Friending the larger fool

Over at the WSJ's Wealth Report there is a story regarding Goldman Sachs offering shares in its investment in Facebook to its private clients.

Some basic facts reported on GS's investment are that they acquired 1% of the company for $500 million, cash.  Ok, that says FB is worth $50 billion post investment.

Let those numbers wash over you for just a moment.  I'll wait here.

To me, the more interesting story is not that GS is taking a $500 million flier on a company about which very little is known regarding their revenues and earnings (presuming they have any).  The more interesting story is that they are NOT, their private clients are. GS may retain a small stake just to say they have skin in the game.  For sure, their eyes are wide open as to what they are risking for what they are getting.  What cannot be so certain is whether any of the GS customers are doing the same thing.

No, what is going on here is that GS is catering to the needs of its wealthy clientele that has nothing to do with making money.  Just about anyone could prove there are better opportunities to make money out there.

While I am not saying that this is a Madoff-like Ponzi scheme, the marketing parallels are certainly striking: it is only available to a select few, special clients.  You gotta know somebody. The client must sign away liquidity (the shares are locked up for at least two years), the client will pay most likely a hefty placement fee (the money paid to GS for the privilege of participating in the deal), and possibly even an ongoing management fee to GS.   How exactly one "manages" shares in a private company that are locked up for years is beyond me.

In sum, what makes this deal fly for GS is the snob appeal.  Sometimes people want what they want just because they want it, or want to be able to tell someone else they have it.

If it were not for snob appeal, Bugatti doesn't sell any cars, or Patek Phillipe any watches.

As a matter of principle, I would never tell an adult the best way to spend their money.  Each of us is the best arbiter of that choice.  What I would tell an adult is that status items and investments are a dangerous mixture, and anyone deluding themselves into thinking one was the other is in line for a very expensive education.