What Can You Learn from the Facebook IPO?

I was interested to read Evelyn Rusli’s recent article in The Wall Street Journal, “The Facebook IPO, One Year Later.”  Of course, I wasn’t interested so much in reviewing Facebook’s stock price as much as I was in exploring how Facebook’s IPO story illustrates important investment tenets.

The first lesson is obvious. Investors should ignore hype. Investing in the Facebook IPO was a costly mistake for thousands of investors. Some sold when the stock hit rock bottom. Others are still hanging on waiting for their Facebook stock to bounce back. Yet, in her article, Rusli notes as of May 16, the company’s shares closed at $26.13, down 1.8% on the day and 31% from its IPO price of $38. The S&P 500 Index rose from 1295.22 to 1650.47 during the same period of time.

The second lesson, however, comes from Facebook’s recent management decisions. That is, to build a secure future, investors should build a diversified portfolio and not speculate on an individual stock. Yes, Facebook now practices diversification.

As Rusli reports, “Before filing for its IPO, Facebook made 85% of its revenue from desktop ads in the right-hand column of its website, with the rest coming from a payments business fueled by virtual-goods sales from Zynga Inc. Today, the company is experimenting with more than 10 other ways to make money, including a fledgling e-commerce store and fees that it charges users to send chat messages to strangers.”

Rusli also reports that Facebook has broadened its ad business, running ads for the first time on mobile devices, in its News Feed, and creating ads that promote installations of third-party applications.

That sounds like diversification to me. And the same holds true for your portfolio, which should be invested in a broad range of asset classes and spread across the global market.

Rusli concludes that Facebook’s changes have paid off, lifting revenue to $1.46 billion in its most recently reported quarter, up 36% from $1.06 billion in the same period a year earlier.

But that doesn’t mean I’ll be buying Facebook stock anytime soon. It’s wise to invest in diverse institutional asset class investments that hold hundreds (and even thousands) of companies rather than put your faith in the fortunes of one company.

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