The Facebook share price continues its decline from the early morning IPO high of near $42 on Friday, May 18. Today, Tuesday, May 29, against a generally rising market, Facebook lost another 5%, closing below $30. If you read the Persuasion Blog, this is no surprise because I’ve told you that the fundamental business of Facebook – persuasion – is lousy and Changes no Other Guys which means you cannot make money through Facebook’s business.
However, you can make money doing business with Facebook which is a persuasion play of a different color, but still a persuasion play. No matter how you read the financial sheet on Facebook, you know that it is wildly overvalued at any price above, say, $15, that it has a poor business plan for the future, and above all, it still cannot deliver the persuasion promised in a network of 900 million users. But, through the skillful use of persuasion, you can put lipstick on the pig. Some analysts catch a glimmer of the illusion, but still miss it.
The Facebook debacle is a textbook case of the collision between human needs and the nature of the financial markets. What went so wrong with this IPO can only be appreciated in terms of the intersection of collective human behavior and finance. The mass psychology of this IPO was that of a classic mania. And that meant a multitude of problems were rendered invisible. We are referring here to two critical and related issues – the timing and the valuation assumptions.
This quote through the WSJ is from Walter Zimmerman, a market analyst at United-ICAP. Zimmerman knows the market, but he does not know human behavior or understand the principles of persuasion when he calls the market response to Facebook a classic mania. Economic manias typically involve a long term and widespread irrationality over a large area or sector of investing. The Tech Bubble of 2000 is a great example of a classic mania. That involved hundreds of companies and millions of investors over many months. The “mania” with Facebook at that level as never occurred.
Past quibbling over the exact meaning of mania, realize that except for trading malfunctions from Nasdaq on the first day, the market for Facebook has been orderly, transparent, and highly scrutinized. Everyone involved in buying or selling Facebook is thinking rationally. It’s just the rationality of the Peripheral Route as many people who bought on the first day followed the Scarcity Cue as their investing guide.
I noted how Facebook Cued up Congress through lobbying to acquire a legal exception for an increase the number of positions they could offer in the secondary market – all those pre-IPO investors. By law, nonpublic businesses are restricted to a relatively small number of investors and once that number is crossed, they must go public. Facebook used standard persuasion Cues to lobby Congress, mainly Reciprocity, to then make an interesting Scarcity play.
Congress allowed Facebook to nearly double the number of private positions it could offer without having to go public. In other words, Facebook got a slightly larger box, but not nearly large enough to handle all the demand. That’s a Scarcity play. When you deliberately limit supply to a demand, you artificially create Scarcity. That drove up the price for Facebook. Thus, through artful and legal maneuvering, Facebook created the illusion of high price and high demand.
Then, in the run up to the IPO, Facebook did something that rarely occurs with IPOs. They made a sizable chunk of stock available to the average investor instead of just large banks and institutional investors. Facebook played this as The People’s Company and positioned themselves as a friend and ally of their customers. Of course, such a move also served to create an artificially higher demand for the IPO, meaning that there were now more competitors demanding the same supply of stock. Again, a Scarcity Cue.
Such Cues do not require a manic market, just a bunch of Low WATT investors at the moment of decision. And that clearly happened on the morning of the IPO as the stock quickly rose to nearly $42 then began the drop that continues a week later. Other Guys, motivated with the Scarcity Cue, piled in early and bought up. And, I’d argue that people who have bought Facebook to hold and not to short are still operating with the Scarcity Cue even if they are getting a lower price. Facebook is selling sand to Sauds and ice to Aleuts which means if you buy, you are making a mistake no matter what price you pay.
Since humans buy and sell, markets can never avoid human nature and anytime human nature operates, persuasion opportunities will abound. Overload Other Guys with conflicting technical and emotional information, crowd millions of potential Other Guys into the auction through the magic of online trading, offer the illusion of limited supply, then fill bags of either sand or ice depending upon the Other Guy and trade for bags filled with money.
While you and I cannot do persuasion business through Facebook, a handful of early investors used persuasion to sell Facebook to everyone else. Nothing illegal. Certainly no mania. Just good old fashioned persuasion. If you were selling Facebook on Friday May 18 then you enjoyed the benefits of persuasion maven status.
There’s a Difference between Smoke and Mirrors, and Persuasion; with Persuasion the Illusion Lingers.
P.S. Persuasion Bonus Prediction! If you bought early and high, then realize you made a mistake, you’ll feel like a fool, and get out. If you bought later and lower, then feel doubts, dissonance will get you and you’ll hang tough with Facebook through its long slow fall to $15 a share. In other words, it’s easier to see that you fell for the smoke and mirrors illusion at the higher price than at the lower price. Or else Facebook is gonna ride the rocket like Apple or Amazon or Google . . .