Facebook's much discussed IPO has generated a lot of discussion about the "real value" of the stock. Much of the information being disseminated is both inaccurate and harmful to investors. Unfortunately, this is typical of what you read in the financial media. There's a reason it is aptly called "financial pornography."
The speculation started even before Facebook trading began. A number of seemingly well qualified "experts" gave their views on the anticipated "pop" in the stock price. VentureBeat polled Silicon Valley's elite venture capitalists and asked them where the stock would end up on opening day. The predictions ranged from a low of $45 to a high of $63. According to Yahoo Finance, the stock closed at $38.23.
Undeterred, the speculation continues. In his MarketWatch column published by the once venerable Wall Street Journal, Mark Hulbert provides a "fair price calculation" of $13.80 for Facebook stock. Mr. Hulbert bases his calculation on an academic study that examined employment and revenue growth performance of domestic operating companies with IPO's from June, 1996 through 2010. Based on the data in this study, Mr. Hulbert concluded that his "back-of-the-envelope" calculation of $13.80 "could very well be too optimistic rather than too pessimistic."
Mr. Hulbert is the editor of the Hulbert Financial Digest, which tracks the performance of investment newsletters. He also runs Hulbert on Markets, which gives subscribers the names of "stocks and funds these market-beaters are recommending." Should you rely on his prediction about the value of Facebook stock?
I am struck by the number of people who make predictions and the paucity of research concerning the accuracy of their past picks. One study used the investment newsletter archive of the Hulbert Financial Digest from 1980 to 1996. The authors concluded that newsletters do not on average outperform appropriate benchmarks based on market capitalization, book-to-market and stock prices. When you include trading costs and the cost of the newsletters, they underperform. The ramifications of this study are discussed here.
Mr. Hulbert has made many predictions based on impressive data over the years. Like most prognosticators of random events, sometimes he is right and sometimes he is wrong, which is exactly what you would expect from random chance. In a column published in the New York Times on May 18, 2008, he discussed the merits of the "Recession Buy Indicator". He noted "... anyone trying to beat the odds may be interested in a market indicator with an excellent track record." While advising his readers to proceed with caution, he noted that this market indicator had "an excellent track record."
Hopefully, his readers did not plunge into the market relying on this "buy indicator." According to Yahoo Finance, the DJIA on May 19, 2008 was 130. One year later it closed at 85.12.
Here's the real value of Facebook stock as of the closing on May 29, 2012: $28.84, its closing price on that date. How do I know that? Because millions of traders all over the world have taken Mr. Hulbert's views, and all other publicly available information about the company, into consideration and built that information (positive and negative) into the price of the stock. The collective opinion of these investors is the best indicator of the fair value of Facebook. The stock may increase or decrease in value, but its future price will be based on tomorrow's news. Neither Mr. Hulbert nor anyone else knows what that news will be or how it will affect the price of the stock.
Investors who rely on predictions of "experts" in an effort to find mispriced stocks are fighting formidable odds. While predictions about the future price of any stock are highlighted by the financial media, relying on them is akin to gambling with your retirement nest egg.
Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read, and The Smartest Portfolio You'll Ever Own. His new book is The Smartest Money Book You'll Ever Read. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.