Facebook and GM

A couple of years ago we saw the government-backed GM IPO; it was (at the time) the largest IPO ever for an American company. 

Last week we saw the somewhat larger Facebook IPO (apparently these days virtual farm equipment is more valuable than the real thing) and the subsequent slide in price and scandal and lawsuits. 

So Facebook opens at $38 and now trades at $32, a loss of about 20%, and the press is in an uproar. But GM opened at $33 and now trades at $22 - a 33% drop - and the press is silent. To be fair, twenty percent of Facebook might be worth valued at more than a third of GM. And that's just screwed up, right there - real machines ought to be worth more than virtual ones. Then again, Southern Man just paid $2 to download levels for a tower defense game on his iPad. If a few tens of thousands of other people did the same, some programmer was able to create the value of a new car with a few week's effort.

But as Mickey Kaus points out, it's evil when private companies rip off their private investors - thus the uproar - but when the United States Government takes us for a ride it's just fine.

Now, Southern Man was openly skeptical of the Facebook IPO from the beginning. Why would a social-networking site be worth that much money? But he scoffed at the Google IPO as well and we all know how that went; opened at $85, closed that day about 15% up, and slowly and steadily climbed into the neighborhood of $600 per share (which is actually down from a peak around $800 a year or so ago). Not bad for five years. What was the difference? Google was (and is) a scaleable revenue machine. Facebook is not.

The moral of this story is don't take investment advice from Southern Man, who simply plugs away at his stock-based retirement account (which gives him a 40% gain up front from employer matching) and hopes that the market hangs on for a few more years 'till he can pull it out without a big tax penalty and move into a potato economy.