Is Mark Cuban right to blame investors for Facebook IPO?

10th September 2012

Mark Cuban, owner of the Dallas Mavericks basketball team and Facebook investor, argued in a recent blog post that the IPO had been handled "exactly right". He contends that the job of those selling the company's shares was to maximise the amount raised, and it was up to brokers and investors to ensure that they didn't overpay.

The losses that the stock has suffered since are a consequence of the mistakes that the latter groups made in assessing the price. Or as Cuban so eloquently puts it:

"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."

The fault, dear Brutus, is not in our stars, But in ourselves

Assuming Cuban is right (which many people do not) what does it say about the culture of investing?

When a potential investor looks at a company there is always a balance to be struck between emotional factors (excitement of buying a brand; potential of returns to come) and technical factors (strength of the balance sheet; market share; price to earnings). Unfortunately the former all too often overtake the latter.

The case of Facebook can therefore be seen as educational. Despite the endless column inches painting a picture of Machiavellian corporate types playing on the innocence of unwitting investors, the warning signs were writ large well before the IPO.

Going back to those trusty technicals: the IPO price valued Facebook at over 100x its current earnings (for reference the benchmark US S&P 500 index is currently trading at 14x 2013 earnings); its revenue growth had been slowing in the years leading up to the float going from 154% in 2010, 88% in 2011 and in Q1 figures were up 45% year-on-year; and the company was struggling to cope with the migration of its users to mobile.

It is undoubtedly a profitable company with revenue of $3.7 billion last year and a user base of almost a billion people logging onto the network each month. These numbers, however, helped create the fog surrounding the IPO, blinding investors from looking at the figures that really mattered.

Not everyone is quite so charitable. In his list of those implicated in the disastrous launch Felix Salmon, the finance blogger at Reuters, does not pull his punches:

"Finally, there are all the investors, including that anonymous hedge-fund manager, who bought into the IPO even though they knew that the valuation was incredibly high, and are now casting around for someone else to blame for their losses. It's impossible to feel any sympathy for these people – especially institutions who had no appetite for stock at more than $32 per share, but put in large orders at $38 anyway just because they were counting on Morgan Stanley to give them a nice opening-day pop. If you pay 100X earnings for a hyped internet stock on its first day of trading and then you lose money, you frankly had it coming."

How can investors avoid becoming snow-blind?

It is impossible to disconnect entirely from your emotions, and there will always be a sufficient number of people of both sides of a trade arguing their case to create confusion. For every Facebook naysayer there was someone willing to tip shares would soar.

Pausing before making that snap decision and consulting trusted sources can undoubtedly help in this process. It is important to confront views that clash with your own even if it reduces the excitement over a prospective investment.

Yet perhaps the most important thing is to take responsibility for your own actions. The lawsuits currently raining down on Facebook executives and the banks that played a part in the deal appear very similar to an inverse of the self-attribution fallacy. By this I mean that while investors are willing to attribute successes to their own decisions, they are unwilling to do the same for losses.

"I think investors must take responsibility for the results of their investment decisions," says Tim Richards, author of The Psi-Fi blog. "In a world characterised by uncertainty it's clearly not possible to get every decision right, but we shouldn't allow that to blind us to our overall performance; which is measurable if we care to make it so.

"Nonetheless, corporations and intermediaries have a responsibility also: to ensure information is presented simply and without confusion. Whether that happened with FB I don't know, but if it didn't then not all responsibility lies with investors."

Those who thought that they were buying into a "sure thing" in Facebook may believe they have good reason to feel aggrieved that their bet failed to pay off. They may even have received poor or insufficient investment advice that prompted them to act.

While these things may provide context to a decision and are deserving of some sympathy, they do not remove the responsibility of an individual. Indeed it is only by accepting this responsibility that investors can learn from their mistakes and hopefully avoid the same pitfalls in the future.

 

More on Mindful Money:

Is Goldman Sachs to blame for everything?

Is investing a level playing field?

What investors can learn from Dr Dre and Justin Bieber

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31 thoughts on “Is Mark Cuban right to blame investors for Facebook IPO?”

