Do retail investors price stocks?
Generally speaking the answer is no, but the talk of the business media this past week has been the Facebook offering and its less than stellar execution and performance, especially focused on retail investors. First let's start with some facts and then get to the issue, says the former grade school teacher.
Facebook and its underwriters allocated a huge amount of the IPO shares to the retail investor market, at least 20%. On almost any major IPO, the amount allocated to retail has been somewhere between 2% to 5%, mostly focused on high net worth individuals. How many times have retail investors looked at a promising innovator, tech or biotech IPO, seen the stock soar by 20%, 30%, or more on the first day, and say to themselves and their broker "why didn't I have access to that". The big institutions got it all.
For whatever reason, the likely one being that they had so many loyal retail users, Facebook and its underwriters decided to do things differently. Retail investors lined up to buy 50 or 100 shares, sometimes probably much more, but buying in such small lots is mostly unheard of in an IPO. If this had been primarily an institutional offering, only big boys and girls buying, the primary focus of the follow up would be on the Nasdaq execution errors, and where the responsibility lies.
That is said because Facebook did amend its proxy statement for the offering around two weeks(don't know the exact time here) before the offering to suggest a moderated change in outlook. Informed institutional investors would have had access to that, and certainly salespeople at the underwriters would have mentioned to their clients to look at the modestly revised statement. It was public information in any legal sense. The stock was priced with that in mind and roughly 80% of the offering was bought at the $38 offering price by institutions that should have been well informed and made the decision to buy.
It is certainly terribly disappointing for retail investors to finally get an opportunity to pick up a few IPO shares and have them fall, but broadly that has not been at all abnormal for IPO's in 2012. The execution blunder simply exacerbated the problem with the pricing and the decline, and that is an understatement.
Getting back to the original question which, put in a different way, is does the participition in equity markets by retail investors have any major impact on the performance of equity markets? The evidence suggests otherwise. Look at the rebound in stocks from the spring of 2009 to the fall of 2011. Stocks, generally speaking, recovered all of their losses implying a gain of 100%. Retail investors in the aggregate either stayed out of the market or continued selling their equity mutual funds throughout the entire period with only a few slight interruptions. That's "sad but true." The market collapse from mid-2008 to March '09 simply scared them away which is understandable. Their lack of participation certainly did not hinder the market rebound.
Retail investors can, one could suggest, be influential in unique situations: small cap stocks that go viral for some reason in either direction; small cap stocks that have little or no following by institutions or research analysts; and possibly in periods of hysterical selling or manic buying when they are additive to a radical move in either direction.
Retail investors have been net sellers of equity mutual funds for the past five months, and the Facebook experience will for sure not turn that around. JPMorgan's widely reported trading mistake does not help the mood either. Are the retail sellers right this time? Who knows but more on that in a later comment.
Pension funds, other retirement funds, annuities, college endowments and other financing vehicles in many cases are broadly representing individual investors so they are in the market, like it or not. Accepting that, why not just sleep on a lumpy mattress. Maybe the sleep will even be better.
Postscript - additional thoughts at 8:30pm same day -
---While this post focused on the financial side of this IPO that was an unfortunate for many retail investors, it did not mention the political and societal implications. While the money is important, adding to the distrust in the financial system and the feeling that everything is rigged in favor of those already rich is a more serious issue.
---As is meant to be clear from the post, institutional investors can have no legitimate beef with the changed outlook for FB because it was made public in a legal sense two weeks before the offering. Those retail investors that deal with full service brokers and pay their high fees were likely to have been called, or certainly should have been called, by their brokers or asked their brokers for information if that firm still has a competent analyst. That said, most of the major trading by retail seems to have been through discount brokers. For $8 trading fees, one does not get investment advice on individual stocks, as in you get what you pay for.
Facebook and its underwriters allocated a huge amount of the IPO shares to the retail investor market, at least 20%. On almost any major IPO, the amount allocated to retail has been somewhere between 2% to 5%, mostly focused on high net worth individuals. How many times have retail investors looked at a promising innovator, tech or biotech IPO, seen the stock soar by 20%, 30%, or more on the first day, and say to themselves and their broker "why didn't I have access to that". The big institutions got it all.
For whatever reason, the likely one being that they had so many loyal retail users, Facebook and its underwriters decided to do things differently. Retail investors lined up to buy 50 or 100 shares, sometimes probably much more, but buying in such small lots is mostly unheard of in an IPO. If this had been primarily an institutional offering, only big boys and girls buying, the primary focus of the follow up would be on the Nasdaq execution errors, and where the responsibility lies.
That is said because Facebook did amend its proxy statement for the offering around two weeks(don't know the exact time here) before the offering to suggest a moderated change in outlook. Informed institutional investors would have had access to that, and certainly salespeople at the underwriters would have mentioned to their clients to look at the modestly revised statement. It was public information in any legal sense. The stock was priced with that in mind and roughly 80% of the offering was bought at the $38 offering price by institutions that should have been well informed and made the decision to buy.
It is certainly terribly disappointing for retail investors to finally get an opportunity to pick up a few IPO shares and have them fall, but broadly that has not been at all abnormal for IPO's in 2012. The execution blunder simply exacerbated the problem with the pricing and the decline, and that is an understatement.
Getting back to the original question which, put in a different way, is does the participition in equity markets by retail investors have any major impact on the performance of equity markets? The evidence suggests otherwise. Look at the rebound in stocks from the spring of 2009 to the fall of 2011. Stocks, generally speaking, recovered all of their losses implying a gain of 100%. Retail investors in the aggregate either stayed out of the market or continued selling their equity mutual funds throughout the entire period with only a few slight interruptions. That's "sad but true." The market collapse from mid-2008 to March '09 simply scared them away which is understandable. Their lack of participation certainly did not hinder the market rebound.
Retail investors can, one could suggest, be influential in unique situations: small cap stocks that go viral for some reason in either direction; small cap stocks that have little or no following by institutions or research analysts; and possibly in periods of hysterical selling or manic buying when they are additive to a radical move in either direction.
Retail investors have been net sellers of equity mutual funds for the past five months, and the Facebook experience will for sure not turn that around. JPMorgan's widely reported trading mistake does not help the mood either. Are the retail sellers right this time? Who knows but more on that in a later comment.
Pension funds, other retirement funds, annuities, college endowments and other financing vehicles in many cases are broadly representing individual investors so they are in the market, like it or not. Accepting that, why not just sleep on a lumpy mattress. Maybe the sleep will even be better.
Postscript - additional thoughts at 8:30pm same day -
---While this post focused on the financial side of this IPO that was an unfortunate for many retail investors, it did not mention the political and societal implications. While the money is important, adding to the distrust in the financial system and the feeling that everything is rigged in favor of those already rich is a more serious issue.
---As is meant to be clear from the post, institutional investors can have no legitimate beef with the changed outlook for FB because it was made public in a legal sense two weeks before the offering. Those retail investors that deal with full service brokers and pay their high fees were likely to have been called, or certainly should have been called, by their brokers or asked their brokers for information if that firm still has a competent analyst. That said, most of the major trading by retail seems to have been through discount brokers. For $8 trading fees, one does not get investment advice on individual stocks, as in you get what you pay for.
posted by John Borden at 1:05 PM
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