I wonder how common this is amongst retail investors: buying things they have no business buying. Whether it's an IPO or an options contract, there's a great deal of complexity behind many financial instruments, and just because your brokerage gives you the opportunity to pull the lever it doesn't mean you're qualified to do so.
On the other hand, it's hard to work up sympathy for the woman in the story. Yes, she wasn't privy to behind-the-scenes details. But it sounds like she put less research into her $200K "investment" decision than she did with the last car she bought. The Atlantic may have left out the details of her late-night scouring of web pages for information, but as a proxy for retail investors in general it's probably accurate.
Here's the only thing a retail investor needs to know about IPOs: FB isn't the exception, it's the rule. Buy an IPO on opening day and the vast majority of the time you're going to lose money. Why? (And I wish I could bold and underline this.) Because the IPO isn't to make you money. Stay the hell away from them unless you know what you're doing. And you probably don't.
EDIT: maybe I'm mis-remembering, but didn't the problem of mobile users and ad revenue come out before the IPO day?
It is not the responsibility of the purchaser to know information which is purposefully withheld from them. From the article
> Scott Sweet's multi-billion dollar hedge fund client flipped the stock at $42. His subsequent short made his firm its "largest profit of the year," Sweet said. There's "no way" a retail investor could have known about the lowered projections, unless he or she "had a friend at a multi-billion dollar institution," he added.
Please explain to me, when information is withheld from the purchasers and only specific clients notified as to circumstantial and meaningful changes to the state of the offering, how anyone could ever "know what you're doing?' In fact, Morgan Stanley was actively misleading investors by continuing to adjust the specifications of the offering to make it look better.
Analogy: If an automaker produced a new car which was secretly designed to become worthless (engine would fuse together) after 3 months and only told one rich people not to buy it, would that be fine? What if there come back was 'you could always open the hood and see our computer components which execute after 3 months, its not our fault you don't know what you're doing'
My understanding is that the information was not withheld from retail investors; rather, it wasn't actively disseminated to them, and the significance of the information impressed upon them.
The reduced revenue estimates were public information; I recall reading about them myself before the IPO took place. If someone had put me in charge of billions of dollars and told me to take a position on the Facebook IPO, I would have shorted the stock, as many others did.
The crux of the issue is that wealthy institutional investors had analysts at their disposal to point out the revised revenue estimates, and retail investors like Swaminathan didn't. Retail investors were ill-prepared for the IPO, and they got burned.
They're ill prepared to consume the information in the format its delivered (if it is delivered at all). Notice, the revised S-1 doesn't say the amount of the adjustment, you had to receive that from Facebook via another channel. So, it doesn't really have to do with special analyst job knowledge, it has to do with special treatment.
I mean, "actively disseminated" seems a bit generous. They call 3 institutions to let them know meanwhile individual (notice i'm intentionally not saying "retail" because thats become some sort of in-crowd, brow beating, bullshit term for shaming regular, non-hedge fund investors) are left to read smoke signals. Its not that the institutional investors "had analysts at their disposal" its that the systems is built to make sure institutional investors and hedge funds get information others don't.
You can say what you want, but the quote from the hedge fund manager seems much more clear then your opinion, and he's a domain expert who took part in the situation.
>"There's "no way" a retail investor could have known about the lowered projections, unless he or she "had a friend at a multi-billion dollar institution," he added."
She shouldn't have taken such a large position in a single stock. As a retail investor, that is stupidity.
As a retail investor, it is your job to find someone who knows what they are doing and can teach you how to invest or manage your investments for you. After that, if you are investing over 10% of your portfolio in one stock you are asking to be broke.
Your car analogy doesn't work because there is really no way to diversify your car whereas there are plenty of ways to avoid this kind of bad decision with your investments.
The part you quote was not the only warning sign to stay away from the IPO. Just a quick search brought a whole page (published before IPO day) of reasons to stay away: http://www.zdnet.com/blog/feeds/facebook-ipo-risk-factors-an.... Regardless, big IPOs like Facebook are driven by hype, not sound financials. I'd be willing to bet that Facebook could have used 24 point type on their login page stating: "we're losing money hand over fist" and there would still be people lining up to pay $42/share when that bell rang.
Were insiders withholding information? I'm not going to argue one way or another. How do you "know what you're doing"? Start by knowing that insiders would stick it to their own grandmothers if they could get ten cents more per share. But when one's whole strategy is to hope for a first day "pop", that's playing a lottery ticket, not investing (exhibit: Zynga). For one, if one buys after the opening bell, you're not going to profit from the pop, you are the pop.
