Dear Warren: Here are the Overvalued Social Networking Companies

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There is a cliche that companies waste half their ad spending. They just don’t know which half. Something similar might be said about social networking firms. Most are overvalued; we just don’t know which ones.

Enter Warren Buffett:

Investors should be wary of valuations for social networking websites as some of the industry’s biggest companies prepare to sell shares.

“Most of them will be overpriced,” Buffett, chairman and chief executive officer of Berkshire Hathaway Inc., said today in New Delhi. ”It’s extremely difficult to value social-networking-site companies,” he said

Not to be entirely glib, this is up there with the ad adage I mentioned earlier: half of social networking companies are overvalued; we just don’t know which half. Well, I can help.

It starts by recognizing that most of these companies have already gone public. How do I know? Here’s how:

1. You can buy and sell shares on exchanges
2. Many employees are newly wealthy from selling shares
3. Analysts are covering some of the companies
4. VCs and institutional investors are selling their holdings to non-pros

You see? These companies — LinkedIn, Zynga, Facebook, Groupon, Twitter, etc. — are already public, just not public on traditional stock exchanges. So, when they go re-public, that is, when they go public on more traditional exchanges, like Nasdaq or the NYSE, that will be the moment at which insiders exit en masse in an unprecedented way. Any professional investor who wanted a taste of this stuff has it, and they will be idiots not to exit when the liquidity improves on more traditional exchanges.

That doesn’t make them bad companies, of course. They’re not. They’re very good companies, emblematic of huge changes in society and technology. But they’re public, and they’re about to go re-public, which will almost certainly make their prices fall.

And Warren, if you need more detail, just call. I am easily found.