TAKING STOCK: Facebook phenomena

Dear Mr. Berko:

Please give me your opinion on investing in Facebook. I won't be able to buy the stock on its initial public offering, but I am thinking of buying the stock as soon as it begins trading in the open market after the IPO is complete. I will be using a $23,000 CD that is coming due soon to buy this stock.

While I need income from this CD, you might agree that reinvesting this money in 20-year-plus corporate bonds at 4.5 percent or in another CD for five years at 2.2 percent would be a very bad decision if interest rates rise. So my thinking is: Why should I renew my CD at a ridiculous 1 percent when a potential investment in Facebook would probably earn a heck of a lot more?

I know I will pay a much higher price for the stock, which is supposed to come out at $40 a share, and it looks like this stock has limitless growth potential. But it isn't my intention to flip the shares at a higher price as many people probably intend to do, so I don't mind paying $70 or $80 if you think this is a good long-term investment and I might be able to double this money in a year. How come you are not on Facebook?

PE in Detroit, Mich.

Dear PE:

Investors in the pre-issue market are paying upward of $45 a share for Facebook; however, the British Bookmakers, who are a great source of usually accurate information, believe the IPO will come between $27 and $36 a share. At that lower price, FACEBOOK will trade at 112 times earnings with a total market value of more than $700 billion (including unissued shares) or 40 percent larger than APPLE with $100 billion in cash trading at 35 times earnings. If you buy this stock in the aftermarket at $60 or $70, you will be paying more than 200 times earnings, which ascribes a $1.4 trillion valuation to Facebook.

These metrics are not reasonable and suggest an "Alice in Wonderland" logic. There are some folks who believe even $70 is a low valuation, which could be right, and may heaven protect the future if they are. If they are right, then it's my contention that aftermarket Facebook investors and others of similar pathologies suffer from a primitive satyriasis and an uncontrollable financial nymphomania. And sadly, these people are able to reproduce. However, not even the hot new gay bridal registries in California trade at those premiums!

Your comment on Facebook's "limitless" growth reminds me of Carl Sagan's musings on a bacterium that reproduces by dividing itself every 15 minutes, which is four doublings an hour and 96 doublings every day. And though a bacterium weighs only a trillionth of a gram, its descendants after a day of wild asexual abandon will collectively weigh as much as a mountain. In a little more than a day and a half, it will weigh as much as the Earth and, in two days, more than the sun. In three days, the entire universe will be composed of bacteria.

Fortunately, this will never happen, because the growth you ascribe to Facebook always bumps into some natural obstacle. Bacteria run out of food or poison each other or are shy about reproducing in public, and then their growth curve hits a wall and flattens like the surface of a pool table.

In my opinion, Facebook, Groupon, Yelp, Zynga, etc. are examples of the endemic failure of capitalism in which values have little relationship to earnings. This was recently illustrated when the tech bubble imploded a dozen years ago, when the housing market collapsed in 2007, and when GM, Chrysler and American Airlines were forced into bankruptcy. Investors are caught up in an evangelical greed that disses the time-honored formula of commonly accepted accounting standards.

Lastly, I am not on Facebook because I don't have self-image problems, I'm not insecure, I don't need "gang" approval of my daily behaviors, I have few friends because I place a high personal value on "friendship," I enjoy my own company, I enjoy reading books, I'm not intimidated by face-to-face relationships, and I value intelligent conversation. Frankly, I can't imagine a single benefit that would accrue to me from a Facebook membership.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2012 Creators Syndicate Inc.

Published: Mon, Apr 2, 2012