Learning Objective:
To understand that investments are driven by beliefs.
Introduction
Over the past month, one of the most dominating news stories in financial markets has been the debut of Facebook as a publicly traded stock. There are so many great investor lessons about the world of investing and finance that this historic event can provide and so we at SparxTrading.com have decided to participate in the Facebook IPO conversation as a chance to impart the many important lessons to those currently investing and to those who are thinking about it. We will start this series by taking a look at what the Facebook IPO can teach us about our investing biases and tendencies and then explore how this IPO can give us a window into how investing works.
Imagine all the people…
Facebook is a reflection of the current world we live in; it is so much a part of many people’s daily experience that starting to imagine a world without Facebook is becoming difficult. Indeed, with each passing day, I’m slowly forgetting the “old layout” and embracing their timeline. Facebook is becoming increasingly part of the ‘norm’ for many people across the planet and for some it will be all that they’ve ever known. That said, all this connectivity with others is new territory for human kind. It is at this kind of exciting frontier that the idea of Facebook – a medium for connecting with so many people – is alluring. This “thing” called Facebook has captured the world’s imagination.
In the human mind, time can be suspended, rewound or fast forwarded and gravity can be just a footnote. In the “real world” however, time marches on and gravity pulls things down. Imagination is intoxicating and reality is sobering. There is no doubt that “Facebook the idea” was born from imagination however “Facebook the business” is in the real world, and being in the real world it is subject to all the natural forces that things in the real world are – profit margins, operating expenses, regulations, etcetera, etcetera. Businesses are built on ideas but in order to be successful businesses, they still need to make more money than they spend: that’s reality.
A business as an investment
Even though a business may have a great idea, whether or not that business is an attractive investment depends on whether investors believe that company will be profitable in the future. With “new” companies, or companies such as Facebook where there is a great deal of “potential”, there are high expectations. Those expectations of what something is worth in the future usually guide investor behaviour – investors (should) act in the best interest of making a profit at some point in the future. Whether or not those expectations can be met, however, will be borne out over time as will the faith the market has in a company’s ability to follow through on its promises.
Conclusion
Even though Facebook may have launched with a lot of enthusiasm, gravity is still ever present. For share prices to rise “Facebook the business” will have to be an attractive investment and fulfill the promise that the world seems to see in “Facebook the idea.” Whether it is Facebook or any other company, before making an investment, it seems appropriate to ask which world you are investing in, imagination or reality?
To read Part 2 of the Facebook IP-uh-Oh series, click here.
