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Those who agree that Facebook IPO was overvalued, please raise your hands.  That’s everyone in the room!

Facebook is an example of a share that sold more based on its emotional value than its actual value as an investment.  Many who bought the stock bought it because they used Facebook and had an emotional attachment to owning a piece of it.

Get attached that way to an investment is the best way to lose money in the stock market – lesson learned – but now what?

Facebook took steps Tuesday to reassure investors and employees worried about its plummeting stock price. Facebook says that Chief Executive Mark Zuckerberg won't sell any stock in the company for a year, and that two of its directors, Marc Andreessen and Donald Graham -- have no plans to sell their personal holdings either.  In a regulatory filing Facebook detailed how it will essentially buy back 101 million shares when it issues previously restricted stock units to its staff in October.

At recent prices, it would spend roughly US$1.9 billion in cash to keep those shares off the market. Together, the steps are meant to effectively reduce the amount of Facebook stock in the hands of the general public.  As lock-up periods on the stock expire the stock price is dropping, and the love affair is coming to an end.

I believe that the share price will drop well below the company’s real value and will then rise again to a level that is truly reflective of it’s value.  If you’re really looking to invest in Facebook rather than own it for emotional reasons, you might want to buy at share prices below $15.

If you already own Facebook stock and are taking a hit on it, you can do two things: short the stock from now into November is a good time, or buy more of the stock at prices below $15, and average down your purchase price.  If you have a three to five year time horizon on the stock and you can average down, the stock will go back up to $38 and beyond.  Lastly, if you don’t want to take a risk on either of these strategies, hand tight you will get your money back with profits in less than three years, and make a killing if you’re willing to risk a five year time horizon.





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