Soon after Facebook Inc.'s botched initial public offering in May, a lot of people believed that popular attitudes towards the IPO market and the stock market in general had been harmed. Now, this hunch is being backed up with survey numbers.
A survey from Tabb Group (via the Wall Street Journal's MarketBeat and Abnormal Returns) found that the Facebook IPO affected investor confidence almost as much as the Flash Crash two years ago, when major indexes hit a sudden air pocket triggered by the actions of high-frequency traders.
The survey of 175 market participants – the professional types, including investment management companies, hedge funds and brokers – found that 31 per cent had weak or very weak confidence in the stock market. Half said they would be cautious about participating in the next headline-grabbing IPO.
The Facebook IPO was marred in all sorts of ways of course, but its biggest flaw by far had to do with the share price performance: The shares flopped, falling as much as 33 per cent from their IPO price of $38 (U.S.) and 43 per cent the intraday high of $45, hit soon after the start of trading.
Since hitting a low of $25.52 on June 6, though, Facebook has actually been doing well. As of Friday morning, the shares were up nearly 28 per cent from their low. The winning streak is also impressive, with the shares up for seven of the past 10 trading sessions – including during Thursday's broad stock market slump, which left few survivors. Does anyone care or even notice?
That's the thing with investor sentiment: Failures mean a lot, recoveries mean little. The Flash Crash in 2010 occurred in a matter of minutes, with the Dow dropping about 9 per cent or 1,000 points. It recovered just as fast and the blue-chip index is now up an impressive 20 per cent since then (27 per cent if you factor in dividends). Long-term investors – or anyone who didn't panic or even notice the brief plunge – were barely touched.
If you're the type of investor who is scarred by market downturns, or the turbulence of individual stocks, there is no shortage of examples throughout history – and presumably there will be plenty more to come – from the Black Monday crash of 1987 to the dot-com bear market to the outright failures of Nortel Networks Corp. and Bear Stearns Cos. Inc. Protect yourself by diversifying your investments and steering clear of over-hyped fads.
Confidence is always being shaken, and that's actually a good thing. It can bring stock valuations down to cheaper levels, making future expected returns far more enticing.