Anatomy Of A Bad Trade

There has been endless talk about the Facebook lockup expiration. 271 million shares were eligible for trading today on top of the 421 million already trading. Markit reported that roughly 100 million shares of Facebook were sold short up from 30 million a few weeks ago.Recent lockup expirations in social media stocks have led to large declines so short sellers were lined up to take advantage of this one.

I thought this lockup expiration would play out differently for a number of reasons:

• The entities that were eligible to sell are the same that sold shares in the IPO so there was less urgency to take  something off the table


• Microsoft was one of the companies eligible to sell and I do not believe they are in a rush to sell their remaining shares


• The short sellers were already heavily anticipating this lockup expiration.


• From a game theory perspective it made sense for these firms to allow a short squeeze to occur and then start dribbling out shares or do a secondary. The roster of holders were mainly large venture capital firms such as Elevation Partners. I was not expecting a race for the exits.

I went long Facebook yesterday on the theory that the lockup expiration was being over anticipated. I did not believe these large firms would start a rush for the exits, but would be more methodical in their selling.

I took a 5% loss in my Facebook trade this morning. I was clearly wrong in my assumptions. But that was not the reason I believe I made a bad trade. The reason I made a bad trade is that I did not believe in Facebook from a fundamental perspective. In other words I veered from the type of trades I typically do. I have done many trades where I take crowd psychology into consideration but I generally believe in the companies fundamentally. I will chalk this up as another expensive lesson courtesy of Mr. Market. Stick to my knitting.