Generally articles I focus on deal with investment ideas and details regarding winning strategies and tactics. Unfortunately sometimes things go terribly wrong. At these times it's important, even cathartic, to get something out of the trade. In this case it's a revised set of personal investment rules.
My Facebook investment experience demonstrated the consequence of veering from defined portfolio management strategies that have proven their merit. Flexibility is important in investment management but in this case it wasn't flexibility that lead to my Facebook problems. The root of the problem was letting the momentum of the market, hyper public opinion, overly optimistic valuations, and greed sway me from proven tactics. I have experience in Silicon Valley and thought I had a decent understanding of the Facebook business plan and opportunities. My trading plan was simple enough and having thought through the expected outcome and risks I was eager to enter the Facebook trade. My investment plan was to use a limit order at the opening of the IPO so I could get in early and trade out half of my position during the first day to capture expected gains. This represents a meaningful departure from my traditional long-term strategy. I expected Facebook to rise aggressively on the first day then drop to a lower but acceptable level during the following weeks. Capturing 15% to 20% profit was my day one target.
My limit order executed but there were major problems with the market maker and brokerage. My purchase was not reported back to me until two days later. There was no record of the purchase and no way to trade it as it did in fact meet my expectation for day one and rose from $38.05 to $45. I ended the first trading day certain that I did not own any Facebook and given the price retracement I considered this a good outcome. It closed day one at my limit order level.
In retrospect my strategic shift was fraught with problems and unfortunately the combination of technical breakdowns and flawed strategy demonstrated that there are risks in trading that until now would not have been considered. Somewhat like the flash crash I view this as a learning experience, an expensive learning experience. A dispute was filed the next trading day and I expect to see a multitude of lawsuits and disputes filed over the management and execution of the IPO.
- Do not change proven strategy to speculate on short-term profits.
- Technical breakdowns can occur that impact trading so stay with long term profit objectives.
- Always define an exit strategy when entering a trade.
- Leave IPO's to the investment bankers.
In the future I will use the Facebook lesson to remind me of the possibility of unforeseen problems and risk.
Disclosure: I am long FB.