My Q3 FAANG Bubble Warning, And The Subsequent Trillion Dollar Wipeout

Posted: Nov 27, 2018 10:00 AM
My Q3 FAANG Bubble Warning, And The Subsequent Trillion Dollar Wipeout

We all knew that bears had big fangs, but few people anticipated how much the FAANGs would end up having such a big bear market. The collapse of those companies has been sudden and dramatic.

Sudden, dramatic… and surprising, though it should not have been.

For five years US growth stocks outperformed value stocks. This means that for half a decade the bull market depended on expensive stocks getting more expensive. During this time period, FAANG stocks were the driver of growth stocks, which means that the bull market depended on the most expensive of the expensive, continuing to get more expensive. During this period, FNG (Facebook, Netflix, Google) were the driver of FAANG, which means that two of the three of the most expensive of the most expensive of those companies, which didn't sell anything other than access to eyeballs, were getting more expensive based on nothing more than an expectation of future access to eyeballs. In retrospect, it seems pretty unsustainable, and in retrospect, it was unsustainable. But that final push upwards, defying both gravity and price elasticity depended on investors who, once again, lost all reasonable sense of what sustainability was.

I recorded a short video shortly after the end of the third quarter which explained the degree to which US domestic stock performance had become dependent on five stocks, and really at the end, on just two of them, and those stocks had become overvalued -- in a few cases shockingly overvalued.

Here's the video.

The point of having principles is to help you remember something when everyone else seems to have forgotten it. The other point of principles is to get you to do something when all emotional pressure is against it. Up until recently, all of the emotional pressure was towards the FAANG stocks and their baby teeth equivalents such as Snapchat and Twitter.

How do we know that the emotional pressure was in favor of them? First, their outsized performance led them to stratospheric valuations. Second, when the bubble burst, they fell the most.

Looking at the FAANGs alone, the loss from recent peak to current (as of this writing), those five companies alone have wiped out almost one trillion dollars in value.

That's bad news for investors who chose to invest in those stocks. But it's also bad news for almost everyone who simply decided to invest in a 'diversified' index, since the big money indices were heavily concentrated in these stocks. That's the problem when you don't consciously invest according to set principles, you generally end up drifting with the currents, which is really easy to do, right up until you reach the waterfall.

Images and table courtesy of Visual Capitalist.