Facebook is a big story in the news now. It had a stupendous initial offering that made many people very rich, but the stock hasn’t done well and people are calling foul.
I don’t claim to understand all that happened, but listening to CNN just now think the issue is the dissemination of information to a few large institutions and not giving it to everyone. The result was that many got hurt in the deal by not knowing all the facts. And it was the “little guy” who paid the price. They may be right.
But…. I think there are other issues that go along with this. A common expression in the investment business is that people are motivated by fear and greed! Both affect the markets.
So let’s talk about greed. I think Facebook is a good example of how greed lured in the little guys. The stock was hyped for weeks and by many accounts would be a home run if one could only get in on the offering. There were offering documents that presented the investment and that and the hype drove the mania. The fear was that one wouldn’t get in.
The problem I see for the little guys is that the information, however complete, can be very confusing and difficult to understand. I have seen many of these offering documents and don’t really understand what they say. They are very vague as required by law and list all the risks of investing, but the risks are often mitigated by the hype in the little guy’s mind. Never mind that there was more information, it may not have affected their decision anyway. The ones I have seen show risk anyway, and I assume any additional ones would too.
I am a relatively conservative investor and have a broker managing much of what I have. On paper I would be considered a sophisticated investor, but in my mind I am not! I don’t claim to have the ability to analyze information and when I do I have difficulty relating it to the stock price as there are many more variables to it. These things are very complicated and way above my head so I stay away from them unless I have a few dollars to gamble with. I have had my lessons with fear and greed myself and they didn’t work out well.
I don’t think the answer is to put more regulations on Wall Street. I think the answer is for the little guy to contain fear and greed and leave the gambling to the pros who can afford to lose. I know I can’t.