It feels both right and wrong - say I sold a inferior product to someone at a bloated price. As a seller, I made heavy profit and my business is a success. But I knowingly inflated the price and screwed the buyer (of course, it is buyer's responsibility to evaluate the value of the item he/she purchases). The second part (bloating the price) just feels wrong.
It would have been wrong if FB could themselves accurately measure the "quality" of their company and price it accordingly. However, no one can do this. If FB could, they wouldn't be in the social media business - they'd start an investment group and start pillaging NASDAQ.
If we're going to talk about an IPO as selling a product, we should be clear what this product is - a golden goose. The goose itself has some value in of itself (e.g. the company's assets), but the real value comes from the golden eggs the goose produces. Now, an owner of a golden goose could give you a good idea as to the number and rate of eggs that's come out of the goose to present day (e.g company's S-1 filing), but there's no guarantee that the goose is going to produce eggs at the same rate (maybe the goose dies from gold poisoning, or maybe the goose goes on an egg laying spree.)
The point is, the buyer and seller have to come to an agreement on what's a fair price for this goose. They both have different goals when pricing the goose, and there's nothing to say either of their pricing is accurate, since we're talking ultimately about modeling future events.
So who's really complaining about getting screwed? Long-term investors? Doubtful - if they're in the stock for the long term, then they have to believe that FB will rise in value. They're loving the stock bottoming in that they can buy more at 1/2 price. Traders looking for a bump? Well, it's a trade - for every buyer who thinks FB is going up, there's a seller thinking it's going down. Why would FB under-price their stock and let others pocket money the IPO was supposed to raise?
Retail investors might have a gripe with advisers who pushed them into FB stock blindly. Maybe these advisers are trying to deflect their client's anger to FB.
Say I'm selling a house. Prices in my neighborhood are skyrocketing because there are rumblings that the city will build a new subway line near the area. I personally think the project will fail because the parties won't be able to agree on certain aspects of the new line. But I don't "know" that. I can't predict the future. If I sell my house for $900k based on speculator enthusiasm, and it later turns out that the new subway line does fail because of NIMBYs in another neighborhood, and the value drops to $600k, did I do anything wrong?
Distinguish this case from one where I have knowledge that, say, my house has a cracked foundation. The buyer never checks, and I never tell him. Have I done something wrong in this case?
Except the person buying the inferior product is trying to re-sell it to the next sucker for a larger mark-up than you are. I have as much sympathy for speculators as I do gamblers.
Facebook told everyone their weaknesses for months in advance. Every financial detail was disclosed before the IPO.
"Screwing" the buyer implies some sort of dishonesty. If I see an inferior product at an inflated price, I don't buy it. The only way the seller would be at fault is if they lied to me about it.
This. The buyer knew exactly what they were getting.
Something's only worth what people are willing to pay for it. If there wouldn't have been any buyers at that price, they would have had to lower it. But there were, and they didn't.
Investors exchanging cash in hand for a discount on future cash flows, because they have different time or risk preferences. If you can't ever come out ahead without selling the asset (to a speculator who will of course have to kick it further down the hall of mirrors), its price has exceeded its fundamental value, which pretty much has to screw somebody over.
Eh, the issue you're against is that a stock price incorporates people's expectations of the future, and these expectations often turn out to be wrong.
This is where the gambling comes into play, but it's foolish to think it could possibly work any other way. Take the following example:
Say Congress passes a law that seriously hurts FB, and it will only go into effect in 3 months. There's a very small chance that FB will be able to successfully lobby its case, and a large chance that the law that has passed will go into effect.
Now, do you expect everyone to trade on FB's current "fundamental value"? Anyone in their right mind could see the changes that are coming and will price the stock accordingly. If they didn't, there would be huge arbitrage opportunities for anyone that could short the stock today and buy it in 3 months.
Now imagine that the certainty is less clear. Your own discounted cash flows model relies heavily on growth rate; a change in growth rate today disproportionately affects future potential a few years down the road. There are a lot of things to pay attention to but growth is probably the most important in the DCF model.
Everyone is trying to guess where that growth rate will go, and nobody can predict the future. Hence, a stock that can be volatile and not priced on its "fundamental value" according to you.
If you disagree with this, I would suggest you propose something different that would actually work.
If a baseball player is successful, the price of their trading cards goes up. Why? There's no concrete relationship between the two; the league doesn't pay the owner of the card per win. It just makes enthusiasts want to have the card to show off, and attracts speculators who intuitively expect the price increase they themselves help bring about.
In the same way, the success of facebook.com doesn't create any income for people holding FB shares, it just makes it psychologically easier to flip them. The price goes up for no better reason than everyone assuming it will.
The stock market has become a casino where self-perpetuating phantasms create noise that swamps the signal. I can't blame any company that fleeces willing speculators rather than try to sway value investors using actual yields. I'd love to propose a fix but I don't have one.
I understand how stock market works and I also understand we need stock markets for huge projects that require billions of dollars in investments. But other than that, it is just one sucker trying to find the next sucker, offload his stuff as fast as he can, for as much gain as he can. The whole thing feels a bit odd.
Well, I think you can view it as fair based on the idea of asymmetric preferences among investors. One investor's decision to sell after a short term period may offer an advantageous buy to another investor who wishes to hold the stock for a longer time, etc. So one need not assume that one party has an information disadvantage.
