When Facebook (FB) went public, several folks immediately asked if they should buy it. My response was, uniformly, “no”. It was not that I thought FaceBook was overvalued (I did), not that I thought the price was going to drop soon (I did – IPOs frequently go down in the short term, and a spectacularly expensive and over-hyped one like this was likely to be not an exception, but an “even more so!” moment).
It was that I generally don’t recommend for individuals to buy and manage portfolios of individual securities. Most of the time, folks aren’t likely to beat the market as a whole, aren’t going to take the time (or necessarily have the ability) to do true due diligence, manage their diversification, track prices, have an exit strategy, or have a risk management framework into which to place the security. There are excellent low-cost funds which solve many of those issues (and make the rest a lot easier to manage). I recommend them. (As usual, there are exceptions – some asset classes which are difficult to get good exposure to through funds – but they are exceptions, not general rules).
So I said “don’t buy Facebook stock”.
The other reason I recommended against buying FaceBook stock was this – whether you buy actively managed funds or index funds, you’re likely to end up with some FaceBook anyway. With a market cap at IPO of nearly $100 billion, it was instantly one of the most valuable companies in the world. Even at today’s new low, it’s still a $40 billion company. It’s going to be in a lot of funds – and not just actively managed tech and growth funds. It’s already in Vanguard’s Large Cap Growth Index ETF (at approx. 0.2% of holdings, it’s not a huge piece, but it’s in there). That fund tracks a subset of a large-cap MSCI index which is used by several other Vanguard funds.
Especially interesting, a couple of days ago, Henry Blodget posted an article on Business Insider detailing not just several major fund companies and managers who’ve bought large amounts (and likely lost large amounts of money), but he also threw in an incidental note about how he, too, may have some Facebook — because he personally buys Vanguard’s low-cost index funds. It’s an interesting read, if not because of the main theme about Facebook, because of the recommendation to buy index funds and who it is who is suggesting so – Blodget was one of the biggest cheerleaders of tech stocks during the tech stock bubble.
Here’s that “confession” regarding Blodget’s own preference for index funds:
(Confession: I’m a Vanguard client. I love their low-cost index funds. Alas, Vanguard’s low-cost index funds appear to have loaded up on Facebook, because Facebook is an important stock in the market benchmarks. So I probably own Facebook. The only consolation for me is that I didn’t pay a huge fee to Vanguard’s research department to “select” Facebook’s stock for me. This, by the way, is a big reason why I’m such a fan of index funds. Because after 20 years in and around Wall Street, I’ve realized that even the most brilliant money managers aren’t brilliant enough to consistently beat index funds after deducting their huge fees. So I’d rather pay less and be guaranteed to beat 75%-80% of these managers, the way I do with Vanguard.)
The day after this blogpost, another WSJ article was brought to my attention:
Facebook Awaits Index ‘Like’
Wherein they note that Facebook is not in the Nasdaq 100 (yet), nor the S&P 5oo (yet) nor several other major indices. However it is already in Russell and MSCI indices, which is why we’re starting to see it showing up, for example, in some Vanguard funds since Vanguard has added a lot of funds indexed to the MSCI indices over the last few years.