The article makes it sound like the only research she did was:
> and came to know of the phenomenon known as the first day "pop." On the day that companies would debut on the stock market, the price would tend to shoot up before stabilizing
If that is really the limit to her research, I'd have the same sympathy as someone who put their life savings on black and complained when it came up red.
And seeing as investment 101 is "diversify", it seems very likely she really did put that little thought into it.
How much research are you obligated to do before purchasing stock, going into surgery, buying a house, or accepting a job?
I've noticed that the answer to this from others is always "should've done more" whenever a victim (of luck, of poor planning, of circumstances, whatever) dares speak up.
Did a group of people knowingly screw you over on your mortgage? Your fault.
Did a group of people knowingly suggest surgery you didn't need? Your fault.
Did a group of people knowingly conspire to screw your stocks? Your fault.
One of the historically "American" values is the lack of social and economic barriers to people who want to take risks: the ability for anyone to take a huge risk and earn a huge reward. You don't have to come from wealth or be a banker to take financial risks. If you want to risk your life-savings, no one is going to stop you. Preference is given to the individual freedom over safety.
At the end of the day your life, your choices, and their results are your responsibility. We don't want people/government to protect us from ourselves because that directly limits our personal freedom. The prevailing attitude is that you should be freedom to gamble your own life/possessions and ignore the nay-sayers. You have the right to take on whatever risks you feel you are big enough to handle.
So when someone does something risky, like invest their life-savings, we expect them to own the responsibility for their risk. In our culture risk and responsibility go hand in hand. We have little sympathy when someone gripes about a risky decision that turns badly. It was a risk. If you were not prepared to handle it turning sour you should not have taken the risk. If you did not do even the basic research to understand the nature of the risk we feel even less sorry for you.
We love the story of the underdog who risks it all and wins. We love the story of the underdog who has the courage to risk it all and accepts responsibility when he fails. We dislike the guy who takes a risk capriciously and whines when it fails and we hate the guy who arrogantly takes a risk without spending even a little time to understand it. Playing the stock market is widely known to be a risk. Playing the stock market with your life savings is such a foolish risk it is a stereotype.
Its a craftsmanship thing. Notice its her life savings, not just some random dollar amount however large or small.
I have an uncle who could swing a 1/4 mil loss and laugh. They intentionally chose this woman because she intentionally in gross ignorance decided to blow away her lifes work.
Its like an artist spending his entire life on an amazing sculpture, decades of toil and sweat, then blindly, idiotically, "eh, I donno, I'll just use this sledgehammer to trim the last little bit" and the whole life's work is gone, crumbled into ruin. Do we need sledgehammer control? More education? Can we blame the rich? How about more govt regulation? Nah, just fewer idiots with sledgehammers. Maybe the story will scare dumb people away from one dumb activity... probably into another dumb activity.
Which brings up the next issue, the other part is fools will always find a way to be fools. This quote says it all "He kept asking me what was going through my head when I bought the shares" That was her life's crowning achievement. Not being awarded a doctorate, not a Nobel prize, just an empty head and its all someone elses fault... That money was going to be lost one way or another, in real estate, casino, or other scams. Most scams have really sleazy operators, at least the stock market scam is somewhat less sleazy than some bookies and some used home salespeople and the like. Not much less sleazy, but a little.
> Its like an artist spending his entire life on an amazing sculpture, decades of toil and sweat, then blindly, idiotically, "eh, I donno, I'll just use this sledgehammer to trim the last little bit" and the whole life's work is gone, crumbled into ruin.
Uh, no, it isn't. A lifetime artist would be familiar with his tools and wouldn't make such a stupid mistake. The point is she wasn't an investment banker and didn't have the connections to get advanced information that could have protected her. I don't disagree with your other points, but this analogy is wrong.
What would be your solution to the problem you pose? Forced education of investors before they invest? Or just banning individual investors from the stock market? I don't really see any other way around the problem.
You do realize that before the widow in question was allowed to invest she had to click through a number of windows that informed her that "past performance is no indication of future performance" and "you're investment is not secured against loss", etc, etc, etc.
Lots of hindsight bias. There's always a grain of truth to it, but the overall American sentiment is that you and you alone are to blame for anything that happens to you (unless it happened to me, in which case it was bad luck). That's why Americans seem less understanding of poor people and tend to put rich people on a pedestal.
10% of her losses were on the first day trading. No big deal. Most of her losses were later on while she tried to cash in on a big lawsuit as advised by :
"Her son advised her to hold onto her shares until she either resolved the matter with Vanguard or the price bounced back."
I have no problem with retail investors buying stock because they believe in the company and have the patience to hold on to it. That can be a very good, low on stress investment.
