Facebook plunges 11%: Should you buy?
(MoneyWatch) The hype surrounding Facebook (FB) continued on the second day of trading. After closing only $0.23 above the IPO price of $38 on its debut, the stock closed down $4 dollars, 20 cents or 11 percent to $34.03. The day two drubbing prompted a friend to ask, "The stock's down 11 percent, so is now the time to jump in?" I quickly responded "ARE YOU INSANE?"
Pretty much everyone here at MoneyWatch has warned against buying Facebook. The advice not to jump in has nothing to do with the lead underwriter for the deal (Morgan Stanley) reportedly telling major clients it was reducing its revenue forecast for the company. After all, is there anyone who still relies on Wall Street analysts (aka stock cheerleaders) for guidance?
My colleagues and I don't have a hate on for Facebook even as a business model. The bottom line is that my friend has no business buying individual stocks and chances are, neither do you. Sure, there are fabulous stories about people who plowed money into Apple and are now millionaires, but odds are that's not going to happen to you. The reason is simple: Research shows that even professional stock pickers have a hard time compiling a winning record, when compared to their relevant indexes.
According to research from Wharton, over the 23 years ending in 2009, actively managed funds trailed their benchmarks by an average of one percentage point a year AND another report from S&P found that most actively managed funds waged a losing battle over the five years through Dec. 31, 2010. If actively managed mutual funds, which are filled with lots of well-paid analysts, can't beat the indexes, why should we expect that mere mortals like us could?
So if you want to try to play with Facebook, do so only with the amount of money that you are willing to lose. Otherwise, stick to a well-diversified portfolio of no-load index funds, where wimps and successful investors find calm amid the raging market storms.
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