The Facebook Debacle - And Why I Avoid Investing Fads

Includes: FB, SOCL
by: Roger Nusbaum

The latest news on Facebook (NASDAQ:FB) has Peter Thiel selling most of his shares pursuant to a plan to sell that was apparently filed properly. The stink raised as a reaction comes from his still being a board member (as of when this post is being written). Had he only sold 5-10% of his shares then maybe there would not be such a commotion but he sold 78% of his position based on the numbers here. Gary Kaminsky called it a shitstorm on the air yesterday morning.

The arc for the story thus far seems to be one that has repeated many times before which means that the behaviors have been repeated before. There was obviously a lot of excitement that built up before the IPO, speculation about how high it would go when it started trading and then things unraveled very quickly from there. Since the IPO in mid May the stock has cut in half, raising all sorts of questions with the Thiel sale being the latest.

Throughout all of this there has been a never ending stream of coverage of the stock in print and on the air. Facebook, along with the other social media stocks are a fad and have been a fad from the start with many of the stocks in the fad doing very poorly.

I've pointed out several times the extent to which this is a fad including here and here and I believe I have been consistent over the years in saying that fads are usually better to be avoided. A couple of easy ways to know when something is a fad is to watch CNBC for a day to see how much airtime the supposed fad is given and click over to Seeking Alpha to see how much attention it gets there.

That is not a shot at either CNBC or Seeking Alpha. I am very motivated to avoid fads for the simple reason that I do not want to bet client money that I can recognize the top and so anything that makes it easier to decide that some stock or group of stocks is a fad ends up being a huge time saver. Obviously it is a more effective use of time when you can rule something out before committing the time you might need to decide to buy something.

Certainly many people view this differently as evidenced by the interest and volume in the stock. My opinion on this stems from having the goals of smoothing out the ride as much as possible and giving clients the best shot of having enough when they need it. Recognizing a fad is not the most difficult part of participating in markets and so avoiding it, if that is what you want to do, is also not the most difficult part of participating in markets.

The behavior of investors getting too excited about anything, including the wrong thing, is something that will continue to occur. It would be nice to view it as a behavioral curiosity as opposed to a huge problem you have to solve for yourself.