Blames Himself For Losing Money On Facebook IPO
McGruber writes "In a blog entry, American business magnate Mark Cuban explained who he blames for his losing money in Facebook stock: 'I bought and sold FB shares as a TRADE, not an investment. I lost money. When the stock didn't bounce as I thought/hoped it would, I realized I was wrong and got out. It wasn't the fault of the FB CFO that I lost money. It was my fault. I know that no one sells me shares of stock because they expect the price of the stock to go up. So someone saw me coming and they sold me the stock. That is the way the stock market works. When you sit at the trading terminal you look for the sucker. When you don't see one, it's you. In this case it was me.'"
Many of us did stay away - far away. Facebook and GroupOn were a no brainer for me NOT to invest. I'm mostly a "value and growth investor" and those two companies had neither of those. It seemed to me that those IPOs were to cash out the VCs and original investors; not to get more capital to expand or invest.
The folks who bought the stock after the IPO were folks who either didn't look at the financials or folks who were hoping for the Greater Fool Theory to work for them. In either case, if they paid attention to the late 1990s, they would have been a bit more careful.
Although, I don't want to seem too cocky/arrogant/know-it-all because I thought the same of Apple a few years ago and I think it's too late to get in on the APPL gravy train. Investing can be real humbling .....
I usually price stock at 1:1 price:revenue (a very traditional measure), in which case it's a $2-3 stock, reaching maybe $5 over the next couple of years.
In any case, Facebook is a dead-end for advertisers. They need to figure out a way to make money without advertisements, since social media is terrible for ads. Why would a company pay to have their ad next to a photo of your friend from high-school throwing up, when they can place it next to a fashion spread of Kate Moss? This is why social media will never compete against traditional media, because they won't be able to bring in the national advertising dollars, and will forever be stuck with local 10 cent ads.
They're trying to fix that with their edge-graph algorithm, to only shows you stories that are popular, but the problem with that is that it's a computed process, not an human-edited process that advertisers prefer. Also, this kills brand Facebook page views, so brands have less reason to care about Facebook if their stories only reach 6% of their likes. Twitter doesn't filter out your posts, so it reaches all your followers.
Facebook has an audience of 900 million, yet only makes $4billion/yr. Conde-Nast has an audience of maybe 20 million, yet also makes $4 billion, because professional human production & editing will always win over amateurs and computers.
Wasn't there are a US trade embargo against Cuban and his cigars?
rewriting history since 2109
He's publicly stating that much of the stock market is about finding the bigger bagholder- the poor sap you stick with the losses to gain thereby.
It's about time one of the high-rollers owned that reality.
"Correct" is a matter of interpretation. Underpricing the IPO is one of many clever ways of compensating angel/venture capital, stock-compensated employees, and the investment bank in a manner that doesn't have to be costed on an income statement and will be taxed at favorable capital gains rates.
Right, which is again part of the problem. The purpose of the IPO is supposed to be raise capital for the company, it's not supposed to make millionaires out of investors and employees, and certainly not supposed to make multi-millionaires out of well-connected millionaire investors. Adding all of these other aspects to the IPO makes it harder for an investor to know whether it's really a good investment or not. An IPO should not be used as a lottery ticket for those connected enough to get in early.
Which is why the auction format is so rarely used - Google had the clout to force underwriters to do an IPO auction, but they sure did grumble since they lost much of their ability to reward clients with a big bounce.
And Amazon has had a PE of over 100 for a long time and has more than doubled in the past 2 years. Its current PE is 315! My point is that making a trading decision is not as simple as looking at the PE.
Amazon is different. Amazon is essentially making a land grab and has huge revenues. If you are in Amazon's position, you build revenues first, then later focus on profitability. It also helps that this strategy also demolishes your competitors.
Facebook on the other hand, is not seeing revenue growth anywhere near what it needs to be to justify its valuation. It is finding it harder to monetize its user base. Amazon is already the world's largest online retailer, with revenues growing faster than Facebook's by some accounts.
P/E is not everything, but an investor can make a reasonable bet that Amazon's P/E will come down without the share price going down.
