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Facebook IPO: Lessons for Investors

Peter Foley/Bloomberg via Getty Images(NEW YORK) -- With Facebook's stock down 11 percent at Monday's close, many retail investors who thought they were getting the hot ticket in town may soon be playing hot potato with their Facebook shares.

If there's one lesson to be learned from Facebook's IPO letdown, it's don't buy a stock based on emotion, said Bill Middleton, president of Sound Portfolio Advisors of Mystic, Conn.

Those excited investors who bought at $45 a share -- Facebook's high on Friday -- had a rude awakening when the stock opened on Monday below its offer price of $38, and closed at $34.03.

"This is one of those things built on hype, and they maximized the hype," Middleton said.

Nevertheless, hype is to be expected for a such a widely used consumer product.

"What people forget is that Google went down, too, not from the IPO, but down the first week," Middleton said.  "So, what you're seeing with Facebook is not completely uncommon.  This, though, is a different kettle of fish."

Google was priced at $85 a share at its IPO in 2004 -- 74.6 times its earnings, or price-to-earnings ratio.  Shares of the search engine and advertising behemoth, based in Mountain View, Calf., closed up 2.28 percent on Monday to $614.11 a share.

Facebook's IPO price of $38 a share was 100 times its earnings -- a high price-to-earnings ratio, even for an eight-year-old company, Middleton said.

"That's a difficult environment, with Microsoft at 10 times earnings," said Middleton.  "Exxon is at 10 times its earnings.  Even Apple is at 14 times."

Not only was last week a difficult environment for stocks -- one of the worst of the year -- but Facebook's IPO terms with its underwriters or investment bankers may have also created an unfavorable environment for retail investors.

"Usually, coming off the IPO price, the underwriters try to leave a little room for retail buyers to have a good experience," Middleton said.  "Here, Facebook squeezed the underwriters so hard that they squeezed every last penny they possibly could out of the offering price."

Copyright 2012 ABC News Radio

ABC News Radio