A friend sent me this article with the headline “Why Facebook Will Be the First to $1 Trillion” and asked me if I thought FB is a good buy.
There is no doubt Facebook is a booming company. To what extent none of us, including the guy who wrote the article can predict.
Here are my back of the envelope, no calculations or financial gurus consulted thoughts…
The 2 questions I would ask myself are:
- What price am I paying for FB’s growth?
- How much of my overall investments should I have in FB?
Good questions to ask yourself anytime you come across any investing “advice” or suggestion to buy something.
1. What price am I paying for FB’s growth? What price are you paying --- for the large companies that everyone is paying attention to -- Google, Amazon etc?
Is their predicted tremendous growth already priced into the share price? When will you get out? Facebook will grow, but is it enough to justify the price you pay today?
The term used by investors to describe how expensive a stock is, is the P/E ratio (usually pronounced “P E Ratio”) or the share price divided by the company’s actual earnings. The higher the price for the earnings of the company the more expensive a stock is relative to what the company is making. As of February 16 Facebook’s P/E is 79…. vastly more expensive for its earnings than some other big American companies (Coca Cola at 25, Goldman Sachs at 12 and Intel at 12).
So if you’re adding FB or another “glamour” stock, buy it when there are dips in the market like there are currently.
Taking the second question:
2. How much of my overall investments should I have in FB? Even the cleverest and most concentrated of investors - the big multibillion dollar funds that make Wall Street Journal front pages and blow the rest of us out the water tend to hold 15 positions or more so about 7% of their portfolio on their biggest and most optimistic bet.
Professional value investors who spend their entire weeks (and weekends) poring over company reports advocate 30 -50 holdings so most of their bets are 2%-3% or their portfolio. Mutual fund managers hold 100s of positions, very few over 1%.
So go ahead and buy something you’re confident will grow but keep in mind how much of your net worth you’re putting on this one bet keeping in mind even the big boys (and they’re all boys) tend to be under 10% on their super sure bets.
I’ve been busy on the business front getting clarity on financial regulation and incorporating my business. Several of my friends have suggested I tie up with an established wealth manager… not something I’m keen on but I thought I would do some basic research.
Of course I looked up the big daddy of them all -- Coutts -- this is the super prestigious wealth manager where the Queen (of England) herself keeps her money. Turns out they have been hit by a scandal for misleading their super rich and elite investors into funds that didn’t diversify them enough.
So the Queen probably needs some solid investing lessons on buying Facebook stock!
So long for now...
My first investing workshop (scary and way out of my comfort zone!!!) is on March 12th in London. If you or anyone London based you know is interested checkout: http://mallikafirst.eventbrite.co.uk