Around three o’clock yesterday afternoon, my brother-in-law Hank started camping out in my reception area, pleading with Gretchen to find time for a meeting. That happened at five, when a consultation with the deputy secretary from the Embassy of Mali was abruptly canceled.
“Tom,” Hank stuttered as he rushed in and threw himself on the couch in front of the picture window, “I know you’re really busy and don’t have much time between appointments…”
“No problem,” I assured him, “and no need to rush. I wasn’t forced to squeeze you in; there was a cancellation.”
“Oh, oh, great,” Hank sighed, “that’s relief, because I’ve got a really… complicated… uh… dilemma that only you can solve.”
“What’s that?” I cautiously inquired.
“Um… uh…” Hank stammered, “the… er… Facebook IPO.”
“Ohhh… kay,” I continued, experiencing a peculiar sinking feeling, “what about it?”
“Well, Tom,” Hank began, “as we all know, social media is the wave of the future…”
“As you and a lot of other people think you know,” I demurred. “But I’ll thank you not to put words in my mouth.”
“Okay, sure, sorry,” Hank apologized. “I meant that I, myself, and millions and millions of other people besides you think social media is the wave of the future.”
“You and millions and millions of other people also think angels, ghosts, miracles, mind reading, telekineses, fortune telling, witchcraft, the Loch Ness monster, Bigfoot and extraterrestrial visitors are real,” I reminded him.
“Now, now, wait a minute,” Hank contested, “there’s no way I believe in ghosts. That would be sacrilegious. Or fortune telling… well, I don’t approve of it, anyway, because it’s witchcraft. And there’s also plenty of evidence for Bigfoot, you know. So, anyway, I think there’s a real good argument for social media being the wave of the future, anyhow.”
“Or the biggest fad since the Hula Hoop,” I japed.
“Now wait just another minute there!” Hank snapped indignantly. “Facebook is like, a thousand times bigger fad than the Hula Hoop ever was!”
“Actually,” I pointed out, “in the 1950s, at the height of the fad, there were one hundred million people wasting their time and behaving like idiots with Hula Hoops. Today, there are only about nine times as many people as that wasting their time and behaving like idiots on Facebook. For Facebook to be a thousand times as popular as the Hula Hoop, there would have to be one hundred billion people on Facebook, which is fourteen times the number of all the people in the world. What’s more, there were only three billion people in the world in when the Hula Hoop was a 100 million unit fad – that was three point three percent of the world population. Today, with seven billion people on the planet, those 900 hundred million Facebook users amount to thirteen percent of the world population. So looking at in those terms, the Facebook fad is less than four times as big as the Hula Hoop fad.”
“There is one hell of a lot more to Facebook,” Hank protested, “than there ever was to the Hula Hoop!”
“True,” I conceded, “the Hula Hoop never invaded your privacy in order to market your personal information to advertisers.”
“Look, Tom,” Hank fumed, “Facebook is a great idea, okay? It’s a huge, powerful technological force, an historic achievement of enormous proportions and an unprecedented cultural phenomenon that will change society forever, okay? And Mark Zuckerberg is a genius, okay?”
“Maybe,” I shrugged. “And maybe someday, pigs will fly. So what?”
“So how come when I bought Facebook at forty-two, it went down?” Hank wailed.
“You…” I murmured, “…an unemployed diaper company executive…”
“Unemployed Upscale Infant and Toddler Outfit and Accessories executive!” Hank vehemently protested. “So after the mortgage meltdown, the bottom fell out of the market for organic natural color hand woven Peruvian cotton nursing slings! So after the credit default swap scandals, nobody wanted to buy artisanal baby food anymore! So after Lehman Brothers collapsed, the demand for master crafted mahogany bassinets did, too! What could I do about that? So Pabulex went bankrupt and I lost my job! Does that make me a bad person or something?”
“It makes you,” I dryly replied, “completely unsuitable to engage in stock speculation. How did you end up investing in Facebook at forty-two dollars a share in the first place? It only sold that high…”
“I know, I know,” Hank interrupted, “it only sold that high for a couple of hours right after the insiders who got their IPO slices for thirty-eight dollars started selling them off on the first day of Facebook trading a week ago. I called in a couple of old favors with one of my buddies from college who’s a stock broker to make sure I bought in as early as possible.”
“Sure,” I nodded, “get into an IPO feeding frenzy on the first day of trading, watch the stock skyrocket in value, dump it at the peak and get out with a huge profit. That’s what savvy speculators used to do with every big tech stock.”
“And Facebook is big,” Hank pointed out.
“Yes,” I agreed.
“And Facebook is definitely a tech stock,” Hank appended.
“Um… well, I suppose so,” I reluctantly concurred.
“But, this time,” Hank hung his head and sobbed, “instead of shooting up like… like a geyser or something, like a cool, awesome new big tech stock is supposed to, Facebook went down, and down and down…”
“And just closed,” I observed as I consulted the latest stock quotes via the computer on my desk, “at thirty-one dollars and ninety cents. Hmmm… let’s see – that’s about a twenty-four percent loss…”
“Tom!” Hank shrieked, “I… I… took the money out of our joint savings account!”
“All of it?” I asked.
“About half of it,” Hank confessed. “That is, I left about half of the money in the account. And I got some more money by maxing out the cash advances on all our credit cards.”
“My God, Hank,” I exclaimed. “The credit card companies charge twenty, twenty-five, even more…”
“Twenty seven percent,” Hank shuddered, “for one of them. That’s the highest. The lowest one is twenty-four point eight.”
“How much?” I demanded.
