Friday, May 18, 2012

Extraordinary Popular Delusions and the Madness of Facebook

The Facebook IPO priced at $38 per and the offering was increased 25% by over 100 million shares. At this price Facebook will be the largest tech IPO in history and second largest IPO of all time behind VISA. Depending on how the offering trades, it may finish the day as the largest offering of all time. At the IPO price Facebook as a company will be valued more than tech giants Cisco, Amazon, and more than all except 20 other companies listed on the S&P.

There is no shortage of advice on how to assess the value of Facebook's stock. You can easily find analysis outlining the bull case, the bear case, and everything in between. The financial news networks have turned all their programing over to 7x24 Facebook coverage. Many spent $5.00 to download an anonymous author's analysis in e-book form - The Pitch. This blog will not try to assess the merits of the company value versus the IPO value versus the value of as it trades in a speculative frenzy. However, we will suggest that the best book for analyzing the Facebook offering is available for a free download for your Kindle, or on the web.

Charles Mackay's Memoirs of Extraordinary Popular Delusions and the Madness of Crowds was first published in 1841 and summarized three economic bubbles:

"Among the bubbles or financial manias described by Mackay are the South Sea Company bubble of 1711–1720, the Mississippi Company bubble of 1719–1720, and the Dutch tulip mania of the early seventeenth century. According to Mackay, during this bubble, speculators from all walks of life bought and sold tulip bulbs and even futures contracts on them. Allegedly some tulip bulb varieties briefly became the most expensive objects in the world during 1637. Mackay's accounts are enlivened by colorful, comedic anecdotes, such as the Parisian hunchback who supposedly profited by renting out his hump as a writing desk during the height of the mania surrounding the Mississippi Company."
Submitted for your consideration - Charles Mackay's insight into the Facebook IPO:
"We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first. We see one nation suddenly seized, from its highest to its lowest members, with a fierce desire of military glory; another as suddenly becoming crazed upon a religious scruple; and neither of them recovering its senses until it has shed rivers of blood and sowed a harvest of groans and tears, to be reaped by its posterity...

Money, again, has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper. To trace the history of the most prominent of these delusions is the object of the present pages. Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."
Your loyal blogger is no more immune to the "delusion of multitudes" than anyone else. He begged his discount broker for any allocation of the stock. Why not? I like tulips.

Semper Augustus, the most expensive tulip sold during tulip mania

Good luck to anyone lucky enough to be allocated shares.

Remember the trading aphorism - "No one ever went broke selling too soon".

Sell early, sell often.

Without additional comment, a comparison of the price of Tulips during the 1636/37 bubble and the price of Facebook stock on it's first day of trading:

The price of Tulips and Facebook

Price discovery happens faster today, but extraordinary popular delusions seemingly follow the same trends.


Anonymous said...

hope you wereable to buy all that you wished

mw said...

Thank you, Anon.

Actually, I was - which was a pretty good indication that the IPO would not go as predicted. Fortunately I took my own advice in this post and bailed out immediately.

Tully said...

I shorted FB stock on opening day. It made me very happy.

mw said...

You've got bigger balls than me to step in front of that mania. I felt lucky to have dodged a bullet and just get my money back (with a small profit).