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Twitter and the fear of missing out

If you wanted a sign that the equities markets have recovered their mojo, you don’t have to look much further than the announcement overnight that Twitter, home of the 140 character message, is to list on one of the US stock exchanges.

Twitter, seen as something of a little brother to the much bigger Facebook (Nasdaq: FB), was last valued earlier this year at around US$9 billion, based on private sales of employee shareholdings.

Of course, Facebook’s own float (initial public offering, or IPO) in 2012 was far from smooth sailing, with shares being issued at US$38 and falling to a low under $18 less than 4 months later. The first trading day was marred by technical problems at the Nasdaq exchange, which interrupted trading and left investors unsure of their shareholdings for periods at a time.

Show me the money

Now Twitter is planning to hit the boards. It faces similar challenges to Facebook – namely, how can you ‘monetise’ (to use the vernacular) a popular website. Advertising is the natural answer, while Facebook also has a proprietary currency of sorts that users can apply to games that run on its platform, and has also trialled movie rentals and other revenue-generating options.

Twitter doesn’t have the same level of user engagement as Facebook – either in terms of the size of its user base or the amount of time its users spend on the site – but it has become a significant part of both popular culture and news and current affairs.

The service was notably used by anti-government protestors in Iran in 2009 and 2010, and again in the Middle East uprisings in the last two years. Kevin Rudd’s ‘selfie’ of his shaving injury rose to prominence in the recent federal election campaign, and US President Barack Obama’s record-setting ‘Four more years’ tweet after his election win last year arguably signalled the arrival – if any was required – of Twitter as a broad zeitgeist force to be reckoned with.

Popularity isn’t profit

As airline investors can tell you, though, popular doesn’t necessarily mean profitable. While airline travel has exploded over the past half-century, airline profitability is as elusive as ever. Ditto the automotive industry.

Likewise, a great product doesn’t necessarily make for a wonderful IPO. Indeed, past experience has been patchy. Facebook spent more than 12 months trading below its IPO price, and has trailed the US S&P 500 index for all of its life as a public company.

Closer to home, reproductive services company Virtus (ASX: VRT) is up 23% since listing in June this year, while comparison website iSelect (ASX: ISU) is down 11% since its late-June 2013 IPO.

Going a little further back, KFC franchisee and owner of the Sizzler restaurant chain, Collins Food Group (ASX: CKF) listed almost 2 years ago to the day, at $2.50, a level not seen since. Fast forward those 24 months, and the shares are down 31%, while the broader market, as measured by the S&P / ASX 200 has delivered a 20% gain.

And that’s just in the industrial company space. There are many, many stories of miners and mining exploration companies that have listed with hopes and plans of making a lot of money – only to go broke or conduct a seemingly-never ending series of capital raisings that severely dilute existing shareholders’ interest in the company. Of course, that doesn’t dampen the excitement of IPO investors who hope that maybe, just maybe, the next company to list will be exception that proves the rule. If it sounds like the same thinking that attracts people to buy lottery tickets, there’s a reason for that… it is.

IPO where angels fear to tread

It’s precisely this chequered history that makes The Motley Fool incredibly wary of IPOs. A company that has a history on the ASX – having met reporting standards and having been exposed to full public glare for at least a couple of years – is a relatively known quantity. Contrast that to a business that has been out of the public eye – at least financially – until this point. We don’t know how the company has been run or the costs that may have been cut and deals that were done to help improve profits.

Equally, being able to see a company’s success or failure through a longer period of time, ideally across an economic cycle, provides a good sense of the resilience of the business. During the late 1990s tech boom, many dot.com companies proved they could attract people to their websites, but only a precious few proved that when the venture capital money dried up, they still had viable business models.

It’s understandable that management and investors alike hope they have the next Google, CSL or BHP Billiton on their hands. It’s less understandable – given a history of chequered outcomes – that investors are prepared to throw good money after bad.

Twitter is about to go public. Here in Australia, there is a line-up of companies who are either confirmed or rumoured to be on the path to public listing, including Sealink, Nine Entertainment and Dick Smith among others.

Maybe some of all of those IPOs will be wildly successful. History suggests that won’t be the case. The Fear of Missing Out is a very human flaw. Faced with the choice of potentially missing out or potentially losing money, our tendency – likely driven by envy – is to choose the latter. We don’t want to kick ourselves for missing the Next Big Thing.

Foolish takeaway

We don’t know if Warren Buffett suffered from FoMO during the tech boom when he was broadly criticised for missing out, or being ‘past it’. Actually, we do know the answer. He refused to indulge in the collective delusion that characterised the late 1990s – a decision that was subsequently vindicated.

When it comes to the fear of missing out, investors would be well advised to follow the lead of the Oracle of Omaha – let someone else take the outsized risks, and do as he does – get rich slowly by making rational decisions and not chasing rainbows.

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Scott Phillips is a Motley Fool investment advisor. He owns shares in Berkshire Hathaway. You can follow Scott on Twitter (http://twitter.com/TMFGilla). The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).

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