Schadenfreude and Facebook

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Schadenfreude is loosely defined as taking joy in another’s pain. Pretty sick, right? The Buddhist in me can’t possibly be guilty of such an act. But I’m human too, and every once in awhile an advisor gets to smile and say “I told you so.” Right now, the thousands of advisors around the country who warned about the risks of buying an IPO are grinning.

Facebook’s awful showing in the stock market should be a reminder that a sexy investment isn’t necessarily an attractive one.  The market itself is efficient enough to know when a stock is cheap or expensive relative to the expected earnings of the stock. Facebook IPO investors clearly haven’t forgotten the “Tech Bubble” burst of 2002, but investors who bought Facebook on opening day may have either forgotten, or just didn’t care. The excitement was in the air…and that was enough.

Every day, we do a risk/reward analysis without even realizing it.

When people gamble, they know the odds are against them. But, a smart gambler either consumes enough free beverages to break even on the losses, or figures in some kind of enjoyment factor – “As long as I have fun, I can handle losing 100 bucks.”

When we drive on the freeway, the odds of getting a speeding ticket are greatly increased when we exceed 80 MPH (even worse if done in the passing lane).  So, we choose to drive a bit over the speed limit and limit our time in the passing lane to, well, passing.

Many skiers and snowboarders have caught on to the risks of serious injury and now wear helmets, even at the expense of ruining their hair or looking less fashionable (I’m working on this).

The design of an investment portfolio can have huge consequences for a person’s financial future. In other words, if Letterman did a “Top 10 things for which you should do a risk/reward analysis”, an investment portfolio would make the Top 3. Yet, people still can’t seem to resist taking a disproportionate level of risk in an attempt to receive a marginally higher return. Too many investors still value excitement over logic.

Perhaps in the end, Facebook stock owners will get the last laugh and it will bounce back to become the next Apple. Yet, I still prefer to see it as a bread crumb in one of my mutual funds than as a ticker symbol on my quarterly statement. And not to worry – if you “friend” me, I will still confirm 🙂