  1. Drf says:

    Hi Shaun,

    “…why should anybody bother to save at all? As we need a balance between savers and depositors such a development would be an economic disaster but we edge ever nearer it in my view.” Well clearly the answer is that they should not, and as for pensions (other than public sector inflation-linked pensions) no one should bother, since they are all a recipe for having your previously-sacrificed income in real terms stolen from you! The main problem with that is that more and more pensioners will be looking to the state for support, and the state will not be able to afford that support by then.

    The other significant issue is that normal market dimensions are being grossly distorted if not inverted. That means that we now have a centrally-planned and controlled economy rather as the USSR used to have, with no free price discovery in the market-place. That augers very badly for the future, and can only predict nothing but serious economic decline ultimately.

    1. Anonymous says:

      Hi Drf,

      The UK has a crony-capitalist economy that is being badly
      messed up by government intervention. I agree that it’s likely to cause
      serious economic decline.

      Luckily we don’t have a centrally planned economy, with a bureaucrat dictating annual car production of 600,000 green Austin Allegros and 200,000 blue Morris Marinas. If you want one of these cars, please take a bottle of vodka to the car ministry offices and bribe your name onto the 20 year waiting list …..

      1. Drf says:

        Hi EpatinBG,

        I agree that we do not have a centrally-planned economy in the sense which you imply; however it is centrally-planned now in many respects: with manipulated interest rates, and debasement (QE) to ensure that rates remain down by forcing bond yields down. It is also manipulated in other ways, such as with funding for lending, Osborne’s new scheme to subsidise mortgages at the expense of the taxpayer, and deliberately downwards deceitfully manipulated supposed inflation data from the ONS. So in those respects the UK economy is now centrally-planned, and as you agree in this present scenario (whatever you classify it as) is going to lead to serious economic decline. The only real question left is whether this “strategy” is the result of dire incompetence or whether it is part of a deliberate plan?

        1. Anonymous says:

          I’m sceptical of conspiracy theories that claim our politicians have a deliberate strategy to wreck the economy. What is the motive ? Just what do they gain ?

          The theory that they are bumbling incompetents without any strategy seems more credible, especially when many of them are in deficit denial and claim to believe they can borrow and print indefinitely.

          1. Noo 2 Economics says:

            Hi ExpatinBG,

            Most assuredly the politicos are blindly grasping for the next twig to help them through whatever crisis they are experiencing at the moment, with one eye on the next election. Whilst short termism like this persists there is no chance of a coherent long term strategy to address competition, financial sytem and fiscal deficit problems.

            They bumble on and actually, I do not believe they do have the mental capacity to think strategically and plan forward identifying risks and potential risks, then developing mitigation and contigency plans to try to deal withthe peceived risks if they materialise. They seem to have abandoned the economy to the Central Bank to sort out which is beyond the BOE’s capability.

        2. Anonymous says:

          I find a difference between manipulating the economy and central dictats.

          As an example, Norman Lamont tried but failed to manipulate the exchange rate, where the Soviet administrators simply dictated the fantasy exchange rate they wanted and ruled that Soviet citizens were not permitted to possess hard currency.

          A good market signals demand and we expect suppliers to adjust supply to meet the unfulfilled demand. Market manipulation impairs the market. Central planning is a bureaucrat imagining a number that is dislocated from reality.

          The UK health system is centrally planned – and despite their best efforts, waiting lists are frequent. Central planning means a lack of market information and misallocated resources.

    2. Anonymous says:

      Re state support of pensioners. I have been in Spain for a few weeks, reading the country’s very ample and well-written newspapers. I note with some surprise that the Spanish state pension system is (a) funded (€60bn) and (b) much, much more generous than ours. It is changing slowly (not fast enough for Brussels that, however, will be ignored) and results in a pension that is roughly twice the level that UK pensioners ‘enjoy’. And Spain is a country with truly enormous economic and demographic problems. Even Portugal has far better state pensions than us. A Spanish panel of pensions experts recently published its recommendations for the future, for the first time recognising (in a published formula) that people are living longer. That means that the retirement age will rise – one day!!

