How the Average Market Timer Thinks About Facebook Stock and the Twitter IPO

Lemming (4137)

Self-portrait of a market timer

“You know what they say; when you have lemmings, make lemmingaid.”
–Debbie Ohi

Recently, Twitter confidentially filed a S-1 to the SEC for their forthcoming initial public offering.

This means that coming to a stock market near you in the soon-to-be-determined future, you’ll be able to buy shares of Twitter.

I couldn’t help but to think about all of the hype that surrounded Facebook and its IPO. Everyone thought the stock was going to go to the moon. The IPO price was $38, but the first trade that you and I could have participated in – since we weren’t insiders or part of the deal team’s preferred customers – was at $42.05.

By August, FB stock was trading around $20 – a dream price if you’d only had the foresight when options trading opened to buy a put (by the way, that’s not a recommendation to dip into options trading. I’ve been there, done that, and still have the scars on my feet from stepping into that particular bear trap) – but a nightmare price for the average investor who’d bought when it first became available.

Given that we’re subject to loss aversion, the average person investing in stocks turns out to be a terrible market timer.

All on the ride down, Wall Street analysts were either recommending investors buy FB shares or hold onto the ones that they had.

However, by September 2, with the stock hovering around $18, analysts decided to downgrade the stock and recommend selling it.

A year later, as FB finally cracked its opening day initial stock price, analysts were jumping onboard to tell investors to buy, having told them to sell at $18.

Thus, the herd thinks the following about investing in Facebook stock:

How the average market timer thinks about investing in FB stock by Hull Financial Planning

For those of you who are wondering how FB compared to a standard S&P 500 index fund, let’s compare FB’s performance versus the Vanguard S&P 500 during the same period.

FB vs. VFINX performance by Hull Financial Planning

Why do I get the feeling that, when it comes to investing in Twitter’s stock, we’ve seen this movie before?

Did you invest in Facebook’s IPO? Are you thinking about investing in Twitter’s IPO? Let’s talk about it in the comments below!

About Jason Hull, CFP®

Jason Hull, CFP®, is the Chief Technology officer of myFinancialAnswers, an online comprehensive financial planning service.