Under the rubric of “even brains won’t save you from stupidity” comes this classic opening from today’s New York Times story about fleeing the stock market for investment, spurred on by what another article, featured in “The Week” magazine, referred to as the “Facebook debacle:”
The excitement surrounding Facebook’s initial public offering was enough for Alex Tsesis, a law professor, to give the stock market one more try. But after the company’s stock encountered technical problems then sputtered for three days, he sold his few hundred shares for a $2,200 loss and vowed to end his equity gambles for good.
I’ve suggested to anyone within earshot (mercifully a very small number of people) that the catastrophe that was the Facebook IPO was a disaster one could see coming from miles away. Perhaps even as far as the distance between the most antipodal of Facebook subscribers in their locations on the globe. To digress a bit, if you don’t understand what Facebook does, suffice it to say that they (Facebook, that is) could tell you at any time, if somehow the information could be made marketable, what the distance is, in your choice of metrics (whether measuring meters or yards, or MIT “smoots” if you like), between any one subscriber and another.
I’d say you needn’t spend too much time on Facebook to understand something about its value (disclosure: I spent about five years on Facebook, being one of the first subscribers after they opened the site to anyone with an email address, including those that didn’t end in .edu—I recently, that is, as little as a couple of weeks ago, requested that my account be deleted and not merely deactivated–which is the social media equivalent of being one of the living dead, ready for resurrection, with no miracles attached, at a moment’s notice—let it be enough to observe that I simply had had enough, in my own neurotic way, of having my sense of privacy, and personal integrity, mind, potentially and actually violated), in sum to understand that Facebook serves no better or worse purpose than very economically in terms of time and effort expended, staying in touch with as many people as you like. You do so under the delusion, it’s a mass delusion, and I feel safe saying that because the subscriber count is approaching a billion on the planet and you must subscribe accepting the methodology and terminology—signifiers and signified included—forced upon you, as there is no other to use, that each of your correspondents is either one of all of the undifferentiated great number of millions of the Facebook “public” at large, or is, more specifically, your “friend” (Facebook may have managed to give a word with a long and illustrious etymology the status of being devoid entirely of any useful meaning whatsoever—so much for John Kennedy being one’s “friend;” on Facebook, he can be, as I’m sure he has a page, if not a membership, and also Facebook is high on the list of notorious reasons to exile oneself permanently, if not deport oneself for the duration, of Internet-based enterprises that essentially exploit the dead: just ask me about the time they informed me that my late wife, at the time, two years gone, had been seeking her friends using some new convenient friend-seeking utility they had just initiated, and why didn’t I try it?). What is its value then? Well, General Motors’ actions with regard to its relationship to Facebook as a channel to reach whatever number of people among its potential customers it deems represents a good investment of part of its advertising budget are as good a way of finding a means of measuring it as any.
General Motors had been an advertising client of Facebook to the annual tune of ten million dollars (a drop in the bucket given a total budget of nearly two billion, as reported by The Wall Street Journal). They will continue to spend 30 million on preparing marketing content for its “brand page” on Facebook. But consider one salient fact. Facebook will now see not a plugged nickel of what GM spends for advertising itself on the page it gets for free (just as you do, or would, and just as I did—but sometimes free is just another word for paying through the nose, the one you cut off to spite your face: go ahead, take a close look at almost any “profile photo” on Facebook, another face without a nose… it just looks like there’s one there, one of those optical delusions). It gets its revenue, Facebook does, from advertising revenue, which it attracts because of its vaunted powers of helping advertisers target their messages with extreme precision to the captive audience, or any slice or segment of it the advertiser likes as defined by some list of targeting criteria.
