Investors in Snap Inc., the parent company of popular mobile app Snapchat, have had a few rough months. After scooping up shares of the Snap on its IPO day, the investment’s gone very south and very fast.
I’m sorry that these people have lost money on Snap. But I’m also not sorry.
It’s hard to watch one of the most beloved mobile apps suffer such an embarrassing fall. There were several promising signs heading into the deal. For one, Snapchat’s ridiculously popular. At the end of 2016, the social media giant boasted over 150 million daily active users. And those users produced an average of 2.5 billion “snaps” per day. We also learned that the photo-disappearing app is no longer just a pastime amongst the teenybopper set. Older adults, including the Obamas, have begun to embrace it.
Oh, and there’s this: A reported one in 10 Snappers even admits to using the app while driving.
But, were there any financials or metrics that hinted toward the company not doing so well, that Snap stock was anything short of becoming the investment of a lifetime?
Yes. Plenty.
There were legitimate warnings from business journalists, financial planners, and market analysts here, here, here, and here. And there was this one too. After reviewing the company’s IPO filing, critics described the $25 billion valuation as downright absurd. Many also voiced doubt over Snap’s ability to turn a profit without annoying users with excessive ads.
But being the irrational investors that we tend to be, it’s sometimes hard to see through the hype and hoopla. I mean, have you seen Snapchat’s unicorn filter this week? So cute!
Of course, stocks have their bad months. Years, even. And plenty manage to bounce back triumphantly. (See: Tesla, Apple.)
But the lesson here, as with Blue Apron’s decline since its recent public offering, is that investing in the new and hot stock du jour, just because it sounds compelling, is an amateur move. Some (like me) might even call it dumb.
Just because you like the idea of a product or service, and may even be an avid consumer, doesn’t mean said product or service will succeed as a publicly traded company. Public companies play by a whole different set of rules. They report to shareholders, not consumers. The pressure to turn a profit is very real. A set of disappointing earnings or a negative analyst rating (of which Snap has received both) can mean bad things for your bottom line as an individual investor.
Instead, put your money in boring things like index funds and exchange-traded funds that carry low expense ratios and have a history of outperforming actively traded funds. That strategy is not as glamorous, but that’s what Warren Buffett does. And he’s really rich.
I say all this with a big-hearted emoji. My wish for you is that this will serve as yet another reminder of why buying into the stock market hype is a fool’s game. And, unlike Snapchat pics, I hope the memory of this financial loss will not disappear.
Farnoosh Torabi is a financial author and host of the So Money podcast.
