On the Facebook IPO

Facebook Shows There's a Sucker Born Every Minute


Consider that as Facebook readied its IPO, there was a lot of shifty business: On May 15, the price was boosted to $38 from a range that bottomed at $28. The next day, the offering size swelled by 50 million shares. Then came a disclosure that insiders would sell 53% more shares, or 84 million shares, in the IPO than previously planned.

... By the time the shares went public last Thursday and started trading Friday, Facebook was close to becoming a $100 billion company with a price-to-earnings ratio of roughly 100. Those were pie-in-the-sky numbers by many measures.

They were ridiculous when you consider that Facebook reported April 23 that its growth had stalled. Revenue fell 6% in the first quarter. Profit fell 32%. There were other warnings, too.

General Motors Co. pulled its advertising from Facebook, saying it wasn't seeing a return on its investment. This wasn't the first time advertisers showed skepticism.

Facebook itself acknowledged that nearly half its advertisers considered the site experimental. In other words, as underwriters were touting the IPO and increasing its size and price, Facebook was acknowledging that it had either hit a rut or that its most robust period of growth—the kind that might support such inflated valuation models—was over.

Here's the upshot of all this: None of these factors was hidden. Facebook disclosed its worries about advertisers. It disclosed its slowing growth and all but acknowledged that it wasn't going to grow and support exponential price growth the way Google Inc. did after its IPO in 2004.
Comment: Benjamin Graham, The Intellegent Investor has an entire chapter on avoiding IPOs. It's simply not value investing. A couple of other articles with quotes: Facebook IPO Fiasco: Here’s How Small Investors Got Rolled Over
But then there are the recent revelations, which is that big institutional investors had much better information about the current condition of Facebook's business than small investors did.

This revelation may well have played into the modest stock "pop" on the first day of trading, and it may also have caused some would-be long-term institutional investors to jettison Facebook's shares, thus exacerbating the price decline.

The information that big institutions were given was estimates for Facebook's future performance, which were developed by the underwriters' research analysts. These estimates are verbally distributed in most IPOs, and the institutions use these estimates to help decide on a fair price to pay for the stock.

In Facebook's case, however, the underwriters' analysts cut their estimates midway through the roadshow, which is a highly unusual and negative event. They did this because Facebook told them that its business outlook had deteriorated--information that was not given to small investors.

As a result of this estimate cut, combined with an increase in the size and price of the deal and the number of shares sold by insiders, some institutional investors "got the willies" about the Facebook deal. Individual investors, meanwhile, were unaware that anything had changed.
Facebook Under Fire: It’s the Valuation, Stupid!
Schiff says Facebook is only the latest example of a flawed system. He blames the regulators, not because there are too few rules, but because there are way too many.

The high cost of jumping through regulatory hoops means only more mature, expensive companies can afford to go public. Up until then, the only people invested in a company were Venture Capitalists, Private Equity, and assorted well-connected, well-heeled individuals.

Those lucky few are using the IPO as a chance to cash out to the public. "By the time the average American gets a shot at all, the upside is gone," says Schiff. In the case of Facebook, the little guys may have gotten doubly hosed. During the road show, the underwriters reportedly lowered earnings estimates prior to the IPO, then only disseminated the news to select institutions and clients.

The specifics of Facebook are different, but in the larger picture Schiff says the Facebook IPO is no different than any other offering. The insiders who are selling know the company is ripe to be sold while the outsiders wager on better days.

Schiff says of the average IPO investor: "You're betting on the come but meanwhile you're paying through the nose." That's not a recipe for investing success.


Beard zenith

I started the beard on October 1st. I had intended to shave it on March 1st to celebrate Spring (which in Minnesota is really about May 1st!)

Mom asked me not to shave it - she wanted to see it. By this time it felt too long but I wanted to see my Mother (picture above on May 17th. Mom turned 92 on May 9th)

When Mom saw it ... and felt it ... her response was "I don't like it!"

Kathee trimmed it to 1" today. Feels and looks better.

Picture above: Mom, Nancy, and me in Kerrville TX

Bill's BBQ Kerrville TX

On Thursday May 17th we visited the Texas Hill Country and stopped for lunch at Bills BBQ in Kerrville, Texas Tom, Bill's grill master, took our picture. (Mom, Kathee, Jim, and my Sister Nancy)

LBJ Trip

Kathee and I returned yesterday from our San Antonio trip. We left Thursday May 10th, spent the night at Guthrie, Oklahoma and then on Friday May 11th, we drove to Mother's house in Arlington TX. On Saturday May 12th, taking 2 cars, Nancy (my Sister) and Mother and Kathee and I drove on to San Antonio. We stayed the week at the Hyatt Wild Oak Ranch. That week, Robert Caro's 4th volume of the LBJ biography was published. I received it just days before our trip. My Brother had read volumes 1-3 and recommended volume 4 to me. But it was George Will's column that persuaded me.