Given the cost efficiencies of waiting as long as possible after early investors have sunk their money into the enterprise as it develops the resources called for in the business model—create a very effective, i.e., cheap, engine for generating data that can be viewed or shaped to be seen from any and every conceivable angle, so that a highly defined demographic portrait can be limned and then discerned from among the enormous pool of possible recipients of advertising messages—Facebook potentially could make a significant amount of money. There should be a great deal of profit in selling the packaged data that can be collected about an aggregation of humans as large in number as a billion (or anything close). Even on the Internet, where selling prices for advertising are what one Website following these things calls something like “criminally low” (in other words, they—that would be something like Google or Facebook—are not charging enough for selling access to consumer eyeballs (ears, all body parts that can be stimulated using a computer), there’s a lot of money to be made, as Google has amply demonstrated. They have also demonstrated, while staunchly clinging to their corporate motto, “Do no evil,” as still being true and applicable to their now global presence and reach, that they can make enormous amounts of money by selling any services related to advertising even at pennies a “click” (that would be you, pressing the button on your mouse, or jabbing your finger at your smartphone screen or tablet, or applying pressure to the trackpad of your laptop).
Facebook know this (rather, the Zuck, or Mark Zuckerberg, the 28 year-old wunderkind and prime candidate for youngest richest and yet most obnoxious-from-a-distance person on the planet earth, knows this). And their rates are geared to make even as untested, if gigantic, a pipe for messages attractive to advertising high rollers. Yet, as General Motors relates to the financial press, they simply don’t know if it’s wise, in terms of, at this point, unmeasurable results, to spend that ten million bucks, which is three percent of the 300 million spent by them in digital media, which is, in turn, 15% of the total amount they spend on advertising—so one of the world’s largest companies, greedy, but smart and rich, if chastened after their near-death experience, doesn’t know the same thing that John Wanamaker, the Philadelphia merchant-king of the early 20th century famously didn’t know: what Wanamaker said was, “I know half of the money I spend on advertising is wasted, but the problem is I don’t know which half”—and, as a result, they’re not willing to spend even that paltry amount whereas Wanamaker had no choice about a great deal more proportionately). General Motors do know that they spend money effectively on their Facebook page, because they know exactly how many people visit the page, or any part of it, over any given time interval. This is all thanks to Facebook technology, and other technologies far older and tested than Facebook’s, and long since in use by the likes of companies the size of GM, and smaller.
So, here’s Facebook, a sensational phenomenon in terms of its apparent social impact, and the effect on the daily lives and quotidian activities of a significant fraction of nearly a billion souls (it’s only a few hundred million who on any given day use Facebook with any regularity, but the potential of reaching a block of people the size of the population of the United States must be tempting to anyone who has a business that faces the task of reaching a well-dispersed audience of potentially interested consumers) that’s making, relatively, hardly any money, given the potentiality.
In point of fact, because even as we remain exposed to the vagaries of regulatory legislation that allows unscrupulous people still to get away with legal profiteering, there are still enough rules in place that require companies making an Initial Public Offering to disclose certain facts about their performance. And the result of examining Facebook’s performance expressed quantitatively gives a very simple number, a very important ratio in the speculative business of making money by investing money in equities (playing or “gambling,” if you like, on the stock market—I personally don’t believe it’s that bad, unless you’re greedy, basically, and your greed and possible suffering from an addiction force you to assume calculable risks that you shouldn’t, if you’re prudent, intelligent, and mindful of what you’re doing, and what you’re risking). It’s called, as you likely have guessed if you’re at all conversant with what are otherwise the vagaries of the investment racket, the price-to-earnings ratio, or P/E. It’s the simplest and first point of judicious assessment of a particular investment.
The P/E of Facebook, which sets its own initial stock price (the “price” in P/E) with the advice of its IPO managers (in this case, Morgan Stanley, already having a certain currency as an exemplum of infamous, and highly dubious, financial practice, sufferings as one of the worst victims of the prime mortgage debacle, speaking of debacles, and despite their role, in the good old days, in underwriting the future of Apple, Google, Cisco, and Compaq—a fact in itself that would set any investor to wondering about the “wisdom” of Facebook management in their choice of advisors), is and was, on the day of the IPO and the days leading up to it, 100. For some perspective, Apple Inc., which hovers close to the position of being the world’s most highly valued company, in terms of stock value, very close to General Motors and Exxon/Mobil, which are in all other respects gigantic compared to Apple (and certainly to Facebook), has a P/E of 14. So Facebook was valuing itself at a level seven times greater than Apple, which has been in business for 35 years. GM’s P/E is about 6.6, Exxon/Mobil’s is about 10. Those companies are, of course, as old as the automobile industry, more or less, and have lasted, through thick and thin, for as long as 142 years in the case of Exxon/Mobil (which started as Standard Oil) and 104 years in the case of General Motors. Respectively they are almost 18 times and 13 times older than Facebook.
