Tuesday, August 28, 2012

Investing In Nothing or Social Media


Since taking the reigns of my investment portfolio I can honestly say that I have made a lot of good choices that have increased my wealth substantially.  However, there have also been some mistakes that I have made which ended up costing me a few hundred dollars. In my mind these mistakes have proven invaluable to me for they have shown me what not to do, and in the end my investment portfolio will be better off because I will never make the same mistakes again. My investment “radar” was honed from these good and bad choices and when a few IPOs were released in the last 12 months, my radar was telling me “Danger Steve, danger…”

Groupon

For those of you who live under a rock or hold the same discontent for the internet as my elderly grandparents, Groupon offers deals to consumers of up to 90% off the retail amount on getaways, restaurants and merchandise with the offers changing daily. I personally have never been to their website until I wrote this post but I can see why people could get addicted to good deals. The only problem with these good deals is that you end up spending money then you normally would not. For example, my friend’s wife purchased tickets for a helicopter ride. The tickets were normally $500 and they purchased a Groupon for $170. They saved $330 by using Groupon, but the problem was that they normally were not in the market for helicopter rides. I’m sure the ride was exciting, but they ended up spending $170 they normally would not have.

It’s like buying 100 pencil sharpeners because they were only $0.25 cents a piece. Would you normally buy 100 pencil sharpeners on any given day? This act of spending seems like a good deal at the time, but in actuality it’s tricking you to consume more then you normally would. The money saved is, in essence, non existent, but in a consumers mind they got a good deal, so the money they spent is justified. Yes they may have Groupons for services you already enjoy, but I’m not sure this type of consumerism has any longevity.

Now from an investor standpoint, one has to look at Groupon from a different perspective. When you boil it down, Groupon doesn’t have much substance as an investment. They are basically middlemen who take a small percentage of each transaction between consumers and businesses. The relationship between consumers and businesses already existed and Groupon just skimmed from the profits for bringing in massive amounts of consumers. To me, that doesn’t seem like a strong business model that I want to invest in for the long term. During a decline of spending in a recession or depression, businesses will be more likely to cut out the middlemen to make sure all profit comes back into their own pockets.

In November of 2011, Groupon had there IPO that opened at $28.00 per share, had a high of $31.14 and closed that same day at $26.11. The only people who made money that day were the circling day traders and the founding members of Groupon. As of the date of this post, the current stock price for Groupon is $4.75 per share. That’s a significant loss in less then 9 months and any new investors have probably jumped ship by now.

Facebook

Unlike Groupon I actually use Facebook to keep in touch with old friends, new friends, family members and even have a Facebook page for this blog. Facebook makes money by selling ad space to companies and then matching ads with individual users depending on their interests and likes. Like 95% of the people who use Facebook, I pay no attention to the ads that pop up on the side of the page so really I’m not sure how they keep making money.

From an investor standpoint, I never saw Facebook as a solid, dependable company. Sure over 900 million people use Facebook, but a large majority of them use it as a free, easy way to keep in touch with people all over the world. If anything it can be said that it helped revolutionize how mankind communicates, but so did MySpace. MySpace is a mere shadow of it’s former glory and I fear Facebook will follow the same path when the next great social media giant emerges.

In mid May 2012, Facebook’s IPO opened at $43.05 per share, had a high of $45.00 and closed at $38.23. Again the only people who made money that day were day traders and that graffiti artist who chose Facebook shares instead of money. As of the date of this post, the current stock price for Facebook is now $19.05 per share. I would fee sorry for Bono but he makes more money while he sleeps then I ever hope to attain in my lifetime.

Was it really a surprise?

I know I’m an amateur investor and all, but is anyone really surprised at the results of these IPOs? I have friends on Facebook who update me when they’ve just made bread or that they are hungover; do you really think these people are paying attention to the advertising? And for people using Groupon, they only care that they are getting a great deal on something they really don’t need. They don’t know its scheme to get them to over consume.

Facebook is essentially bits and bytes of information flowing through internet providers. Does a smart investor invest in these bits and bytes? No, they invest in the internet providers.

Groupon takes a cut from setting up consumers with well established companies. This cat would rather skip the middleman and invest in the well established companies.

Investing is not rocket science, in fact I’m proof that anyone is capable of being somewhat successful at it. Whoever invested in Groupon and Facebook were trying to make a quick buck and in my experience, that’s called gambling. I always invest in what I know and since I’m a user of social media, I know it’s something I would never invest in. The great .com bubble was enough to set me straight when it comes to investing in bits and bytes, and I had nothing invested in it. It just goes to show that as long as they build bridges, there will always be someone around that’s willing to buy one.


This article was written by The Loonie Bin. If you enjoyed this article, please consider subscribing to his feed.

1 comment:

  1. "Economic Moats" is a concept I learned a long time ago. Groupon doesn't even have a ditch. FB is not much better. There is a "cost" to shift to the next cool site, but it's not cash, just connections.

    PS please stop using the phase "live under a rock". It's insulting to your readers. Personally I've never been to Groupon or know what a #1 meal is at MCD, but I know enough to just watch GPN and own MCD. I certainly don't feel like I live under a rock, I get plenty of sun:)

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