IPO’s, Markets And Moving Money Around


Sometimes I simply stare at my screen in awe of what happens and what is stated.  It’s mindboggling. 

In the money world, there’s two topics of conversation.  The Facebook IPO and Europe.  And very few seem to understand what is happening.  I’ll start with FB.

Good heavens!  Anyone who thought that crap was worth $100 billion dollars needs to be parted from some money.  But, let’s examine another lessen which needs to be learned.  The stock market doesn’t create wealth.  Let me repeat that for emphasis….. the stock market doesn’t create wealth.  It isn’t anything to base an economy on.  FB is a great example and its recent so we can learn from this.

FB was initially offered at $38/share.  This is what the “experts” valued the company at….. well supposedly.  What it really happened is that it was a “bet”.  Now, during the first day, that share price moved up to about $45/share.  Why?  The total assets of FB hadn’t increased.  FB’s earning potential hadn’t, either.  In fact, there was nothing that changed about FB, assets, debt, earning potential, and anything else you can value a company on.  Nothing.  Now the price is under $30/share.  Again, there’s nothing different about FB.  Nothing.  Now, here’s the beautiful part.  With an IPO, after the shares are first sold by the company, none of the other trading moves capital into the company.  And, it doesn’t take it out.  You could say FB made out like a bandit.  I’d say if the price drops to just below $20/share it would still be overpriced.  So, the valuation of FB was $100 billion or so, but the reality of it was that it wasn’t really. 

And, this is the beauty and horror of the stock market.  After an IPO, it doesn’t do anything.  The IPO is used to infuse cash into a company.  After that, the money doesn’t go in or out of the company.  Though, the value of the company is then forever tied to the value of the stock.  But, FB didn’t make any more or less revenue.  No new markets were opened or closed to FB.  No jobs created or lost.  And most importantly, the value of FB’s product went unchanged.  The perception of the value changed, but the actual value did not.  All that occurs now, is simply moving money around.  Sure, someone will get rich from continuing to play with FB stock, but for every gain, there is a loss

Today, we concern ourselves with the stock market as if it is our economy.  It isn’t.  It isn’t even part of the true economy.  It is a proxy for an economy, but, a poor one at that. 

But, this is our problem.  Now, our markets are woven into our economy and they’re unmanageable.  I often harp on our 401k’s, but this serves as a great example.  We take capital (a proxy for real value) and move it to our markets.  Capital in the markets exists only to get extracted.  Nothing is gained until the stock is sold or the bond cashed.  And, when this occurs the gain is a net zero gain for the population because someone lost on your gain.  But, we’re not selling our 401k’s until we retire.  In the mean time, all of this capital is sent to swirl around in the markets.  Doing nothing. It’s not making a company any better or worse.  It isn’t adding real value to FaceBook or any other company.  It simply swirls around in the market, hoping the the perception of the company invested increases over time to where we gain at someone’s loss.  In the meantime, capital is extracted from the economy. 

Don’t get me wrong.  I’m not against markets.  I’m very much for them.  But, I’m for them to be used in their proper fashion.  We need to distance our economy from the markets.  We’re moving in the wrong direction.

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2 Responses to IPO’s, Markets And Moving Money Around

  1. DirkH says:

    James, the market capitalization of a company is tied to its profits; the P/E ratio, which is usually around 10 to 15 depending on the industry. Sometimes its way higher, this is when investors expect a lot of growth in the future, so that’s where the betting comes in. Buy an oil or energy stock with a P/E ratio of 10 and you usually get a dividend of 6% or so a year.

    Facebook came out with a P/E ratio of 150 so people expected or were made to believe that Facebook will be able to drive up their profits 15 fold in the future. Realistic? I don’t think so. Other people obviously believed it. Well, tough luck.

    So, markets are just fine, and there’s no known BETTER way of pricing a company. As an example for a ridiculously high market capitalization, look at Apple. BUT they’re making tons and tons of profit so the high market cap is only fair – a different question is whether they’ll be able to keep making that amount of money in the future.

    Market cap above 500 bn USD ; expected P/E ratio (kgVe in German) : 11.9799. Meaning, that in 11.9799 years the company EARNS as much as it is worth now (if profits keep coming like today).

    FAIR. Yes, the Facebook IPO buyers made a risky bet. But that’s their responsibility.

    • suyts says:

      Right, I’m not opposed to that. I would caution against using only the P/E metric, well mostly because they’re often FOS….. as the FB IPO shows. But, like you said, if people want to place their bets, that’s fine with me.

      What I was trying to illustrate is how this shouldn’t be tied to our economy. And, how it doesn’t really do anything for our economy, especially after the IPO. If we want our economy to grow, we need to take our focus off the markets and do the things necessary to create wealth, not just move it around.

      Your oil stock example is a great example of what I’m talking about (albeit poorly articulating) the stock goes up as a reflection of the company and it’s ability to create wealth by extracting it from the ground. Whereas, many others go up and down based upon perception.

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