If you follow any news sources, you have definitely heard about the stock market debut of Facebook, the social networking giant. Although I never give specific recommendations about individual stocks, the IPO of Facebook is a good opportunity to review some basic principles of sound investing.
Facebook became available for purchase to the average retail investor this morning after a long period as a privately held company. The social networking site has over 900 million active members worldwide and is extremely well-known and broadly utilized. For these reasons alone, many people assume that it would make a great investment.
Investing is using money or capital in order to gain profitable returns, such as interest, income, or appreciation in value. How does a share of Facebook fit into this definition? Facebook debuted on the NASDAQ exchange today with a market capitalization (share price x shares outstanding) of over $100 billion, representing approximately 100 times its profits from 2011. Most publicly traded companies trade for 10 to 15 times their annual profits. Facebook shares do not currently pay any income. In order to achieve a profitable return, the share price would have to continue to increase. Anything could happen in the short-run, but a long-term appreciation of Facebook shares is only possible with dramatic increases in revenue and profitability of the company. This will require charges for services that are currently free, additional advertising that could drive away users or other new sources of revenue that don't currently exist. Although I will never claim to predict the future, Facebook has a long ways to go until it pencils out as a sound investment in my view.
Prudent investing requires appropriate assessment of risk, diversification and discipline. Invidividual stocks come with a risk that is too high for most common investors. Diversification requires that an individual own many different types of investments in order to spread risks across various companies, sectors and economies. Discipline is also required to achieve consistent, positive, long-term investment returns. The unpredictability and short-term, emotional movements of individual stocks do not cater to the sound discipline of a prudent investor.
There are other investment considerations that I haven't discussed here, but my simple recommendation would be to use Facebook as the great social networking tool that it is and only use it as an investment in a broadly diversified portfolio.
Friday, May 18, 2012
Wednesday, January 4, 2012
Happy New Year!
Although the new year is just another date on the calendar, it does give us an opportunity to reflect on the past twelve months and how we might make the coming days better. Many parts of our financial lives do reset with the beginning of the year, so I would like to offer some recommendations for improvement.
1) Keep better records - This isn't just for the detailed personalities out there. There is a lot of insight and power that can only come from accurate recordkeeping. There are even simple solutions like Mint.com that will do most of the work for you.
2) Accept the past and start fresh - Although real estate troubles or job changes might have changed your financial situation, you can reboot and develop a new financial plan for your current realities.
3) Reduce clutter - This might include closing some unused accounts or consolidating some old investments. Less clutter in the practical areas of our lives allows us to focus more on the things that matter most.
4) Live life more efficiently - There are lots of small things that can be done here. Reducing unnecessary shopping trips, replacing inefficient light bulbs or appliances and programming your thermastat are just a few.
5) Insure the important things in life - You should not take insurable risks that could cause harm to your family in the event of an accident or disaster.
6) Establish an estate plan - This can include a will, health care directives, and a trust. The first step is to think about it.
7) Think about your investments - This is an area that can be very costly when ignored for a long period of time. Each investment involves risks and these should be carefully reconsidered periodically.
8) Reduce unnecessary debts - There are good debts and bad debts. Debts should be reviewed, prioritized and paid down in a smart way. For example - pay down the debt with the highest interest rate first.
9) Do some math - You might not enjoy numbers, but some basic arithmetic can help your financial security. Basic assessments of income and outflows and projected future savings balances have to be done periodically to have a sense of realistic goals.
10) Share what you have learned - Family and friends can benefit greatly from the financial lessons that you have learned through your experience. Be a good example of healthy habits that will be observed by others.
I could list many more, but this should provide some ideas for many of you. If this is seems overwhelming, contact a fiscally-minded friend, family member or financial professional. They would be happy to help!
1) Keep better records - This isn't just for the detailed personalities out there. There is a lot of insight and power that can only come from accurate recordkeeping. There are even simple solutions like Mint.com that will do most of the work for you.
2) Accept the past and start fresh - Although real estate troubles or job changes might have changed your financial situation, you can reboot and develop a new financial plan for your current realities.
3) Reduce clutter - This might include closing some unused accounts or consolidating some old investments. Less clutter in the practical areas of our lives allows us to focus more on the things that matter most.
4) Live life more efficiently - There are lots of small things that can be done here. Reducing unnecessary shopping trips, replacing inefficient light bulbs or appliances and programming your thermastat are just a few.
5) Insure the important things in life - You should not take insurable risks that could cause harm to your family in the event of an accident or disaster.
6) Establish an estate plan - This can include a will, health care directives, and a trust. The first step is to think about it.
7) Think about your investments - This is an area that can be very costly when ignored for a long period of time. Each investment involves risks and these should be carefully reconsidered periodically.
8) Reduce unnecessary debts - There are good debts and bad debts. Debts should be reviewed, prioritized and paid down in a smart way. For example - pay down the debt with the highest interest rate first.
9) Do some math - You might not enjoy numbers, but some basic arithmetic can help your financial security. Basic assessments of income and outflows and projected future savings balances have to be done periodically to have a sense of realistic goals.
10) Share what you have learned - Family and friends can benefit greatly from the financial lessons that you have learned through your experience. Be a good example of healthy habits that will be observed by others.
I could list many more, but this should provide some ideas for many of you. If this is seems overwhelming, contact a fiscally-minded friend, family member or financial professional. They would be happy to help!
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