      What exactly is going on with state pensions? Ours are truly miserable, even if you include Gordon Brown’s means tested top-ups. Spanish pensions are not means tested, and need only around 15 years of contributions, though that could change.

      Some countries seem to have the ability to ignore gravity in the economic sense, holding themselves in suspense while awaiting an EU level solution. Can I guess what that will be? Are they angling to get others to pay? We could end up financing more generous EU pension schemes while we suffer the worst system in Europe.

  2. anteos says:

    Hi Shaun

    Great post as always.

    profligate debtors have been rewarded by ZIRP for long enough. The economy has not recovered. The only way for the recovery to begin is for savers to get a decent return on their savings. this will give them the confidence to start consuming again. A modest rise in rates would be welcomed by many.

    But as we know, any rise in interest rates will hammer the economies only driver for the last fifteen years – the housing market. Housing must be kept expensive at all costs, even if we bankrupt our economy in doing so.

    what a sad state of affairs.

    When do people see IR’s rising? In my view the boe will keep rates at this level until they are forced to raise them.

    1. MickC says:

      Your third paragraph is spot on!
      As soon as interest rates rise, the housing market will collapse, followed swiftly by the banks-and then the Government which guarantees deposits up to £85K.
      Quite how we get out of this is apparently beyond everyone.

      1. Anonymous says:

        Hi MickC

        Let us hope that it is easier than Don Henley and Glen Frey suggested in Hotel California.

        “Last thing I remember, I was Running for the door
        I had to find the passage back
        To the place I was before
        “Relax, ” said the night man,
        “We are programmed to receive.
        You can check-out any time you like,
        But you can never leave! “

    2. Drf says:

      Hi anteos,

      I aagree with your point, but it seems to me that you miss the fact that the UK government is now also amongst these profligate debtors, and therein is the nub of it; if interest rates were to rise the UK government cannot service its present debt out of current taxation!

    3. Anonymous says:

      Hi Anteos

      Some interest-rates have been rising recently if you go by bond yields. For example US Treasury Bond yields have risen which looks likely to push the US 30 year mortgage rate above 4% soon. In the UK the ten-year Gilt yield pushed above 2% last week and is now 2.04%. So markets have been putting pressure on in places other than Japan over the past 2/3 weeks and we await to see if they push again.

      As to the Bank of England it has no intention to raise interest rates and a cut remains as likely as a rise I think.

  3. Mike from Enfield says:

    Hi Shaun,
    Re your final sentence – isn’t a saver and a depositor the same thing? Also, is it not government policy precisely to stop people from saving by shafting them at every opportunity, the theory being that they’ll either spend the money or use it to pump up riskier assets?

    1. Anonymous says:

      Hi Mike
      Thanks and apologies for that,fixed now.

  4. Rods says:

    Hi Shaun,

    Another great blog.

    I agree that consumers have changed their spending habits. I was looking at a personal debt to gdp chart today and from 2007 to 2012 UK personal debts dropped from about 175% to 150% of GDP, which tells a story of people paying down debt and and with increased savings, saving for harder times. Part of this reduction must also be due to housing price falls (real or through inflation) and a subdued housing market.

    I think with all of the central banks artificial stimulus around the world and so little resultant economic growth, just the blowing up of new bubbles in the bond and equity markets (oil and commodities seem to be out of fashion with falling demand), not to mention ever increasing government debts and QE liabilities means the current recession / depression has much further to run and although the US might be at the beginning of the end, I don’t think Europe is at the end of the beginning yet! It is interesting that every time the FED hints at or ends a QE program that US equities tank.

    I think most people also realise that low interest rates won’t go on forever, so are using the low interest times to pay off debts, so with less disposable income they are still affordable as rate rise. Government’s making cheap money available to the banks to convert into expensive money for consumers will not help to make consumers borrow more.

    Thee countries of particular interest with their personal debt to GDP levels are France, Italy and the Netherlands where personal debt to GDP has climbed from 2007 to 2012 even though they have declining house prices! The Netherlands is especially interesting where it has gone up from 240% in 2007 to 285% in 2012!

