Facebook or Gold: Which is the Better Investment?

by JDH on May 19, 2012

I am of course asking a question to which the answer will become obvious, in hindsight: gold, over the long term, will prove to be a much better long term investment than Facebook, now trading on a stock exchange near you under the ticker symbol FB.

I was in my car between 11:00 am and 11:45 am on Friday, listening to the satellite radio feed of CNBC as they gave the breathless play by play of the start of Facebook trading after the Thursday IPO.  The Nasdaq announced that the stock would start trading at 11:00 am, apparently to give them time after the markets opened to match the huge volume of buyers and sellers to ensure an orderly opening.

It was obvious that something was amiss, however, when 11:00 am came and went with no trades.  CNBC stayed with it; they had no commercials after 11:00 am until at least 11:45 when I stopped listening, presumably in the hopes that trading would start any second.  But it didn’t.  They had Jim Cramer on the phone, and even he expressed concern that trading did not start as intended.

It was a bad omen.  Trading opened, the stock jumped up, but it closed on the day at $38.23, a mere 23 cents above the IPO price.  Speculation is that the big underwriters were buying the stock to prop it up, to save everyone from the embarrassment of having the biggest tech IPO in history fizzle on day one.

I’m not optimistic about it’s chances.  In a week, it becomes eligible for short sales.  Over time all of the shares become free trading, and many IPO purchasers will start selling; that’s not good for the share price.

Mom and Pop investor, having suffered through the market meltdown of 2008, are staying away, and if there are no suckers to sell to, the price will drop.  I agree with the Los Angeles Times: this was Facebook’s Epic Fail.

Facebook now has a market capitalization of around $100 billion, which is bigger than McDonald’s.  That’s crazy, because McDonald’s is arguably the most recognized brand in the world, selling an actual product (not an edible product in my view, but that’s not the point).  Facebook might earn $1 billion this year, but is it really worth 100 times earnings?

Supporters argue that if they can tap into the booming mobile market, they will make huge money.  Perhaps, but they aren’t there yet.  My 14 year old son is a typical Facebook user; he has no disposable income, so he’s not a great target for advertisers.

The conspiracy theorists will tell you that Facebook is really just a data collection project of the government, designed to keep tabs on its citizens.  Perhaps, but even that doesn’t justify a $100 billion market cap.

Yes, if Facebook can find a way to monetize their 900 million users, it could be worth it.

As for me, I’m not buying.  It sure looks over-hyped to me.

I’m a much bigger believer in tangible, long term assets, like gold.  Yes, I realize that gold has had a rough ride (although a nice bounce over the last few days), but I don’t see it going much lower, unless we have a massive market crash.

If we do, I will deploy my remaining cash, and thank my lucky stars that we got one final great purchasing opportunity.

If even Mom and Pop aren’t buying the Facebook hype that tells me there’s no-one left.  The S&P 500 has tanked over the last two weeks, and we may be driving off a cliff.

So, place your stink bids, hold physical, and if the crash happens, grab the bargains.

And no, Facebook is not a bargain.

Thanks for reading, and for my readers in Ontario enjoy the Victoria Day Holiday on Monday (the Toronto Stock Exchange will be closed) and I’ll see you next week.

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