Facebook's IPO and What it Says About Stocks in General

The news on the business page of America’s newspapers these days is the initial public offering (IPO) of Facebook stock. It’s even more newsworthy that the company’s headquartered in the Bay Area.

Up to this point, the company has been privately owned. Now it’s gone public by selling stock shares to investors, which changes the complexion of the outfit.

Everyone wants in on the stock because they’ve seen how well Google stock did after its IPO. There will be a privileged few allowed to buy the Facebook stock at its starting price and resell it at any time they wish to reap an easy profit (assuming the stock rises in value).

But what is this thing called stock? We certainly accept it as part of the investment world, but rarely give it a critical glance.

However, the more I think about stock the more ridiculous I think it is, and yet much of our economy revolves around it. A lot of retirement and pension and foundation funds are heavily invested in stock, so how stock performs and whether there’s a “bear” or a “bull” market is highly important to a lot of people.

I don’t pretend to know a lot about the investment world, and all the ins and outs of stocks, but bear with me, and I’ll try to not give you any bull.

Back a couple centuries ago, some European companies began to raise money to expand by selling stocks to a relatively few number of investors, who then became part owners of the company. I assume they actually had a voice in how the company was run and who ran it – and they shared in its profits (that is, they received dividends).

You notice I said the companies raised money by selling stocks. This is quite different than borrowing money, as from a bank, with the obligation of paying the money back with interest. Now, one of those companies went out of business, the only way stockholders could get any money back would be when the assets of the company were sold, and then the proceeds divided.

Today, when a company like General Electric or Apple sells stocks to ordinary folks and small investment groups, those “small potatoes” really don’t have any voice in how the company is run. So, they buy their stocks and hope for the best. In the case of Facebook and other IPOs, the owners issue over half the stock to themselves, so they can effectively outvote other stockholders at shareholder meetings and keep control of their company. Sweet.   

Today, when companies sell stock, it’s essentially like printing money. These companies are like countries that print their own currency. To get to that point, entrepreneurs had to build their companies into financial successes, or demonstrate a great probability for success. This attracts investors who would like to pay those companies for pieces of paper (stock), like money, which has the possibility of increasing in value. They would like to hitch a ride on a galloping horse.

So, companies like Google and Facebook issue millions of shares and take in billions of dollars – and the founders of the companies and their first employees become instantly rich with millions and even billions of dollars (because of stock they’re given). Is this right? Aren’t the companies supposed to be issuing and selling stock to expand or enhance the businesses? What have these individuals done to deserve to be insanely rich? The President of the U.S. only makes an annual salary of $450,000 while Facebook CEO Mark Zuckerberg will make around $20 billion from his IPO. The IPO will also create 1,000 instant millionaires among employees there. Again, it would seem that the companies have been given a license to print money.

Say you buy some Facebook stock as an investment. You want your nest egg at minimum to earn enough interest to beat the rate of inflation. The stock is only doing you any good if it increases in value. Say the Euro-currency countries in Europe have a general banking collapse and that drags down the value of U.S. stocks along with it. Now you’ve lost money.

Some companies share their profits by paying annual dividends to their stockholders, which is a nice feature if you can get it. However, many tech companies have been notorious for not paying dividends – probably using the justification that they need to invest in innovation. Apple, after being incorporated for 35 years, waited until just this year to begin paying dividends – long overdue, since they had many billions of profits salted away in banks.

So this “paper” issued by companies is speculative. In essence, if you buy stocks you are gambling (but of course even if you buy your own house you are speculating to a degree, too, because it can go up or down in value – but it doesn’t seem quite the same, does it?). You are betting. You are picking a horse or horses to win. Remember back when some politicians were suggesting that Social Security be closed and people invest in stock funds instead? Then the recent deep recession took at least one-third of the value of stocks away and those voices fizzled out.

The rise of stocks as investments created a whole new class of people dedicated to creating, and buying and selling stocks along with associated products. Unfortunately, many of these people care more about a company’s stock value than they do for the longevity of the company itself and its employees. This has led to companies thinking more in terms of short-term successes rather than devising and hewing to successful strategies over the long term, just to keep their stock value up. Many stock traders seem to exist in a rarified world where gamesmanship and winning are more important than ethics. Remember that the only time Jesus Christ became angry and violent was when he upset the money changers’ tables in Jerusalem!

My personal horror story with stocks goes back 15 years when I began working for a dot.com startup in San Mateo called E-Stamp. It was one of the first companies seeking to sell postage via the Internet. During the dot.com bubble it didn’t have much of a problem setting up an IPO to sell stocks to the public. As employees, we were offered stock at the initial selling price. My wife and I purchased $8,000 worth. I was a bit blinded by all the rising stock prices in the tech-stock world and didn’t recognize the inferiority of our particular product. We had to sign an agreement that we couldn’t sell our stocks for many months after purchase. Well, the stock rose in value for a week or two, then began its slow decline. It was very painful watching that inevitable slow decline. When I could finally sell the stock, it was for pennies on the dollar. Eventually the company went belly up.

But there were some who made out like bandits on the stock. I assume that the venture capitalists who had originally loaned money to start the company were given copious amounts of stock, which they were allowed to sell soon after the IPO, when the stock value had increased, and before the value began to fall. And certain favored investment houses that handled the IPO were allowed to buy stock at the beginning price and sell it whenever they wished.

This leads to the conclusion that the stock market is configured in such a way that the average small-potatoes investor can make only minimal gains, and it’s rigged and run in such a way that big-time investors and investment companies and banks make the big gains.

I have an acquaintance in New York who with others has set up a computerized system capable of buying and selling thousands of stocks minute by minute when stocks only change in value by a few cents. This is an indication of how far afield and distorted the stock market has become.  

The fact is that this vast system of companies creating their own money, and the highly complex and highly inter-connected (but often unregulated) trading of this paper is a house of cards which can tumble down quite quickly, creating recessions and depressions, which hit the poor and middle classes the most through job losses.

My solution? Stop selling stocks and end this gambling entirely. Make companies borrow money by selling insured bonds yielding a guaranteed rate of interest. If a company goes out of business, insurance would pay off the bondholders. Maybe the economy wouldn’t expand as fast, but it would sure eliminate a lot of insanity.

If stocks have to continue to be part of our economic picture, then prevent companies from issuing their own stock to the company owners and employees during and after IPOs.

In the Dixon area, the most reliable stock stands on four legs.