The bounce is the problem with the IPO market - if the stock was priced correctly, there should be no bounce (and no crash either).
- the problem is with all the regulations around investing set up by the government, which prevents normal people from making money.
Normal people do not place their money into VC funds and companies are not allowed to go IPO before they comply with so many laws, that are set up in order to 'protect' the investors. Well, they 'protect' the investors from making money, that's what they protect investors from.
PayPal co-founder made a billion bucks on a half a million investment on FB, same with many other people - various early investors made money, because they had a lot of upside when they put their money into that company.
Ahh, so you think that companies are inherently altruistic and if only there were less government intervention, then everyone would be better off. The last minute disclosure of Facebook's updated financial information to key investors was probably not illegal (there's some debate, but it appears to be an ethical lapse rather than a legal lapse). So you think if only companies didn't have to comply with all of the filing and other regulatory regulations then the small investor would be better off?
What are some of these pre-IPO regulations that make well heeled investors rich in an IPO? Definitely investing in pre-IPO stock when the stock is available at a fraction of its ultimate IPO price is valuable to an investor, but it also comes at some risk. Would you have invested money in Zynga a year before their IPO, knowing that they were dependent upon Facebook for almost all of their revenue? Those pre-IPO investments are how companies fund their operations before they are ready for an IPO, they have great risks, but also the potential for great rewards. There are hundreds (thousands) of companies out there looking for cash, many of them never make it to an IPO.
By the time all of the regulations are complied with and the company can go IPO, guess what: there is NO upside left.
If the IPO is used for its stated purpose (raising capital for the company), then there is not supposed to be any short-term upside left after the IPO.
Throughout the recent history of the last couple of decades of tech IPOs, the story has been that Wall Street underwriters screw the founders, programmers and other stockholders of the company that's going public by forcing them to UNDERVALUE the stock tremendously so the underwriters can give a free but valuable gift to their best customers who get in at the cheap IPO price, and flip the stock for a quick painless gain when the undervalued stock pops on first day of public trading. This basically cheats the original shareholders by giving them less than they should have gotten if the stock was priced fairly.
This time, the tables were turned as the nerds managed to screw Wall Street, by hypnotizing the underwritersinto setting the IPO price way too high thereby screwing the favored investors instead of the tech company. It was so satisfying to see the 'gift'' that the underwriters gave their best buddies come back to bite those greedy weasels who got a price crash instead of the quick pop and sellout. Actually some of those let into the IPO (if they managed to get the broken Nasdaq to execute for them on that day) DID manage to flip FB and so a lot of the stupid investors were the second wave that mindlessly bought into the stock on the first day at close to the IPO price then watched it slide from there.
As others have noted, FB's PE is outrageously high and there's was and is no obvious reason why it's going to be become very profitable (Google, by comparison, certainly DID have a real revenue model when they IPO'd). The problem is that there is a lot more money sloshing around in in the pockets of the US wealthy than brains in their heads.
Think about that. All those facebook addicts out there. I bet that most of them would be willing to pay $1 a month to use it. That's about $800,000,000 a MONTH in revenue. Even if only half of them sign up that's still $400,000,000. If you pay the dollar you get an add free version and maybe a little more control on how your data is used and shared. People pay to use Dropbox why not facebook?
Half of them won't sign up, i'd be surprised if 1% would sign up. Facebook needs critical mass. It they take a dollar to let you post stuff on your wall, there will be a huge outcry among all the users, even or especially the fans. Facebook will lose a lot of its fans and the mass will go to the next free social media platform: Google+
The problem is that the decay would be exponential. If 50% of the users signed up for the paid subscription to "try it out", they would quickly notice that (about) HALF of their friends are now gone. So when time comes to renew the next month, those who lost a significant amount of friends (making the service useless) would quit.
Then, the remaining 30% would have less friends subscribed and would cancel the next month. When you're down to 10% of the original user base, what incentive is there to stay? You can talk to about 1 of your 10 "friends" on the service. That would be pointless.
Grandpa: My Homer is not a communist. He may be a liar, a pig, an idiot, a communist, but he is not a porn star.
