Last May, a few weeks before Facebook went public with its IPO, Warren Buffett had said in not so many words, investing in Facebook is something he'd planned to steer clear of doing.
Warren Buffett has been in business a long time and is a very high-profile investor. In U.S. business degree programs it is almost a given a finance course is going to mention him at some point.
Buffett never had intentions to invest in Facebook at IPO
Last May, the head of Berkshire Hathaway, told CNN (via New York Daily News) at the company's annual meeting that Berkshire Hathaway never buys into an initial offering.
“We should stay away from things we do not understand”. He [Buffett] “needs to understand competitive position and earnings power 5-10 years into the future. BRK has not bought an IPO in 30 years. IPO’s come to the market when sellers want to sell. It makes no sense to spend 5 seconds on a new issue. The idea that a new issue is going to be the cheapest thing to buy among thousands of stocks is crazy," a recent Business Insider article recapped.
Investing partners also against buying into Facebook
While Buffett appeared to have kept his comments broad in the weeks leading up to Facebook's IPO, it was clear the social network giant's imminent IPO was, at that time, on the minds of company leads. Buffett also noted back in May that the "worst mistake" an investor can make is to buy or sell stocks "based on current headlines."
His investing partner was reportedly not so diplomatic about his feelings towards Facebook.
"I don't invest in what I don't understand. And I don't want to understand Facebook," partner Charlie Munger said. "I don't want people putting all this personal stuff into a permanent record when they are 15 years of age. I think it's counterproductive," the 88-year-old Munger had told CNN last spring (courtesy New York Daily News).
Looking in hindsight
The recent Business Insider article revisits why Buffett did not invest in the social network giant. This article comes at a time when Facebook's first lockup period has just recently expired and many shares held by early shareholders are now beginning to hit the market, causing a surplus.
Last week the price of Facebook stock hit an all-time low, trading around $19 a share, roughly half the price of its debut back in May. On Aug. 29, the stock price was just $19.10 at time of close. CNBC has compiled a history of the prices since May. Over the next few months, a large number of shares are likely going to hit the market as additional rounds of lockup periods expire. Nov. 2012 will be a particularly telling month.
Looking in hindsight, it appears Buffett and Berkshire Hathaway made a wise choice not to invest during Facebook's IPO. Considering Facebook's performance since IPO, it appears Buffett was on target with his financial decision-making.
Early investors in the company, such as Peter Thiel who is now selling his stock, are making money, however post-IPO investors, not so much. It should be noted, however, Thiel's decision to sell off his Facebook stock was made long before the stock's drop in worth.
Whether or not Berkshire Hathaway ever invests in Facebook remains to be seen. Right now, the stock is performing poorly, but who knows what the future may bring? Some others, such as Netflix CEO Reed Hastings, are investing in the social network.
Whatever happens, Buffett carefully considers his investments. The prominent investor didn't reach US$ 44 billion net worth by making poor investment choices.