“I was going to pay it all back,” Hank desperately declared, “the next day, after I sold Facebook at fifty, fifty-five, something like that!”
“How much?” I persisted.
“Sixty three thousand two hundred nineteen dollars and eighty one cents,” Hank admitted. “Fifteen hundred shares plus fees and commissions.”
“Fifteen hundred shares,” I mused, clicking on the calculator application on my monitor, “now worth forty-seven thousand, eight hundred and fifty dollars, for a net loss of… let’s see… um… fifteen thousand one hundred and fifty plus the fees and commissions to buy… that’s fifteen thousand three hundred and seventy dollars.”
“Yeah,” Hank shuddered, looking at me with a pleading expression, “what the hell happened, Tom?”
“The obvious explanation,” I told him, “is that Facebook wasn’t worth the thirty-eight dollars a share it opened for on IPO day. At thirty-eight, its price earnings ratio was over a hundred. You were fantasizing about bailing out when it hit fifty-five, which would have amounted to a P/E ratio of over one hundred and forty. That’s like buying a B-plus rated bond that pays six tenths of one percent annual compound interest, which would be foolish. So foolish, in fact, that your strategy and expectations outran the Greater Fool Principle.”
“The what?” Hank wondered.
“Facebook stock pays no dividends,” I noted. “And – according to the Gordon Model of stock valuation, anyway – anybody who buys a stock that pays no dividends is a fool, because the Gordon Model says that the value of a stock is equivalent only to the present value of the future income stream of its dividends. And any fool who buys a stock which pays no dividends can only be hoping to sell it later at a higher price to someone else who is a greater fool than they are. But as the prices of such stocks go higher and higher, the degree of foolishness necessary to purchase them increases and the number of people possessing that necessary level of foolishness decreases, until we’re left with nothing but people like…” I let my words hang in the air and shot Hank an expectant glance.
“Me?” Hank winced.
“The Greatest Fools,” I confirmed, “the fools who bought Facebook at forty-two.”
“Holy Mother of God,” Hank moaned. “What’s Facebook stock really worth, Tom?”
“Since I am sane, reasonably intelligent and emotionally mature,” I responded, “Facebook – and its stock – are completely worthless to me. But the question you are actually asking is, ‘What is the price range in which the legions of ordinary fools who actively trade no-dividend stocks like Facebook will shuffle it back and forth among themselves indefinitely?’ My best guess on that would be something in the neighborhood of twenty dollars a share.”
“Twenty bucks!” Hank exclaimed. “Is that all? Jesus Christ, how come?”
“Facebook’s business model,” I explained, “depends on selling advertising. That, in turn, depends on advertisers seeing measurable sales revenues attributable to Facebook in excess of what Facebook charges them to run their advertisements. It’s not certain, by any means, that Facebook will be a roaring success advertising goods and services via a network of social contacts. On the one hand, marketers have traditionally placed a high value on ‘word-of-mouth’ advertising, the ‘buzz’ created by a movie that sells seats in theaters without a big publicity campaign, the ‘viral’ spread of ‘consumer memes’ on the Internet, and things such as that. On the other hand, it’s not clear that Facebook ‘likes’ influence Facebook users to buy things their ‘friends’ have ‘liked.’ Furthermore, the way Facebook is currently run, it’s possible to game the ‘like’ system, such as buying ‘likes’ or paying people to ‘like’ things. Finally, and perhaps most important at the moment, even as more and more people spend more and more of their time accessing Facebook on mobile devices, there is currently no mobile app that displays Facebook advertisements on them. So when all of those issues are factored into revenue projections, a P/E ratio of around fifty – equivalent in foolishness to buying a B-plus rated bond that pays two percent compound annual interest – is a figure that would be more likely to prevail in the long run. The long run for a pop technology stock like Facebook being about a year, that is. Hank, will you please quit blubbering like that?” I handed him a man-sized helping of three tissues from the box I keep in my desk for the occasional highly emotional client.
“Sorry, sorry,” Hank wept and sniffled. “Tom, I’ll sell, I’ll sell – first thing Tuesday morning. I’ll put all the money back in our joint savings account. But when Rose finds out about the remaining balance that I won’t be able to replace, plus all those credit card cash advances I won’t be able to repay, she’ll… leave me… she’ll divorce me, Tom. We can’t let that happen, Tom, we’re Catholics! And what about our children – your nieces and nephews, Tom? Aren’t you worried about them?”
“As far as they’re concerned,” I admonished, “my greatest worry is that they all possess half of your DNA.”
Hank blew his nose, totally destroying the tissues I had already given him. I handed him half a dozen more. After wiping up, he slumped forward on the couch, dejected. “Tom,” he pathetically beseeched, “like you said, that still leaves fifteen thousand three hundred and seventy dollars I have to repay by the end of next week, and I…”
“You don’t,” I surmised, “have it. And you came to me because…”
“We’re family,” Hank interjected.
“Unfortunately, yes,” I acknowledged as I took out my check book and began to write.
“Not a word to Rose about this,” Hank cautioned.
“Sure, under one condition,” I qualified. “No more Masters of the Universe for you.”
“But Tom,” Hank complained, “I’m a businessman! I’m a former executive! You can’t…”
“Until you get job,” I warned, waving my completed personal check for fifteen thousand three hundred and seventy dollars, “you’re staying out of the stock market – otherwise, I tear this up and throw it away.”
“No, no, no, don’t do that,” Hank hastily ejaculated as he bolted from the couch and grabbed the check from my hand. “Okay, okay, Tom, you’ve made your point, you got it, no problem,” he shouted as he quickly made for the door. “I’ll never forget this!”
“Neither,” I assured him, “will I.”