But trying to outsmart people living in Bloomberg terminals at their own game, buying on IPO and trying to dump it the same day? Her loss is no ones fault but hers.
Dropping 1/2 of your life savings after retirement into a single nest egg is sort of a classic mistake; one of the textbook things Not To Do when you read any introduction to investing. It's one thing to get flummoxed by handling options and other derivatives; the common wisdom isn't so common there for the novice investor. But stocks are relatively well understood. :-/
It's a real bummer for this lady, and I hope she can figure out how to manage her losses without drastically affecting her life, BUT she committed a classic textbook error in stock trading.
Granted, she was extraordinarily foolish to have gambled her entire life savings on one stock's IPO. However, this is where things fall apart for me:
========================
She turned her attention to her computer screen only to realize that there was no sign of her having voided the order. She kept refreshing the page in hopes of seeing the notification. When no cancellation report appeared, she called her stockbroker at Vanguard. "What's going on?" she asked.
If the cancel order was placed, then it's probably cancelled, the broker told her. She got off the phone and went back to her computer screen. There was no sign of cancellation. She called Vanguard again. This time, she says, she waited on the line for a long time, but no one came to take her call.
Meanwhile, Facebook stock opened at 11:30 a.m. The mysterious delay was due to technical glitches. NASDAQ's electronic trading platform couldn't handle the high volume of trades. In the first 30 seconds, around 82 million shares were exchanged.
==================
Am I reading this correctly that she attempted to cancel the order and it just failed? Is that really tolerable?
She only lost about 10% of her life savings on that trade on the first day.
"Her son advised her to hold onto her shares until she either resolved the matter with Vanguard or the price bounced back."
That would be an interesting malpractice lawsuit, mom vs son. Just sayin.
How dare her trade not profit! I know, file a lawsuit for a 400% rate of return for, um, well, not winning in the casino, thats what.
This is what is known in the business as catching a falling knife. By the time the legal stuff wrapped up, she lost more like 90% of her life savings as the stock cratered. A legal maneuver attempting to cash in on the situation was the gamble that lost most of her money because she caught a falling knife and stubbornly refused to let go. Really its two back to back gambles both of which failed.
If she tried to cancel the order, the broker should have been able to cancel the order for her. They had over an hour to work with -- if it were their own money, it'd have been handled in milliseconds.
It's standard to blow up the damages figure in the initial lawsuit filing. Big companies do this EVERY SINGLE TIME. Yet this woman does it and she's the greedy one who won't take responsibility?
Vanguard had one job here, they failed at it, and they should have either settled with her for her first-day losses and no punitive damages immediately or lost in the lawsuit with bigger damages eventually. Of course, the game being what it is, they just won eventually.
How so? She clicked buy, did she not? And she got exactly what she wanted. Quite awhile later, she changed her mind about what she wanted. Oh well.
Its like buying a lottery ticket, then after the numbers are picked, deciding you don't want it anymore and trying to return it. You can get away with that kind of stuff at walmart or target, not so much at the lotto kiosk or the stock exchange. She had 12 years of stock trading experience per the article. Not as much as me, but she didn't exactly fall off the turnip truck the day before, either.
Oh come on. She changed her mind over an hour before the market opened and they couldn't process her cancellation. She didn't ask for her money back after losing it, she asked to stop the trade before it was executed and they failed at that for over an hour. Are you seriously not getting that distinction?
It's not like buying a lottery ticket and deciding you don't want it after the numbers are picked. It's like starting to buy a lottery ticket, then changing your mind, and the clerk punches you in the face and takes your wallet, giving you your lottery ticket anyways.
I understand that it wasn't on purpose but in most industries if you fuck up and cost your customer a lot of money then they're going to have legal recourse against you.
Yes, actually I remember that day. Transactions sent in even buys took hours and _hours_ to execute. I didn't know the final state of my fb trades until the next day.
The problem as I understood it:
(1) Consumer brokers often consolidate trades/buffer them up and send them on
(2) More centralized entities actual have access directly to the trading systems and execute these batches of trades coming in
(3) The trading system does it's magic and responds
My understanding was that (2) and (3) became _incredibly_ overwhelmed and latency spiked, queues filled, and trades took _forever_ to go through.
Unfortunately, the consumer broker is stuck at the mercy of waiting for responses from (2). So yes, they can take in customer requests, but they are not the ones that finally execute and latency can become huge.
Completely unacceptable, in my opinion. If I cancel the order, the expectation is that the order is cancelled. If it is not cancelled when I told it to cancel explicitly, then Vanguard is on the hook for that. The timestamps on the trades should be enough to illustrate what happened when.
