“We should stay away from things we do not understand”. He (Buffett) “needs to understand competitive position and 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.”

This was a clear warning about the upcoming Facebook (FB) IPO on May 18.

Three months after the Facebook IPO at $38 per share, FB traded below $19 a share August 20, a decline of 50%. Why did this IPO fail? How can investors avoid a similar situation in the future?

With these questions in mind, I was invited to discuss the Facebook IPO on FOX News Channel 5 (Washington, DC) on August 21. I mentioned that there was a very large demand for the shares for a company that was difficult to value. Within an hour or two of the IPO, FB’s price rose from $38 to $42, and then $45. Thereafter, its price has declined to its current level of about $19. The supply of shares has also been increasing as early investors sold their shares. (Insiders, including employees, will be able to sell an additional 1.4 billion shares on November 15, when an important lockup period ends.)