Robert Caro's "The Passage of Power," the fourth and, he insists, penultimate volume in his "The Years of Lyndon Johnson," which when completed will rank as America's most ambitiously conceived, assiduously researched and compulsively readable political biography. The new volume arrives 30 years after the first, and its timing is serendipitous: Are you seeking an antidote to current lamentations about the decline of political civility? Immerse yourself in Caro's cringe-inducing catalogue of humiliations, gross and petty, inflicted on Johnson by many New Frontiersmen and, with obsessive hatred, by Robert Kennedy
The trip was not really an LBJ trip - it was to celebrate my Mother's 92nd birthday. But I worked through the LBJ book last week. Additionally we visited - and this was an absolute highlight of the trip - the LBJ Ranch and Texas White House.


The "Little Pig"

We've had one of these for almost 25 years. I bought in on Colorado Avenue in Denver (I think in 1988). Kathee uses it on the stairs. What a solid little performer it has been. The image above is from an Ebay ad for a used one.

Today I did a little bit a Internet research on it. I found this interesting:

A forerunner was the The Compact Vacuum Cleaner: Compact Vacuum Cleaners were among the prizes offered on the 1950s television game show “Queen for a Day.”

  A bit about the history of the "Little Pig" as it is sometimes known:

Interstate vacuums were originally produced and patented by the Interstate Engineering Corporation, and they are responsible for the creation of the compact vacuum. Both Interstate Engineering Corporation and Interstate Electronics, a sister corporation, were owned by Interstate Aircraft. Their first manufacturing plant opened in El Segundo California in 1937. These vacuums were originally made to clean the Howard Hughes Company aircraft fleet during the nineteen forties. Due to their success at cleaning the aircraft, and the fact that the company already had the necessary tools and dyes for the vacuums, these machines were sold to the public by door to door salesmen starting in 1946.

The compact vacuums were only sold by the salesmen; but in 1949, the Revelation vacuum cleaner was introduced to retail outlets and was only available there. The compact vacuums designed and patented by Interstate Engineering Corporation were also featured as prizes on a nineteen fifties game show called "Queen for a Day."

Throughout the years, the Interstate Engineering Corporation has moved several times, merged and been sold, and it now exists in two different companies run by descendants of the founder of Interstate Engineering Corporation. The two companies operate under the names of Tristar and Air Storm, and sell vacuums based on the original compact vacuum model. The Interstate Electronics Company is still in business today. The design of the vacuums sold by Tristar has changed little since their patenting, with only the motor and internal components changing, not the external assembly. The Tristar Company has many different vacuum models, including the EXL, PN5, C6 and C7. The company has canister and compact models for home and business use. The Mg series of Tristar vacuums are designed to bring ease to cleaning by providing cyclonic action and consistent power for all types of cleaning and use. The cyclonic action allows the Tristar cleaner to keep dirt and dust from clogging the filters as it pushes the debris away from the filter, not into it.
I'm not sure if the units can be purchased new but parts and supplies are readily available - for example here.

"Sometimes Mr. Market behaves like 'a psychotic drunk'"

Live-blogging Buffettpalooza


Carol Loomis presents a question from a shareholder who asks why Berkshire shares have been undervalued for so long. Mr. Buffett responds by taking an even longer view. “We’ve run Berkshire for 47 years. There have been four or five times where we thought it was significantly undervalued,” he says. “The beauty of stocks is they do sell for silly prices from time to time. That’s how Charlie and I have gotten rich.” Then he turns to his usual speech about investing in stocks, giving a shout-out to Ben Graham’s idea of Mr. Market, which he says investors should think of as their partner. The beauty of having Mr. Market as a partner, he says, is that sometimes Mr. Market behaves like “a psychotic drunk.”
Comment: An "Oracle of Omaha" moment. More: On Wells Fargo:
Asked why he bought J.P. Morgan Chase stock for his personal account but not for Berkshire Hathaway, Mr. Buffett explains that he prefers Wells Fargo -- of which the company owns 400 million shares worth $11 billion or so at year-end -- better. "My best ideas are all in Berkshire," he says. "That I can promise you." "I know Wells better and it's easier to understand," he says, adding that he bought Wells Fargo in the first quarter.
On Wal-Mart:
"I don't think there's something fundamentally dishonorable about Wal-Mart," Mr. Munger says. At companies of the scale of Wal-Mart or Berkshire, with 270,000 workers, "I guarantee someone is doing something wrong right now," Mr. Buffett says. "I guarantee 20 people are doing something wrong."
On Investing:
"Investing is not really that complicated," ... Mr. Buffett says patience is the key virtue in investing, and that those who understand the market is a tool rather than an adviser will do well over time. The market is often wrong for a variety of reasons, he says, and those who bear that in mind can take advantage of the market's pluses, such as transparent prices and liquidity.
On Prostate Cancer:
"I have four doctors. At least a few of them own Berkshire Hathaway, though I don't screen them." He and his family listened to doctors a few weeks ago. His plan says survival rate is above 99%. "Maybe I will get shot by a jealous husband," Mr. Buffett says. Mr. Munger says he doesn't know if he has prostate cancer "because I don't let them test for it."