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Facebook IPO versus the S&P500

Facebook (NASD: FB) issued its IPO at $38 and began trading May 18, 2012. Atypical of IPOs it immediately fell and then closed as low as $17.73 (53% loss) on September 4, 2012, remaining below its IPO price until August 2, 2013. On January 12, 2014 it closed at $57.94, a 52% gain. While many called this a botched IPO, the underwriters did well by the issuer by not leaving money “on the table” as happens when an IPO runs up after issuance. Was this a good investment for IPO investors? Since the issuance, FB has returned 52% while the S&P500 has returned 46%. On an annualized basis those returns are 29% and 26% respectively. So, FB wins, right? Hardly. Owners of FB have suffered extreme volatility — they woke up each day wondering whether they were richer or poorer. Investors dislike uncertainty, and so must typically be compensated for enduring it. Because FB has not been public long enough to reliably calculate a beta (a typical measure of relative uncertainty), we can instead compare the returns as adjusted by their respective standard deviations (Sharpe ratios from Nobel laureate, William F. Sharpe). The annualized standard deviation of FB and the S&P500 since the IPO have been around 54% and 12%. Using the annualized excess returns of FB and S&P500 plus the risk measure above,  the Sharpe ratios have been 0.54 and 2.15 (higher is better). Holding the S&P500 was a far better risk-adjusted return investment for investors.