For the past year an overwhelming focus has been on the Facebook rollout and their disappointing returns. Honestly, “I have never heard as much hype regarding any one stock, as I have heard with Facebook”. In addition, I have been asked more questions concerning Facebook than any other stock. Today I am going to answer some of these questions so let’s get busy.
When asked “If one should buy Facebook before the stock roll out”? My standard answer is… I do not give buy or sell recommendations but teach what to look for to make your own decisions. Before the rollout (IPO) Initial Public Offering, I explained that one should wait a full six months before buying. Give the market time to find the price that would offer the most value and potential price appreciation.
In my classes and seminars I suggested, “If one had to have Facebook then look at the Exchange Traded Funds (ETFS) buying Facebook”. Some of the best candidates were SOCL, PYH, IYW and ROM. Out of the four candidates only one would have qualified (IYW) with over 149,000 average shares traded daily. The other funds did not have enough daily volume per my risk management rules. As you can see on the chart below, the return of IYM was a positive 11.46% compared to Facebook loosing 46%, a spread of 57%.
When asked “Why ETFs instead of Facebook stock”? The answer is simply - managed risk. If Facebook goes down in price your account could be wiped out. If you purchased a fund with only a small percentage of Facebook, you would hardly notice if Facebook “tanked”. As you can see on the chart, at one point Facebook dropped 50% in price. This means it would have to have a 100% return to break even. How many stocks do you think will have a 100% return in the next few years?
When asked what I would be looking for in order to buy Facebook? Once again I do not like to buy individual stocks (too risky) and do not give recommendations to buy or sell. I can state that the institutions (the big money) will not be buying heavily until many of the locked out shares have been released. Between now and the end of 2012 an additional 1.7 Billion shares will be released for sale.
Per our basic rules of supply and demand, with this much supply (shares hitting the market) the price can continue to go down unless there is at least an equal or greater demand for the stock. Maybe this is why the hype continues. Learn to turn off the hype and make decisions on what you see.
Many institutions/long investors will be waiting to see where the stock price settles after these additional shares have worked their way into the market.
One of the biggest reasons investors have lost money with Facebook is because they bought what they thought and not what they saw. Just because a product is popular does not guarantee is will be profitable. Study technical analysis (charting) to watch what the big money (the institutions) are doing. Unless you learn what to look for and how to interpret this data then you are not practicing smart buying and selling techniques. I have introduced over a thousand students to these concepts over the past few years. If they can learn these concepts you can too!
In full disclosure I have not and do not own Facebook or any of the mentioned funds.
For seminar information contact me at thetraderseye@gmail.com.
(Disclaimer) The information above is for educational purposes only and is not intended to be financial advice. Your decision to buy, sell, short or hold any stock or investment product is a direct result of your own decision, free will and research.
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http://davidoengland.com/