    1. Anonymous says:

      Pre-2008 credit was granted too easily and some people racked up ridiculously large credit card debts and subsequently bankrupted. Less lending is a necessary part of enforcing credit risk checking. Is the lack of lending down to a lack of credit worthy loan applicants ?

      1. Rods says:

        Good point and I’m sure that there is an element of this in decreasing debts, but I think people have become more conscious of the debts they have and doing their best when possible to reduce them.

        Mortgage debt has been reducing through lack of lending, but also people paying them off faster by making extra payments.

    2. Anonymous says:

      Hi Rods

      I could have added the deleveraging which people are doing via paying off debts which you correctly point out is a type of saving. Some mortgages are hybrids with deposits these days. But I wanted to keep on the pure savings theme.

      As to the Netherlands it has plenty of problems and some of them come from having a mortgage system that seemed to be modeled on Northern Rock’s Together mortgage range. For those unaware of Together mortgages they allowed up to a 125% loan to value. So as house prices fall Dutch banks must be coming under pressure

  5. Paul C says:

    Shaun, an excellent reminder about the insidious nature of the current “temporary” solution.

    Some respondents query whether this is part of a conscious plan or an accident of overlapping/consequential actions. I reckon it is a mixture of both and impossible to separate, dumb people not thinking through the consequences and the calculating folk “gaming” the circumstances.

    It was interesting to overhear that Mervyn King said “he wanted to be judged over the very long-term” (25 years), as recently interviewed on R4 Desert Island Discs. I can only think that he feels that his “rescue financing” will be judged to have given essential respite and time for the Politicians to solve the fundamental problems.

    We all know however that this is not the case, there is no logical or likely positive outcome. It is only about managing decline and catastrophe. As far as I can see so far, sequentially sacrificing the financially weakest/most ignorant and powerless in society, working through each segment and “raping” it in turn. Who is next?

    1. Noo 2 Economics says:

      “…sequentially sacrificing the financially weakest/most ignorant and
      powerless in society, working through each segment and “raping” it in
      turn. Who is next?”

      Ever twas thus – it started abouit 30 years ago with a certain lady raping the land of it’s energy, water and telecomms income producing jewels for a quick gain on the promise of better service at cheaper prices and what happened to all the money she got? With the exception of telecomms, look what happened to “Service” and “prices”, this rape has to continue as the UK’s productive capacity was destroyed by this lady in the 80’s leaving the UK with financial services and housing. Housing has collapsed and taken financial services and the country with it, so now the logical extension of the financial rape is individuals starting with the most weakest/vulnerable although, again the lady was targeting the weakest and most vulnerable 30 years ago. Whos is next? – you and me!

    2. Anonymous says:

      Hi Paul

      Yes thank you for the reminder that we have an “emergency” interest-rate of 0.5% which has lasted so long it fully deserves the label temporary (financial lexicon definition). As to the 25 year span that is an interesting call for a man of 65…….If only he had showed such ambition with his policies!

  6. forbin says:

    hello shaun,

    how long can it go on for ? until it can’t

    and the stagnant western economies are dragging along a suprisingly stagnant oil supply

    except 100$ oil isn’t cheap

    maybe we in the UK can get a boost from that shale gas – except its not cheap to produce and its gonna take years

    bet who ever is in power when/if it comes on stream sells it cheap like we did with North Sea oil.

    As for savers and spenders , well on a personal note, now I branded a top 2%’er by progrock , :-) , if I baulk at getting a loan at 14-17% interest to by a car because my real wages are in decline by 2-3% pa , then those who are below me are going to do the same.

    the disconnect between the BoE base rate these “sharks” can get their cash to lend at 14-17% rates is phenominal and the public have noticed ! Duh!

    Back to the show- popcorn is still relativley cheap

    Forbin

    1. Anonymous says:

      Hi Forbin

      Each time the oil price comes up it feels like it is in pretty much the same place as today’s rally takes it back (Brent crude) to US $104 or so. With economic weakness abounding it shouldn’t really be here but then what market is at the right price?

