The Unintended Consequence of Thinking Your Important

However things work out on the Facebook IPO there is no question but that the company went public with a rich valuation. The average company in the Dow Jones Industrials has a PE ratio of 13.5; in contrast, Facebook has a P/E ratio of 122. There Is little doubt but that Facebook has a greater earnings potential than does the average company in the Dow Jones Industrials. Whether that potential deserves a 10X multiple to the average company in the Dow Jones remains to be seen - I for one sincerely doubt it.

People buying Facebook shares, other than professional investors, and over 0.5 billion shares were traded on the first day, purchased them in part because they knew the company. Decades ago a famous portfolio manager at Fidelity investments, Peter Lynch by name, made famous the notion that it is good to know the companies you buy stock in and to buy lots of stock in companies that are your favorites. Facebook goes several steps beyond Mr. Lynch's advice. For many people Facebook is a way of life - it consumes several hours a day, if not more, of their time. For those people to not believe that Facebook is the greatest thing in the history of humanity would create a cognitive dissonance for them since they've invested so much of themselves into the product.

And that is the unintended consequence. Every good investor knows you need to evaluate the future cash flows of the company and its management before making an investment. Most of these new nonprofessional Facebook investors haven't done that. Instead, they are assuming that things will work out - and that is the unintended consequence - because Facebook for them is so important. . Long-term investing is more than about liking and loving it's about cash. If the investment pays off for them in huge profits because Facebook generates enormous cash flow then the strategy of investing in what you love made sense but not because they loved it but because of its cash making abilities.

Research has shown that some head injury patients and some people with Asperger's are good investors because they have an unnatural ability to do away with emotions and to focus instead on facts. The unintended consequence of being in love may be being a bad investor.

Harlan Platt is the author of, Unintended Consequences: How to Improve our Government, our Businesses, and our Lives, which has just been published. His blog is found at harlanplatt.com.