Which is really fairly naive. If you're Facebook and your IPO is set to rake in ridiculous sums of money, why should you care about the post Facebook IPO IPO market? You won't need the money from those later IPOs. Facebook priced this one perfectly. They weren't selling shares to make you money. They were selling shares to make THEM money. And they did.
Everyone knew FB was overvalued. Well everyone who watched the news, or read anything about it for months leading up to it.
People weren't trying to invest in FB, they were trying to ride the "bump" they expected when it went public. They hoped that it would bump up to some dumb number and they would sell off at the ridiculous price before it went down. The problem is... everyone did that and there were not enough suckers to propel it above the IPO price for any appreciable amount of time.
That's what happened to Cuban. He knew a lot of these companies get bumps up from suckers who think it is the next big thing and then they fall. He expected that this would happen here. He did not count on the fact that probably all of the news coverage and people going "this seems very high for an IPO valuation" effectively removed the optimistic suckers, leaving only the opportunists who would, on no account, pay much more for FB stock than the IPO value. Of course, at that point, the opportunists realized that it wasn't moving and some of them probably sold at just over or just under IPO to gain back some liquidity for a better investment, and the price would have started to drop from there as more and more had to get out or got out before they lost their shirts.
Man, I wish I had the capital at the time to short sell the fuck out of FB.
"So someone saw me coming and they sold me the stock. That is the way the stock market works. When you sit at the trading terminal you look for the sucker."
I am so utterly astounded that even businessmen have this perception of stock markets. It is extremely telling. The perception is in some ways completely accurate but in others it is entirely inaccurate.
Centuries ago, the process of investing in a company to hasten it's expansion became formalized in trading markets. Older retired workers in an industry lent their knowledge to newer businesses by funding those who were doing things right. Rather than individuals working out deals themselves, the process of selling shares was formalized by the introduction of institutions that would deal with much of the logistics of operating a genuine stock market. As these stock markets became more organized and accessible to outsiders, the knowledgeable investors who worked directly with the company in advisory positions or in stock holder associations were joined by speculators. I define speculators here as those who aren't knowledgeable about the particular business and workers whose shares they buy, but rather at best the industry, and more often only the market trends themselves. They are focused not on the productivity of the company, but the growth of the shares themselves.
For quite some time, these speculators were insignificant in effect and number. The vast bulk of trading was done by investors. Because there were so few investors, gross trading volume would usually be about 20% of GDP (figures are for the US). The market had no place for speculators. No one would take their trading signals seriously because they knew better and the speculators had only their own money to squander. The stock market was a mechanism for investment. That isn't to say it is perfect, no group or individual is, but the only times it showed serious problems was when it was in fact only responding to the actual problem(for example, consider the sharp expansion and then contraction of the money supply that caused the stock crash under Hoover). It was a relatively healthy institution and mechanism for promoting productivity, even when the environment it operated in was not. The concerns of irrational exuberance were unfounded and in fact it was only under Keynesian central planning that the worst and longest failures of these stock markets took place(Robert Murphy pointed out that even Krugman himself admits to this fact).
So what happened to change this process? What distorted this exchange from the description I gave into the one that I quoted? At the most general and fundamental of principles, it was violence. Not the insignificant violent actions of individual thieves and con artists, but the accepted and unrecognized violence most still cannot see even today. It was the violence that threatened us all with increased theft of wages unless we put money into the stock market that turned it into the disaster it is now. I'll describe two specific actions here.
The first really set the stage for the second. When FDR and his fellow new dealers were playing with various schemes to control labor, one was to jail people if they peacefully offered certain salaries to potential employees. This was not limited to price caps. It targeted all manner of incentives. One thing it explicitly permitted was retirement mechanisms. This was how all sorts of completely unrelated services have become tied into employers wage offers but that is another topic. For this matter, just understand that the groundwork had been set for connecting employer pay to retirement plans and investment related offers.
The second action is really the final piece that started the whole slide into destruction. In the beginning of the 1980s, a whole number of laws were passed to the delight of investment banking corporations that threatened greater taxation upon workers who did not put money into the stock market. Both they and their employer would see more of their money taken by the government sho