Very cool, if true

I'd be interested to know who bought all the shares. Because the opinion of the experts all seemed to be that they were massively over-valued. So is it mostly private investors who fell for it? All thinking the shares were going to double in value in overnight.

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I think this is a factor of a small number of widely spread stories saying "they're over valued" because "share price valued by experienced team of people with expertise in area who usually do OK" isn't a story. However, once enough people read the story it becomes self-fulfilling because in the end the share price is what people expect the share price to be and that's not necessarily connected that well with the company performance.

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Aye, all a giant lottery, the stock market. I'm amazed so much faith is put in something that is, for all intents and purposes, a really really complicated casino.

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Indeed... although a casino with really fascinating rules. As if you win at poker not for the cards you have but for the cards that the press reports you have.

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And at least poker follows very defined rules of probability. I think it fair to say the best professional poker players probably all have maths degrees. Whereas the stock market is just... insane.

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Most of the people working as quants have advanced maths degrees. They are some seriously smart people.

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Actually I don't think a maths degree would help in poker. All the probabilities of getting a good hand are easy - you buy a book and read them. What you need is the conditional probability that the player has a better hand than yours given knowledge of your hand. That is a function of the player's personality and bidding so far more than it is of mathematics.
If you played poker using the non conditional probabilities you would lose. You cannot calculate the conditional probabilities mathematically as they are conditioned on the type of player Bill is and what you observed Bill's bid is, the current amount of money Bill has etc etc.
I would back someone with a good memory, a working understanding of the game and an instinct to read people's faces over my own ability given a calculator, time to work exact odds and a table of various probabilties.

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The guys I know who play online poker are pure maths guys, but I guess that's because online poker has zero of the reading peoples faces stuff. They log all of the hands played by other players though, and probably build up probability concepts on their opponents? I don't know, there was one guy I know who used to make a pretty good living just playing online poker, he'd have 5 or 6 windows open at once, and be playing multiple games. And he just rolled through it on probabilities.

The logic being most people playing online poker aren't crunching the numbers, they're listening to feelings.

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Hadn't thought of the online -- that would surely make a difference. I know online poker companies try to take steps against people who "automate". That would level the playing field for the "pure numbers" guy.

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a-pawson.livejournal.com

Most by institutional investors apparently, which means pension funds, hedge funds and the like.

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It did seem sort of inevitable that FB shares would crash.

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Yet the question remains why? The price was set by people whose job was to price facebook shares fairly. They could pick any number. The unfortunate thing for their role was that their job followed a wave of stories which essentially said "Facebook IPO too late" (as if that was a meaningful question).

It's very odd indeed. As I mention elsewhere in this thread, there seems to be a wave of "facebook is knackered" belief which is not necessarily connected with the fiscal reality of the situation (ground truth, facebook is making scads of money and continues to make more money than it previously made by a huge margin every year).

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The price was set by people whose job was to price facebook shares fairly.

Surely their job was to set a price which was as high as it was possible to sell all of the shares at?

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I think the "fucked company" perception is also factored in. The fact that the IPO is considered a fiasco is surely embarrasing for facebook. Now I don't know if this would actually genuinely be affected whatsoever if (say) the stock had initially be valued at (say) $20 a share. Because of the bizarritude of the markets, it coudl well be that if the initial price was $20 we could now see the shares at $8 and the same stories circulating. Or, conversely, the shares at the current $26 (?) price and people feeling they'd done quite well from the deal.

Either way, facebook must be feeling quite badly about how it's worked out. But there were storied circling months and years before the IPO that they had left the IPO to late. I felt that this was fundamentally a bizarre statement as in theory it doesn't matter one whit. If your company shows profit it does not matter if it shows it after 10 months 10 years or 10 decades. I think I was misguided in this. The fundamnental thing about the stock market is that it is not about the value or success of the company but about the perception of such. I'd thought that, in the end, the value of facebook would be judged on their profits at the time. In retrospect that was foolish.

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I'm not sure that Mark Zuckerberg _is_ feeling badly about this. Or is embarassed. It's entirely possible he thinks the situation is as hilarious as I do. And as he controls the majority of the voting shares, that's really all that counts.

