With all the hype surrounding the Facebook launch on the secondary market, it’s time to review the Efficient Market Hypothesis (EMH).
Essentially, the EMH states that the price of a stock reflects all currently known and available information about that stock. Is the expectation that the stock is poised for extraordinary gains? If so, that expectation is already priced into the valuation of that stock and the opportunity for extraordinary profits above current expectations is a crap shoot.
So what might one expect when Facebook launches on the secondary market today? It would not surprise me to see the stock price shoot up quickly as the uneducated masses attempt to get in “at the open” and retreat somewhat quickly (hours or days) as those who participated in the IPO sell their shares at hyper-inflated share prices.
As the months go by we’ll see the price of the stock level off to its actual worth without the added volatility of the launch hype. But until then, expect to see wild gyrations while this three-ring IPO circus is in town, and stay away from Facebook shares.