The prudent investor, the wise one, buys a 100 P/E stock in small quantities when the stock market is hot, that is, bullish and rising at a noticeably positive rate in overall value. At present, this is not true of any of the standard indices (the Dow, the NASDAQ, or the Standard & Poor 500 stock index of so-called blue chips.; we are closer to a bear, or retracting, market than a bullish one, and it’s unwise, to state it conservatively—it’s nuts, frankly—to buy any more than a token amount of stock in such a company). But even smart people, like law professors, don’t manage to think when it comes to getting caught up in the undertow of speculation surrounding a stock that is sexy because of the currency and newsworthiness of the company putting itself on the market. This company is a social phenomenon, to say the least, and what can be said equally well is that it is not in any way a financial phenomenon, except on paper, and mainly for the people who have been involved with its development as an entity from the start, with Mark Zuckerberg leading the pack.
The lesson here, where I’ve expended so many words, and not a red cent otherwise let me add, is not about Facebook at all, or even about Mark Zuckerberg, but about the behavior of Professor Tsesis, whose name, I can’t help but notice, sounds remarkably like a Yiddish neologism that might mean, “even smart people do stupid things when it comes to money.” It’s the behavior of such otherwise (I assume) rational and prudent people, who are reasonably well-off—I think you’d have to be to write off, in the space of less than two weeks, an amount like $2,200, as the cost of an object lesson) that underlies a great deal of the ongoing lack of resilience in our economy. For the life of me, I can’t account for why perfectly intelligent people not only do stupid things with their money, but why they persist in compounding that error by dissociating themselves from one of the bedrock components of what drives the still unequalled financial engine of the American economy when it is working properly and in the interests of nearly everyone concerned, except the utterly and absolutely poverty-stricken, who must otherwise (I think) be protected by the marginal or discretionary moneys that any very healthy economy throws off. People who are relatively well-off are entitled, no doubt, to feel they should accord themselves some protection (since no one else, including the government, seems eager to do it). But I would also say that that kind of protection begins with the mindful exercise of the advantage smart people have as their endowment to begin with.
The problem, not to state it too simply, or at least trying not to do so (reductivism is a disease of our time and it is legion), is that smart people are unwilling to do smart things. Sometimes circumstances require not only the exercise of intelligence, but the resolve to see through what our brains can’t help but allow us to conclude what the intelligent thing is to do, short of exercising such a high degree of conservative behavior as to induce stagnation. What we’re suffering are the artifacts and collateral effects of stagnation: recession, slow growth, sluggish financial conditions, and the suffering these conditions induce in an ever-widening circle of victims. Of course, many of them have the distraction (and the utterly useless sounding board for their gripes and moans and complaints) of Facebook—or as I have come increasingly to want to call it, the Book of Face, or, if you prefer, Fecebook. Unfortunately, Facebook, whatever it may have been fantasized to be by its founders and early benefactors, and its would-be next round of beneficiaries through investment, is at worst a symptom of the malaise of “stupid intelligence” and, at worst, and it’s this latter that I fear is the more accurate case, a facilitator of the slow devolution of those acts that can benefit society through the participatory intervention of a majority of its most intelligent members. All it requires is a great deal more, at no greater monetary expense, of that which is in a dwindling supply: thoughtfulness, or, more appropriately, mindfulness on the part of all. But especially those we used to be able to call, truly, the brightest and the best.by
Agreed, of course (P/E is a simple number, but says a lot), but perhaps people were remembering Google, nothing more than one search engine among many, whose stock offering sold at AUCTION for $80/share, and is now $560….perception and reality are curiously mixed in the relatively new, but burgeoning, field of behavioral economics…guessing what people will do in the future often has little to do with facts (like P/E). It can go either way, and economists get paid for predicting which way it will be, and then paid again for explaining why they were wrong….