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I think that's possible. But entirely functional and profitable companies have failed due to poor share price. If your share price becomes less than your material assets you're in poor shape. This is, obviously, unlikely for an internet company but there've been a few cases of well-functioning companies "stripped" for failing in the market while succeeding in the parallel dimension of selling stuff and making a profit doing it.

I suspect he's feeling bad because he looks like someone who lives off his ego and the public perception is that he has personally messed up. This may or may not be actually the case... I know I don't have the savvy to predict that. But I think he looks like someone who will be hurt by the perception he has messed up even if the actuality is that he hasn't.

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How do you strip a company you don't own or control? Usually, companies with low valuations compared to their assets are bought over, and then the new owners strip them. In this case, that can't be done, because Mark Zuckerberg's voting stock isn't for sale.

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If he maintains a controlling stock or sufficient percent then it can't be asset stripped (which as I said was unlikely for an internet company) but it surely remains humiliating to be perceived as a loser?

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Depends. He could sell at a higher level, get more money, and then be seen as a loser. Or he could sell at a lower level, make less money, and be seen as a winner.

Which one is preferable to him is an interesting question, but I lack evidence.

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Hmm.... are we talking "him personally" or "his company".

For his company, selling at a higher value provides them with more capital with which to "do stuff" to grow the business. However, selling them with the price descending removes the option to maintain good staff with later promises of share options -- which has been a favourite of tech companies for years. (Well, I guess they could take the option price from now). So his company makes more for sure giving them options for growth but taking a reputational hit.

For his personal wealth, I have no idea how many shares he owns or how many he sold in this IPO. My guess is that he did not sell any (after all, that would be reported I suspect and would also look like a loss of confidence in his own company). Certainly the share price going down affects the "paper value" of his personal fortune but equally certainly, it's the current value we need to think about. Had they been initially priced at $24 and stayed the same his position re personal wealth would be exactly the same as the opening at $38 and now being at $24.

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Well, he sold $1.2Billion of shares on the day they went public:
http://ibnlive.in.com/news/mark-zuckerberg-is-poorer-by-72-billion/275641-11.html

But leaving that to one side, I agree that whether the price rises or falls to its "natural price" doesn't matter at all for the value of his remaining shares.

So it's whether they give options to staff based on the launch price, or on some later price. I'd imagine that they'd be set at the point the staff joined the company (with a discount), so that anyone who joined between May and Now would be unhappy, but people who join after the point it stabilises (or pre-IPO) won't be affected much either way.

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Interesting re sales. That was almost 5% of his holding - "to pay taxes". I wonder what financial gain he made attracting that level of tax? Most "billionaires" are so on paper - but if they tried to realise it the value would crumble.

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Yeah. I wonder what taxes he was having to pay off!

Edit: And yes, totally agreed on realising paper assets. It's not easy, particularly in a hurry.

Edited Date: 2012-07-30 08:48 am (UTC)

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I'm sure I've quoted to you Keynes' beauty contest metaphor before now:

He describes choosing stocks and shares as like a beauty contest where: "It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees." (Keynes, General Theory of Employment Interest and Money, 1936).

You would be rational to pay $38 for the shares if you believed that it was reasonable that other people would pay that much and more. In this case the belief turned out to be unfounded.

The pattern is not quite so clear as you make out.
They opened at $38, fell to $25, rallied to $33 and then this morning fell to $22 but have now rallied to $24.
It would be a brave investor who looked at the graph and said with confidence that they'd never get back above $38 by the end of the year.
(Apparently they *have* traded at $45 but I can't see from that graph when).
https://www.google.com/finance?client=ob&q=NASDAQ:FB

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Oh yes, everyone thought there would be the usual jump after the release, but in this case the inflation was just too large for this to happen. It was, instead, priced in!

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The thing is though that facebook set that price themselves -- they were free to pick the price they like. So, what we should see is that this is a failure of the people who predict the price of facebook shares. But this is not what has happened. Instead it is seen as a corportate failure in the "facebook" business. However (as I point out elsewhere) the interesting thing is that we're currently living in a time where "facebook doing badly" stories are the interesting stories to print. That puts us in quite a fascinating place because more than ever it means that the stock market success of a company is completely unfastened from its actual success. Obviously this is not an entirely new phenomenon in that previously entirely profitable companies have failed due to lack of market confidence but it seems the internet era is turning the heat up a notch on this... perceived failure is becoming increasingly disconnected from the amount of money a company generates. Interesting times indeed.
It seems we're now moving to a state where businesses are becoming at the whim of the press much like the 90s "we build them up and we knock them down" model of press enchantment and sudden disenchantment with bands.

