Expectations are a funny thing. Sometimes a positive emotional outlook can cloud one’s judgment and restrict sceptical and rationale thought.I know personally because I just ran the Bermuda Half Marathon Derby for the first time which I naively thought would be “not so difficult”.As a beginning runner I was blinded by my own optimism and listening to stories from other seasoned runners who have run multiple times clouded my ability to be more respectful of the sheer challenge of the race.I actually believed the “hype” and nearly fell on my face by the end.The stock market offers its own type of beginner’s optimism — the Initial Public Offering (“IPO”). IPOs involve the first sale of stock by a private company to the public.IPOs through time have had dream stories associated with them. The problem, however, is they are actually a nightmare to invest in.According to research conducted by James Montier in his book “Behavioral Investing”, IPOs actually underperform the market by around 30 percent over the three years after their listing.In a research paper by Coglaiti, Paleari and Vismara, (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=965450) the authors determine the embedded expectations for growth in earnings implied by the IPO valuation using a reverse-engineered discounted cash flow model.What they found is that the estimated growth in cash flow is much higher than the actual growth in cash flows, with the median IPO firm overvalued at the offering by 74 percent!They also found that post-IPO returns are lower for issues whose implied growth is more upward biased.It is then surprising to read quotes about IPOs such as “It’ll be a slam dunk when the shares surge of the first day” or “It’s a no -lose bet”, which on their own should give an investor some pause.This brings us to Facebook (FB) which, as of this writing, has appeared to have fallen on its face right out of the starting blocks, down about 17 percent from its launch price of $38.It was the biggest technology IPO in history, raising $16 billion, and valuing the company at over $100 billion.In comparison, Google’s IPO raised only $1.9 billion.In the run up to the IPO the media coverage and hype was extensive and somewhat overwhelming.The sexy story of growth promoted by the investment banks and the 900 million users often got in the way of valuing what one was actually paying for.With this level of hype the stock was priced for absolute perfection. I often say this but it bears repeating, valuation matters.Let’s do a sanity check with a few facts:n Investor, Vitaliy Katsenelson wrote the following in Institutional Investor: “Let’s say Facebook investors want to receive 15 percent a year over the next five years.In that case, Facebook’s market capitalisation has to double in five years, to $200 billion.Conveniently, $200 billion happens to be Google’s valuation today.Since both companies are in the advertising business and have very similar cost structures, all Facebook has to do over the next five years is achieve Google’s current sales level.Google’s sales level is a meager $40 billion (for purposes of this discussion, we’ll ignore Google’s $40 billion pile of cash, or about $100 a share.This compares with Facebook’s few billion, though that would only further make my point here).For an investor to double his or her money over the next five years, all Facebook has to do is increase its revenues tenfold.”This is obviously possible but also very difficult.n Days before the IPO General Motors pulled its $10 million advertising from Facebook because they felt it didn’t work. I would argue its business model is far from perfect and may not work as expected.n In its first quarter of 2012 sequential growth in operating income were actually negative 30.5 percent and its sales growth has slowed from a peak of 111.9 percent a year to 44.7 percent a year.FB’s growth is clearly slowing as to be expected but one needs to wonder if its huge growth has already taken place?n Facebook went public at about 26 times sales (Google went public at about 13 times) and about 107 times earnings (Google went public at about 152 times).This compares to Facebook’s three year cumulative growth rate of about 140 percent versus Google’s of 233 percent pre-IPO.n Those 900 million users have been valued at approximately $100 each when they current generate $4 in sales a year each.All of this is not to say that I don’t believe Facebook isn’t a great company (it could revolutionise the marketing industry as we know it).I just think its IPO was excessively sensationalised. Clearly a lot was expected of FB and as a result the risk embedded in this IPO was very high.High expectation stocks have a tendency to really disappoint investors.This is why value investing often works. In the immortal words of the rap group Public Enemy: “Don’t believe the hype”.Nathan Kowalski is the chief financial officer of Anchor Investment Management Ltd.