If you want to be a successful long-term investor, you have to distinguish news from noise.
This has been a noisy month. Greek voters seemed to channel Nancy Reagan in deciding to just say no to their country’s creditors. Leaders of the G-8 industrialized nations gathered at Camp David last weekend and tried to coax Angela Merkel to join in a chorus of “Give us growth, my Lord, Kumbaya.” (Sadly, when translated from German, her refrain sounded more like “I’m not paying, you clowns, Kumbaya.”) Global markets have suffered acute motion sickness for weeks. Oh, and a startup company on the West Coast went public on Friday.
What did we learn from this ruckus? Only two small facts, as far as I can tell. Fact number one: Facebook is worth more than Greece. Fact number two: The difference is not as big as Facebook’s IPO underwriters wanted us to believe.
I know it sounds facetious, but there is something noteworthy here.
Greece, with its tiny economy and nearly bankrupt treasury, has sent global markets into near hysteria over fears that its possible exit from the euro will return us to the darkest days of 2008, when no financial institution anywhere in the world seemed reliable. The yield on 10-year U.S. Treasury bonds reached a record low of 1.7 per cent last week, which is a sign of investors’ desperation to stash their money in a presumably safe place for a long time, even if their capital generates no return after inflation.
Yet with a $38 per share offering price that valued Facebook at more than $100 billion, investors who bought into the company’s initial public offering bet that virtually nothing can go wrong for the leading social network, and that Mark Zuckerberg can bury a one-handed jump shot from half-court at Madison Square Garden while, with the other hand, he updates his status.
The fact that there was no “pop” in Facebook’s share price after the IPO does not mean the offering failed. It means the underwriters Hoovered every last dollar that was on the table for the most-hyped public company debut since Google. They got institutional money managers and the share-buying public to ante up every available nickel.
Facebook participates in the same global economy as every other company. If the system melts down for everyone else, it will melt down for Zuckerberg and his friends too. Had Facebook floated this offering in late 2008, when there really was a risk that financial institutions would tumble like dominoes, the IPO would indeed have failed; the underwriters would not have been able to move the stock at almost any price.
On some level, investors realise that the world economy, which has survived every disaster from World War II to Lehman Brothers, will survive Greece as well. Stock prices are ultimately driven by corporate earnings, not by the repayment of principal on government debt. Consumers will still be eating, dressing, driving cars and going to the doctor next year, and in the years after that. They will be keeping up with their Facebook friends, too.
I am not trying to minimize the debt and deficit problems that beset countries on both sides of the Atlantic. The G-8 leaders, including President Obama, who pressed Merkel to adopt “pro-growth” policies, which are really “pro-spending” policies, are disturbingly prepared to keep mortgaging our future to maintain the illusion of a more prosperous present. Merkel is not just insisting on fiscal honesty; she is using the financial squeeze in Europe to push for more flexible labour and business rules and more honest government budgeting. Hers is the pro-growth policy, but it is a slow approach that does not satisfy Obama’s political needs or the aspirations of Germany’s deeply indebted euro partners.
These are not things we just learned. Nothing much has changed in the last few weeks except the markets’ mood as the climax of the Greek tragedy grows closer. May has been a tumultuous month, but most of the tumult has merely been noise.