In May 2012 a first was made. For the first time, Facebook was offering its stock to the general public.

Fast forward to October. Facebook stocks hover around $21. How did the most highly anticipated IPO of the decade lose

45% of its initial price? This phenomenal drop was caused by factors in the stock specifics.

In the aftermath of the IPO, there were clear indications that the stock was about to fall.  During the IPO, Facebook’s total market cap was $81 billion. However, analyzing Facebook’s financial statement shows that its book value was only $11.87 billion, which leads the Facebook P/B ratio to be 6, which means the stock was overvalued. Secondly, the P/E ratio was too high; even now the P/E ratio is well over 100.  Furthermore, Facebook doesn’t have a history of paying dividends, so buying it was like a “ponzi scheme; the stock is only worth as much as the next person in line is willing to pay.”

Lastly, the fact that Facebook’s stock price fell after its IPO isn’t surprising once you see other IPOs and how they fared in the short term. IPOs typically occur when the company is traditionally doing very well, and the optimism about the company turns into unreasonably high expectations about the company’s future, resulting in an inflated stock price. Therefore IPOs are rightly defined by Benjamin Graham to be “Imaginary Profits Only”.

To conclude, investors would be better off ignoring the Facebook stock, or, “Defriending” the Facebook stock altogether.