Warren Buffett on FB IPO – Analytics Thought of the Day
Warren Buffett on whether he’ll be participating in FB’s offering:
“We never buy into an offering” Buffett told CNN at Berkshire’s annual meeting in Omaha.
“The idea that something coming out…that’s being offered with significant commissions, all kinds of publicity, the seller electing the time to sell, is going to be the best single investment that I can make in the world among thousands of choices is mathematically impossible,” said Buffett.
Why should we take anything at Face value (yes pun intended)? The initial conditions always impact the integrity of any developing situation, whether you’re questioning the value of something (a stock or other security), the accuracy of something (a forecast perhaps) or even a particular person coming into your life. Some interesting fundamental concepts:
- 3rd party with incentive misaligned with another party’s – investor wants the cheapest price, bookrunners (bank) want the most fees. Incentives are the most pervasive concept in all of life.
- Publicity tends to dramatize or inflate the importance of things. It’s been months and months since FB decided to demand a valuation about 5x more aggressive than Google. Hey, no MAJOR players in the media categorically denied its plausibility (lot of speculative articles though)…therefore, must be right!
- Seller selection of timing to release product – therefore all information released leading up to the event will be immensely positive. Months ago Facebook said they have no way to monetize mobile (at the scale they can desktop/tablets). All related technology news is talking about how mobile is growing exponentially. If FB harped on this risk in any real way they wouldn’t get half the price they’re asking (personal opinion ymmv)
- Opportunity cost – given the above, how could this be the best thing out there? Exceptions aside, by investing in one security you forego the return of another. You need to think marginally; if I buy another 10x of something, will it provide a higher return than my current total investment will on average? Will I be hedged against some other macro effects if I diversify in this direction or will be risk continue pointing in the same direction?
“I don’t invest in what I don’t understand. And I don’t want to understand Facebook,” Munger said.
“I don’t want people putting all this personal stuff into a permanent record when they are 15 years of age. I think it’s counterproductive. I just basically don’t like it.”
Can anyone understand what the future holds for this company? That’s not an absolute statement but rather one of degrees of understanding. I bet they understand IBM slightly better than Facebook. Other than message/interruption/targeting (the classic advertising model) which FB has no monopoly on to begin with, what is there to know about their business model other than that people log onto FB and interact with features which connect them to some degree with other people? This could dry up in a few years (and has for other social networks) while IBM has a diversified business model with a lengthy track record to back it up.
He also just doesn’t like it. It’s a free country after all! That said, many people have different styles of investing but you can’t say that Buffett’s hasn’t proven itself to be effective. Dumb luck sometimes, sure. But that’s never known beforehand.
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