The title for this post is misleading because Bell Investment Advisors does not recommend or invest in individual stocks. However, the popular buzz about the initial public offering for Facebook presents some important teaching opportunities.
Business Risk
We choose not to invest in the stocks of individual companies because they contain significant business risk. Analyzing individual stocks is a very ambitious and costly enterprise when done properly. Each professional analyst can only cover a handful of companies. The recent $2 billion+ trading loss at JPMorgan Chase is a good example of business risk. Events like this, unique to one business, can easily cause a rapid 20% or more drop in stock value.
Risk Containment
At Bell Investment Advisors, we choose to focus on making life work for our clients. One of our core principles is to never take more risk than is necessary to accomplish a financial goal. We advocate for each of our clients to do financial planning so that we know how to work with them in the context of their financial goals. This is why we choose to invest in no-load mutual funds and exchange traded funds (ETFs): they are effective tools for providing professional management, diversification, and risk containment.
Context
The inquiries we received about buying Facebook when it came public were never in the context of a financial plan or personal goals. This is one of the pitfalls of media coverage about individual stocks: the reporting is rarely in the context of personal financial planning.
Life Money
Jim Cramer has a show about individual stocks on CNBC called Mad Money. He calls it Mad Money for a reason, because all of the information he screams about is never in the context of anyone’s personal financial situation. He never discusses whether or not investing in this stock or that is appropriate for what the investor is trying to accomplish. At Bell Investment Advisors, we deal with Life Money, not Mad Money.
Transitions
Another lesson to be learned from the Facebook phenomenon is that transitions are risky. On May 18, Facebook went from a private to a public company with radically different reporting requirements and regulations. Many private companies choose to never go public even though they could raise a lot of money. Bechtel Corporation is an example of a very large private company that most likely will never go public. The owners of Bechtel just want to do their international engineering and construction projects; they don’t want to deal with public shareholders and all of the requirements and regulations that come with it.
Similarly, when successful college athletes are drafted by professional sports teams, they also face a risky transition. The differences between college level competition and the professional arena are extreme. Many successful college athletes are not effective as professionals.
Maturity
Currently, we like the technology sector, and some day, we may own Facebook through the no-load mutual funds and ETFs we select. This will happen if and when the managers we respect decide that Facebook has been successful at making the transition as a public company and it fits the goals of the fund. It is too early to tell, and because we deal with Life Money, we prefer investments to go through a process of maturity, which cannot be predicted at the point of transition.