You need to adjust your expectations. When you enter an order, your only expectation should be that it gets filled, and not necessarily quickly (or at the price you'd like unless it's a limit order). Check with your broker, I'll guess that they make no guarantee about canceling orders. Using Fidelity as an example, when I cancel an order the page comes back with "attempting to cancel order" (emphasis mine). Someone fills the order before the cancellation makes it through? You just bought yourself some stock.
In ordinary circumstances, yes this is all true. When the clusterfsck that was the Facebook IPO happens and the market shuts down for hours, no... there was time to cancel that order. If her order was sitting in a queue somewhere waiting to be executed, it should have been able to have been removed. If it wasn't, then Vanguard should have at least been able to tell her what its status was.
Regardless of you how feel about FB, Banks, etc... In this case, the IPO underwriters DID serve the founders/company, which is their job.
Meaning, a "pop" means the IPO was priced too small, giving the early investors/founders/employees a low price, and giving the first-day IPO purchasers (who did no work, & are just gambling) the benefit of that new, higher price.
No "pop" means it's priced about right, and serves the interest of early investors, who took far more risk & often built the company.
The underwriter's job is a little bit more complicated than just maximizing the offering for the company. They actually serve many interests including those of their own clients and stakeholders.
A "pop" does not necessarily mean the issue was underpriced. Besides, an increase in share price benefits the founders too
This issue didn't just fail to "pop," it subsequently tanked which suggests that it was overpriced/oversold and while Facebook, Inc. received more cash for the offering, the net value of the enterprise was worth less because of it.
Stock is a form of currency too. For compensation, acquisitions, and more. I think Facebook was out to get all they could, probably still expected a pop (hubris) and the bankers who did the issue let them because they're all shells of their former selves, and they were hedged with the way the deal was structured anyway (greenshoe).
Think of it in terms of taking a cash-out refi on your home with an artificially inflated appraisal. You might maximize the cash you can get, but what's the value of that cash when the actual value of the house is realized and you're at break-even or worse, underwater? Is the bank just "doing their job" structuring deals that way?
Investing greater than 10-15% of your net in high risk stocks is crazy. If you look at Berkshire Hathaway 13F Facebook is nowhere to be seen. There is Amex, Coke, WAL MART, IBM... These corporations will probably be here in 2023. I have no idea about FB.
What's the point of discussing how at fault a poor old retired widow is. Why don't we discuss of how deliberately vague the last minute update to S-1 was! (I was a banker who has written a few S-1s and I can imagine what kind of discussions precipitated when Mr. Ebersman dropped the 'bomb' during the roadshow - if only those discussions could be recorded)
Facebook and its bankers broke NO law. But IPO investing doesn't have to be this big of a crap shoot for retail investors. The prospectus should put anyone, who cares to read and parse it, at equal footing with the institutional investors. That's where the law is lacking a bit. The prospectus can not include any forward projections and institutional investors get to see all of those BEFORE the IPO (of-course making them available will bring their own sets of problems). I wish you guys discussed that part here as well. Being non-bankers and non-lawyers (for the most part), you can come up with better solution, maybe?
She'd never placed such a big bet on just one stock, but she felt a personal
connection to Facebook. She had been using the site to connect with family
and friends since 2009, and almost everyone she knew had an account.
Kind of like feeling a "personal connection" to a TV show you've been watching since the first season.
Odd, just minutes ago that was the title (and was the only reason I clicked on it). I refresh and now it's shortened. I don't know about "link bait", though, as the title is now less appealing to me personally.
She has (had) money, therefore is entitled to continued success. Doesn't the government bail out many other failing business models? The cognitive dissonance is its not supposed to be gambling, she's supposed to be entitled to always win that casino. She had a quarter mil in cash, that makes her pretty rich by most standards, rich people are always supposed to get richer without thinking. Thinking is for the little people, you know.
What the hell that lady was spending half of her retirement account on one investment. That is horrible financial planning no matter how the stock does.
On the other hand, it's hard to work up sympathy for the woman in the story. Yes, she wasn't privy to behind-the-scenes details. But it sounds like she put less research into her $200K "investment" decision than she did with the last car she bought. The Atlantic may have left out the details of her late-night scouring of web pages for information, but as a proxy for retail investors in general it's probably accurate.
Here's the only thing a retail investor needs to know about IPOs: FB isn't the exception, it's the rule. Buy an IPO on opening day and the vast majority of the time you're going to lose money. Why? (And I wish I could bold and underline this.) Because the IPO isn't to make you money. Stay the hell away from them unless you know what you're doing. And you probably don't.
EDIT: maybe I'm mis-remembering, but didn't the problem of mobile users and ad revenue come out before the IPO day?