Twitter IPO – Don’t Tell Me You Know What This Stock Is Worth!

From Wikimedia Commons, the free media repository
From Wikimedia Commons, the free media repository

What’s really fun about following the stock market is watching what a wild, emotional, fascinating and utterly human place it is.

Almost every day I’m tempted to change my mind about where a business or even the market itself is heading next.  I am not alone.

The exciting launch of the Twitter IPO is the latest whacky example.  Investors appear to have fallen out of love with the micro-blogging, messaging, keep-it-brief internet firm in less than one day!

After blasting out of the starting gate with a stunning 73% gain on its first euphoric day of trading,  the mood soured  the next day. Twitter lost more than 7% in a single session.  The stock may have a lot further to drop.

“Twitter investors are valuing the company at the same level as LinkedIn, even though LinkedIn generates twice as much revenue,” wrote Peter Kafka of AllThingsD, who echoed what many traders and analysts are saying.

“No one has a clue” what the value of Twitter really is, said Felix Salmon of Reuters in this wonderful post about the folly of picking a price. “Not even the underwriters, who had to raise the valuation of the company twice.”

During the summer Anant Sundaram, a finance professor and valuation expert at Dartmouth’s Tuck School of Business estimated that Twitter was worth between $5 billion and $7.8 billion.  At the current share price of $43 the firm’s market cap is more than $23 billion.

“The valuation that everybody really wants to know is of course what is Twitter’s stock price going to be,” said Tim Worstall in Forbes.  The trouble with that is despite its astounding success in the past few years the future for Twitter and so many other firms is impossible to predict.

There is a large field of research on mutual funds showing conclusively “that active managers do not enhance returns,” says the wise investment writer Dan Solin.  Most of these highly paid guys do not beat the market. Savers who invest in low fee index funds that track the S&P 500 and other stock averages are usually better off than those who pick actively managed funds.

The emperor has not clothes, perhaps?

Yes, Wall Street is at times  a place of greed, cynicism and bravado. But many well known investment professionals are more often wrong than right.

As in many other fields the wisest players are usually those who take a step back from daily events. They’ve figured out that a little humility about predicting human behavior works best.

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