This Newsletter Isn’t About the Facebook IPO - Old Peak Finance

This Newsletter Isn’t About the Facebook IPO

May 23, 2012

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This Newsletter Isn’t About the Facebook IPO

May 23, 2012

Okay, maybe it’s a bit about the Facebook IPO … but bear with me.

Over the past 80 years, an important relationship has held:  small stocks (as measured by a company’s market value) do better than big stocks, and “value” stocks (basically, unloved stocks) do better than “growth” stocks (think “hyped-up” stocks like Facebook).  Over long periods, the difference has been more than 4% per year.  This relationship doesn’t hold up every year, but it does over long periods.  The fund manager I typically use — Dimensional Fund Advisers — uses this relationship as one of their core investing tenets.  Their funds have done very well as a result.

The science of behavioral investing sheds interesting light on this topic as well.  Studies show that individuals tend to over-value companies they know, to prefer stories over facts, and to prefer investing with the crowd, because it gives them a feeling of “security” they cannot get as a contrarian.  Does that sound like any recent IPO?

Finally, Dimensional’s analysis shows that, on average, IPOs under-perform the market.

No, I did not predict the Facebook offering would be a flop, and I have no idea whether the company’s shares will, in the end, prove a good investment for anyone other than its founders.  (I didn’t buy into the IPO because I buy diversified mutual funds, not individual stocks.)  But I know what the averages say.  You are best advised to broadly diversify, to think long-term, to over-weight modestly toward small / value, and to invest in a cold, analytical fashion … based on facts, not stories.  There’s nothing wrong with using a bit of your net worth to bet on a hot IPO or to look for the next Google.  Just don’t do it with the money you need for retirement.  After all, you want to stay your own best friend.

This article is not intended to provide tax, legal, accounting, financial, or professional advice. Readers should seek advice from qualified professionals who can review their specific circumstances. Old Peak Finance endeavors to provide information that is accurate and current. However, we cannot guarantee that this information has not been outdated or otherwise rendered incorrect by new research, legislation, or other changes. Old Peak Finance has no liability or responsibility to any individual or entity with respect to losses or damages caused or alleged to be caused, directly or indirectly, by the information contained on this website.

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