Retail investors fell for the hype surrounding the Facebook initial public offering, taking losses after investing solely in a name, says Mohamed El-Erian, CEO of Pimco, which manages the world's largest bond fund.
Facebook went public on Friday, although shares plunged 11 percent only one trading day later on fears the company may face challenges monetizing its 900 million users, while the initial $38 share price was too high.
Retail investors have been largely on the sidelines when it comes to equities markets for the past four years, and the Facebook IPO, which was also marred by Nasdaq technical glitches, should serve as a lesson to everyone that when returning to the market, proceed with a little more caution.
"Underwriters set the IPO price at the top end of a range that, already, had been specified above initial market expectations. They also increased the number of shares offered to the public, and they reserved a well-publicized allocation for retail investors," El-Erian writes in a CNBC guest blog.
"All this could well have amplified the risks of a mistake which investors can make—namely, to overpay for a very familiar and hyped name. Indeed, the behavioral finance literature cautions investors against falling into the trap of letting familiarity trump risk-adjusted valuations."
When retail investors do return to stocks again, hopefully they'll remember the lessons learned from the Facebook IPO, El-Erian says.
"Several pundits had observed that the Facebook hype could act as a catalyst for the return to the equity markets of retail investors who remain on the sidelines," El-Erian writes.
"What occurred in the last two days of trading, along with the NASDAQ's technical difficulties on Friday, suggest that we may need to wait for another, more legitimate catalyst."
Other experts point out that Facebook isn't a bad investment, just overplayed and overpriced.
"Investors are clearly recognizing the risks embedded in the stock," says Brian Wieser, an analyst at Pivotal Research Group LLC, who has a sell rating on the stock, according to Bloomberg.
"It’s just been priced for perfection at the IPO price, and that’s clearly unrealistic."
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