  7. Noo 2 Economics says:

    Hi Shaun,

    It concentrated my mind wonderfully when Brussels decided that depositors somehow had a share/stake in the bank they had savings with. Amongst other things I did have 4 time deposits with banks – that now stands at 2 and will be zero by next Spring as I unwind my positions.

    I now view my deposits as being as risky as my investments and stand prepared to make my money dissappear in a flash if I am persuaded by rumours (which I listen out for carefully) of the towel refolder at No 11 considering something similar. He will certainly have loooked at Cyprus and be thinking of the possibilities!

    What gets me is that this is a financial debt crisis and their solution is? Create more debt and punish savers and financially prudent people!!! As you would say – you really couldn’t make it up!!!!!

    1. Anonymous says:

      Hi Noo2

      It also makes banking and indeed economies more unstable. The next banking crisis in the Euro area in particular will see depositors even more likely to flee after the Cyprus debacle and of course they could thereby create for others what they are trying to flee.

  8. ninoinoz says:

    “Should this persist then a deeper question will be asked more and more,why should anybody bother to save at all?”

    A friend of mine paid into the second state pension even though he became self-employed a few years back, to ensure he would have some extra pension when he finally retired.

    The Government is abolishing the second state pension in favour of a universal pension. Result? My friend may as well have not bothered contributing as it hasn’t done him any good whatsoever.

    Why bother to save indeed?

  9. Anonymous says:

    The article is a good summary of some of the negative aspects of Home-Owner-Ism.

    A society which worships high house prices and people who live off rental income above all else, will always end up sacrificing its savers.

    Inflation is the secret weapon of people with land and with debts. Land ownership is not PROTECTION against inflation so much as the CAUSE of inflation.

  10. Anonymous says:

    Saving cash in the UK has long been a mug’s game. You get mugged and it’s not a nice experience! That is why people put their money into housing, that at least is protected by the need to ensure that banks don’t lose the value of their mortgage collateral. The fact that the taxpayer is paying some or all of the rent in so very many cases merely adds another layer of attraction to BTL. People sometimes say that this can’t go on. But it can, and I’m afraid it will. Endless deceit is the name of the game. We have splurged as a nation and we continue to splurge big time. The bill has been sent to cash savers, and until their deposits have been used up, one way or another (and I don’t rule out confiscation), that’s how it will be. The next time round, people will not save in cash, but habits die hard and the current older generation is fixed in its ways. The implications of not saving in cash are complex, and may contain some negative surprises. But there are others, and if Mr Carney is correctly reported as wanting a hefty further devaluation of the £, all sorts of things will change. However, economic changes are relatively slow, so my guess is that most can be manoeuvred beyond the next election, when Labour may well have the pleasure of devising a can big enough to kick forward. Or the IMF…

  11. Rat1960 says:

    All savers should consider holding cash and not fixed when the Cyprus payback date is the present. £375.00 @ 2% for four years earns £30.
    Tell me what QE will pay towards the deficit in four years time?
    QE paid £30bn towards the deficit this April. It did not stand at £375bn for four years.
    Savers can see from that how much interest has been stolen to date.

  12. helen jones says:

    Cameron,Clegg and Osbourne all PROMISED TO HELP SAVERS their actions with FLS is pure theft and treachury
    They are destroying the lives of millions of pensioners who worked hard and saved out of taxed income
    Too many of them are forced to sell their homes and the devastating effects will have an appalling backlash on the entire country and this Government will feel the backlash at the polls

  13. helen jones says:

    Mark Carneyy and all of the MPC and the Treasury REFUSE POINT BLANK to even consider the utter hell and desecration these policies have reeked on prudent people who have nothing but the income from their savings to live on
    Many of them will not even be able to touch the capitol as it will be in a Life Interest
    B of E staff do not even know what Life Interest means such is the total arrogance and ignorance within their entire edifice
    In short they are an utter disgrace leeching off prudent savers to fund Bankers bonuses and profligate debtors

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