Facebook’s (FB) initial public offering in May this year was a much anticipated one. The build up was purposeful, it was the talk of town for months, and every self respecting analyst, journalist, commentator would have an opinion to offer. I remembered reading about Facebook CEO Mark Zuckerberg’s speech before he rang the Nasdaq opening bell remotely at Facebook’s headquarters where he stated ‘I just want to say a few things, and then we’ll ring this bell and then we’ll get back to work”. And I remembered thinking – Wow, what a guy, he just listed his company for 105 billion and all he could think about was to go back to work. Wow.
But whatever kind of guy he is, I sure hope he is feeling ok right now. In the short period of time since May, the counter has behaved like an elevator car with snapped cables. It is now trading at approximately half it’s IPO price of $38, and the bloodbath doesn’t look like it is abating anytime soon. Serious questions have been asked about how wildly off the mark the IPO price has been, and that if investors have been taken for a ride.
Andrew Ross Sorkin wrote a damning article for the New York Times. With statements like ‘if there is one single individual more responsible than any other for the staggering mispricing of Facebook’s I.P.O., it is Mr. Ebersman’ he laid the blame squarely on FB’s CFO for the inflating the price and causing investors to lose obscene amounts of money as 50 billion usd was wiped off its market capitalisation since the listing. Given the somewhat vindictive tone, I wonder if Andrew himself is a victim of the Facebook debacle.
[Free Ebook] How should you invest your first $20,000?
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
Psychologists studying personality have long been interested in how human beings explain and attribute events happening around them. In the 1950s, Julian Rotter developed and popularised a concept called the Locus of Control. Imagine a spectrum with Internal (high) on one end and External (low) on the other. A person with an internal LoC believes that life events are within their control, and that they have the ability to influence and decide on the things happening around them through ability and effort. Someone with an external LoC on the other hand, believes that many things are beyond his or her control and that fate, luck and chance are the main determinants of what happens in life.
The theory is developed and built upon by many academics and it has been found to be correlated with or have an impact on factors such as stress levels, health status, academic achievement, self efficacy, etc etc. Others have introduced yet even more layers, such as the stability of your attributions, to further explain how people think.
As a Trader, there will be times when decisions you make go against you, when trades go wrong and wipe out a huge chunk of your trading capital. As an Investor, there will be times when investments refuses to bear fruit and you are faced with writing off a bad decision. When that happens do you lay blame on luck or others or do you look within yourself first?
Over the years, I have come to realise that the most crucially important trait a successful Trader/Investor must possess is that of a high Locus of Control. Traders with a high LoC know that they cannot control the market, but they can react accordingly to whatever the market throws at them. They do not listen to experts and take in hot tips wholesale, but they never stop listening and observing and learning. They see trading as a sport in which one gets better with practice, and they are confident of getting better with practice. They know it is within their control.
People with a low LoC tend to be a disaster when it comes to active trading and investing. By attributing and relinquishing responsibility of the eventual outcome to fate luck and chance, they are no better than gamblers let loose on the casino floor. Because they think they have no control over the outcome of a trade, they refuse to learn. As a result of that, they will end up making the same mistake over and over again. Most frustratingly, they end up blaming people and elements around them for their unsuccessful trades. In my opinion, this category of people are better off having their wealth managed by professionals or secured in a Permanent Portfolio.
Back to Facebook. Berating the CFO for an overpriced IPO is like blaming Peach Garden for selling their fried carrot cake at ten bucks a serving. The CFO is merely doing his job in trying to sell the company at a price that people are willing to pay for. If you think it is expensive and overpriced, do not buy. You do not have to buy it just because everyone else is. Move over and let the next person have a go.
Remember – You have Control!