Streetwise

Lauren Rudd

Sunday, May 27, 2012

It Is More Than A Day Off

Memorial Day is upon us once again. For many it will simply be a day off from work and a time to drag out the barbeque grill. However, as I point out each year at this time, the day should be a somber reminder of those who sacrificed their lives to ensure our freedom.

Unfortunately, the devastating impact of armed conflict has a way of fading from memory. Few are left who can recount the untold horrors of the Holocaust. A younger but graying generation pushes remembrances of the sickening sweet smell of Napalm and burning flesh ever deeper into the dark recesses of their minds.

Nonetheless, the jarring impact of seeing young soldiers with missing limbs should not only unleash a gushing torrent of emotion, but hopefully will act as a constant reminder of the seemingly never ending violence that takes place across the globe in the name of peace...oh, and yes religion.

You are probably wondering how those comments relate to investing on Wall Street. They do not...except to point out that Memorial Day is an excellent time to once again reflect on the phrase, “Not what your country can do for you but what you can do for your country.”

Meanwhile, Wall Street’s supercilious attitude stands as a monument to unvarnished self-indulgence. As such, the recovery that now floats freely within the Temples of Wall Street is unlikely to ever make its way to Main Street.

Consider the recent initial public offering by Facebook. Last week I wrote that Facebook might well evolve into an excellent investment opportunity. However, I also pointed out that trying to compete with the Street’s heavy hitters who purchased the shares early and will try to marshal some fast profits at the expense of latecomers, could be an expensive mistake. And therefore you would be better off to wait and let the speculative fever die down before making your move.

And you know what happened, Facebook closed two days after the IPO at $31 or 18 percent below the offering price. Furthermore, many investors were shocked to learn that an analyst at Morgan Stanley, the lead underwriter, had cut his Facebook revenue forecasts shortly before the IPO was released - information that apparently was not made fully public.

Morgan Stanley cautioned major clients about revised revenue expectations in the days leading up to the stock's debut. Goldman Sachs and JPMorgan Chase also cut their revenue estimates prior to the IPO. Fortunately, this selective disclosure quickly came to the attention of the regulators, specifically the Financial Industry Regulatory Authority and the Securities and Exchange Commission. Meanwhile, the sharks that feed on short-selling smell blood and are starting to circle around Facebook.

Finally, if shareholders do not like the manner in which Facebook is run, too bad. There are two classes of Facebook shares. The shares the company is selling to the public are only entitled to one vote per share on matters such as the company's board of directors, executive pay packages and company bylaws.

The shares owned by founder and CEO Mark Zuckerberg and his early investors have 10 votes each. The result: After the IPO, Zuckerberg will own 18 percent of the shares, but control 57 percent of the votes.

Which brings us to what I traditionally address at this time of the year and that is when to sell. Too often the subject is exploited with erroneously general terms such as, "the market is going up, sell," or "the market is going down, sell."

Deciding when to sell is generally an investor’s most difficult decision and I would be the first to agree that it takes super human strength to decide the matter dispassionately. Given that it is Memorial Day weekend, may I once again suggest you contemplate the words penned over a century ago by Catherine Lee Bates in the song, "America the Beautiful." She wrote, "Confirm thy soul in self-control."