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philmophlegm.livejournal.com

My own LJ illustration of Keynes's beauty contest idea from some time ago:

http://philmophlegm.livejournal.com/177428.html

http://philmophlegm.livejournal.com/177845.html

http://philmophlegm.livejournal.com/178106.html

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And a very good illustration it is!

I first noticed the effect during the Comics Boom/Bust of 85-97. Comics got popular enough, and their readers rich enough, that early issues went up in price dramatically. This eventually came to the notice of speculators, which drove up the price more, and then when a chunk of the general public noticed _that_ prices/print runs became ludicrous.

And then, at the peak of its ludicrousness, it popped, and 2/3 of all comic-book shops shut.

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Brilliant -- really interesting to see it actually played out.

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trailer-spot.livejournal.com

The stock has been briefly above $40 on the first trading day.

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Aha... thanks. So there was a jump after release, just not a very high jump.

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usmu.livejournal.com

Even more so: Zuckerberg still has a controlling stake in the company. This means that the shares have been bought with the thought that there would be somebody who eventually would pay more than the buyer did at some point just because they'll be able to sell them for even more without having any control over the company whatsoever. It blows the mind.

Edited Date: 2012-07-27 04:39 pm (UTC)

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I'm not 100% sure how he's managed to do this through the early funding rounds without screwing a lot more people in terms of dilution than just Saverin.

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usmu.livejournal.com

They made use of a dual share system for this IPO where type B has but a tenth of the type A shares. Which means that Zuckerberg only has an 18% stake in his company, but controls 57% of the voting power,

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Ah ok... makes sense.

Impressed he kept that much preferential stock then.

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cairmen.livejournal.com

I seem to recall reading somewhere that FB was actually getting smaller in the US - 1% in the last quarter or last year, I can't recall which.

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Looks that way!
http://www.computerworld.com/s/article/9229334/Facebook_user_base_drops_in_U.S._says_report

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But is that not because they are in the microsoft position? They cannot increase their market share in certain regions because their market share in some regions is "everyone". Facebook has 50% of the US population (66% of the online population). If you take away "too young for our T&C" and "can't be fagged with social networking" that's what they're going to get right.

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Actually, the staff are probably screwed by this too, as are the senior staff and founders depending on the strike price on their options - a LOT of them are probably looking at tax bills they might not be able to pay.

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They're taxed on the IPO price, but can only pay with cash they make when they actually sell?? That would make no sense, while not being completely surprising...

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Not quite, they're taxed on the capital gain of the shares between the strike price of the options i.e. what they bought them for, and what the shares were worth when they exercised them.

So, if you joined Facebook 3 years ago and got 10,000 options at $10 a share, that means when they went public you got to 'own' your shares, so if you paid $100,000 you got, at the IPO, $380,000 in stock. You owe tax on $380-$100 = $280,000 at 15% (in the US... although actually this might count as income, I'm NOT an accountant and don't play one in the movies)... but at a minimum a US employee would be in the hole for at least $55K... Now, that's fine if you sold your shares the morning of the IPO - although many option clauses mean you have to hold on to them for a few months...

So now you owe $55K on your actual profit of $130,000 and decreasing...

Now, if you're a founder and have STOCK then you owe a capital gain on the IPO price. So Mark Zuckerberg negotiated an amount to pay the IRS based on, I think, $30 a share... so he's out of pocket by a lot. That said, all he has to do is sell some more stock and he'll be fine. He is not going to suffer.

But if you joined Facebook last year you might have been royally screwed.

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The moral of this story is that as a start up founder who sells a company or has an IPO you need to make damn sure you've a good accountant ready.

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anton-p-nym.livejournal.com

As I said elswhere earlier:

Does #Facebook IPO count as pump-and-dump yet? ca.news.yahoo.com/facebook-secon…
— aka Steve (@Anton_P_Nym) July 26, 2012

-- Steve still thinks the IPO still has more than a whiff of fraud to it.

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Depends if there was any misinformation in the packs they put out.

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