“In seeking to avoid the dangers of crowd action, remember that a majority opinion can be sustained.  Unanimity of opinion is more vulnerable to a contrary surprise.”

The quote above is from Contravisory founder Ed Noonan’s 10 Rules for Investing.  Considering the record amount of anticipation and speculation surrounding the recent Facebook IPO and the subsequent disappointment, this seems like a particularly good time to revisit this rule. 

For the past several months, the buildup to the Facebook IPO has been the rage with investors and media alike.  The coverage has been non-stop.  The speculation surrounding the IPO centered not on whether the IPO will be successful, but how successful.  Will it break the record for the largest technology IPO in history? How high will shares trade on day one? $50? $60?  Will Facebook save the stock market?  The possibility of a disappointing Facebook IPO never factored into the minds of investors.  The most novice and seasoned investors wanted a piece of the most anticipated IPO in history.  Recognizing the unprecedented demand, Facebook raised the asking price from a range from $28-$35 to $34-$38 in the days leading up to the IPO.  All the elements of a speculative bubble were in place and the stock hadn’t even gone public yet.  There was unanimity of opinion that the Facebook IPO was destined for success.       

And then Facebook went public.  After a NASDAQ glitch delayed trading, the initial reaction was tepid as the stock moved higher from $38 to $42.  Those who couldn’t participate in the IPO snatched up what shares they could in the secondary market as volume reached record IPO levels.  With the last retail investors getting on board, demand subsequently dried up and the stock declined to close at $38.   And that decline has continued as Facebook is now trading at $28.  As is typically the case in the post-bubble aftermath, the finger pointing has begun.  Lawsuits and allegations are being filed against everyone from Facebook to NASDAQ to Morgan Stanley and beyond.  It’s getting ugly and investors are not happy.

Human nature makes it hard for us not to get swept up in a speculative bubble, but let this be another lesson that unanimity of opinion is more vulnerable to a contrary surprise.  Thanks Ed.

-David Canal