Feeling Burned by Facebook's IPO? Be Pissed Instead at the Stock Market, a True Sucker's Bet
Facebook founder Mark Zuckerberg now faces a series of lawsuits about his company's public stock offering.
Photo via bestweekever.tv
On May 9, Facebook's upper brass had a meeting with financial analysts to tell them the company's revenue should be on the low end of projections, according to the Associated Press. That was bad news, especially considering Facebook was about to sell stock publicly for the first time.
The analysts for the nation's major investment firms then took that information and handed it out to their biggest whales, according to a series of lawsuits. Regular investors -- the working man who maybe got excited about the chance to own a bit of the website he wastes time on at work -- got screwed.
And that's where you shouldn't be surprised. The stock market these days is a sucker's bet. It's built on the principle that the average worker will never pull money out of the market, no matter the cloudy
projections, no matter if it actually makes sense to invest.
The stock market is in essence a gamble. You're betting on the idea that stocks will eventually increase. But most working people have their life savings stocked away in 401ks with major tax penalties if they take out the money. We've invested in a bet where there's no option but to keep your money on the table.
That's where we get screwed. It doesn't matter if Ben Bernanke came out today and declared the economy was about to implode. Financial analysts would still tell you to keep your money in the market. If they didn't, if they told us to cash our 401ks and money market accounts, it would lead to an economic meltdown. So instead, the big investment banks can sneak information to its biggest investors, like Morgan Stanley reportedly did with the Facebook IPO, and leave the little man in the dark. Or they can take out bets that the economy is about to crash without telling the rest of us.
That's exactly what happened with JP Morgan Chase, which lost $2 billion by betting on shadowy indexes, like one called CDX IG 9, which benefits if major institutions falter. JP Morgan lost that bet, but consider that the bank was putting down billions of dollars of risk on a bet that the economy would suffer, all while telling little investors like us to continue putting away as much money as you can possibly afford into your 401k.
Financial analysts will tell you to look at the long term. Pull your money out now and you'll lose the benefit when the stock market rebounds. Such an argument ignores the fact that 401ks have been a poor place to put your money. An excellent analysis on mymoneyblog.com shows that 401ks over a 20-year period managed just a 4.48 percent return, less than half the return of investors in the stock market. You would've done better in that period to stick your money in treasury bills, something few financial planners would recommend.
The reason for that discrepancy is that money thrown into a 401k largely sits there in whatever accounts you picked when HR asked you to fill out a bunch of forms. It doesn't matter if that off-shore small-cap firm you picked has imploded, because most of us just throw away those depressing 401K reports we get in the mail. Investors in the stock market, meanwhile, are largely the big-money investors getting information from the investment banks that isn't passed down to the regular joes. They're told before the market crash of 2007-09 that things look shaky, while investment banks continue to push small investors into the market.
So Congress has begun an investigation into the Facebook IPO, and there will likely be another probe into allegations of insider trading. But what won't be studied is whether it's a sign of a larger problem, that the market itself is built on the idea that the 99 percent makes an investment in a system where they're expected never to pull their money back.
If they did that at a casino table, you'd walk away.
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