Why Warren Buffett Did Not Invest In Facebook, “Stay Away From Things We Do Not Understand”

Posted Sep 1, 2012

Warren Buffett knows a thing or two about investing so when he reveled that he was going to stay away from Facebook, many people were intrigued and followed his lead.  At a Berkshire Hathaway annual meeting on May 5, 2012 before the Facebook IPO, Buffett said “We should stay away from things we do not understand.”

Buffett said that in order for him to invest in a company, he ?needs to understand competitive position and earnings power 5-10 years into the future.  BRK has not bought an IPO in 30 years.  IPO?s come to the market when sellers want to sell.  It makes no sense to spend 5 seconds on a new issue.  The idea that a new issue is going to be the cheapest thing to buy among thousands of stocks is crazy.?

Facebook went public on May 18 at a price of around $38 per share and now the company is trading at below $19 per share.

At a price of $19 per share and the company’s valuation, Facebook is still selling at 40 times their estimated earnings over the next 12 months.  The price-earnings ratio for Google is 20 and Apple is 15.  In Facebook’s latest quarterly earnings report, Facebook reported a loss due to a slowdown in revenues and increase in expenses.  Around 84% of Facebook’s revenues was from advertising in the 2nd quarter.