Are Fang Stocks overvalued?

(I originally wrote this article in September)
The biggest obstacle to financial independence and success in investing is often investor behavior.

It really is amazing how investors don’t learn from the past, and simply implement the academic data at hand. Technology stocks are a case in point. During the 1990s, the NASDAQ performed brilliantly, and rose about 85% during 1999 alone.

As most of us know, the bubble burst, and by 2002, the Nasdaq was down about 80% on its high.  In recent times, the NASDAQ has once again been outperforming the S&P and Dow Jones.

Should investors in the FANG stocks and tech more generally be worried? The S&P price-to-earnings index is now at around 23-24, less than the Nasdaq, which is trading at about 26.

Now let’s look at the P/E ratios of some major tech stocks as of July 26, 2018:

 

Stock – P/E Ratios

 

Apple– 19

 

Facebook– 36

 

Netflix– 236

 

Amazon– 234

It isn’t just some of the famous FANG stocks either. Microsoft, Google, Alphabet, Tencent and Alibaba all have high P/E ratios, no matter whether you use the trailing P/E ratios or any other matrix.

Warren Buffett’s favorite book is the Intelligent Investor. The book really differentiates between being a rational investor and a speculator.

What is interesting is that the vast majority of traders are speculators. Only about 20% of traders beat the market over 5 years, and about 2% manage it over a 50 year period.

Investing isn’t difficult, but that doesn’t mean it is easy to implement the evidence everyday, with incredible self-control. Going to the gym and being healthy is simple, but how many people reading this do that every day, every week and every year for decades?

But that is often the difference between success and failure in every domain. Those sports stars that do implement the evidence every day, like Christiano Ronaldo, benefit. Simplicity usually beats complexity long-term.

The book Outliers, also shows that intelligence and natural ability beyond a certain level, doesn’t really matter compared to hard work and getting 10,000 hours of practice under your belt.

Likewise, in investing, simplicity usually beats complexity. It is a fact that it is very hard to beat the market, but human nature gets in the way.  It is human nature to:

  • Think we are smarter than others (egoism), and we can use research to beat the market. So many doctors assume they can pick healthcare stocks, and teachers may feel they can pick education stocks. Many traders feel they can trade stocks in their home market or another areas where they have expertise. The evidence suggests the more you trade, the more you lose. Women beat men, on average, in investing, as they are less confident and tend to buy and hold.
  • Further, short-term over-performance, increases egos. I myself beat the market over a 5 year period, and this just encouraged me to trade and speculate more.
  • Prefer safety. So many investors have `home country bias` and only trade in their home index.
  • Get greedy when the going is good.
  • Panic when there is a market crash.
  • Listen to market gurus on CNBC and Bloomberg despite the fact that the advisory group CXO looked at forecasts from well known market gurus who appear on the show. They looked at their forecasts and Marc Faber was only right 44% of the time. The most successful was Ken Fisher, who was right 66% of the time. Research from Nobel Laureate William Sharpe in 1975 called “Likely Gains from Market Timing” found that a market timers must be accurate 74% of the time in order to outperform a passive portfolio.

Interestingly, in the time it has taken me to write this article, Facebook’s share has decreased by about 20%. Many investors are asking if this is the right time to buy. However, based on the above, people should be very careful before coming into the market and buying individual stocks.

If investors really want to stock price, they should try trading a small percentage of their portfolio (10%-15%) in the more risky and volatile small cap and emerging markets, where the academic data on the efficient market hypothesis is less clear.

You probably behave as though you are smarter than Soros and Buffett

If I boasted that I am smarter than George Soros, Warren Buffett and Jack Bogle combined I would be accused of arrogance. Quite rightly so as well.  Consider something startling though: most people may not think they are that smart, but they certainly behave as though they are and it affects their wallets.

This week I had an interesting email exchange that I will share here.  A man who I was about to meet, subsequently said he doesn’t have any money and doesn’t like to invest in markets. I will call this man Andy, to protect identities. My email response is below.

“Thanks Andy, completely understand and I really like your honesty.  Obviously, if you don’t have any money, there is no point in doing the meeting. We are both busy, so I appreciate this.

But I will say one thing.  There is 200+ years of academic data now on markets.  The US Markets (the Dow Jones) were at 66 in 1900, 3,500 in 1995 and hit 26,800 this year. 

In other words, long-term, markets always rise. But it is a bumpy ride.  The markets are just the biggest firms in the US and other firms.  

Anybody who says they don’t want to invest in markets is saying they are smarter than the market. Smarter than George Soros, Warren Buffett and all the trillions of USD invested in the markets. 

I am pretty sure we both aren’t smarter than the market. Indeed, if you would had started investing 10-20-30 years ago when you got your first job, you would have money now….which goes to show the point about not being smarter than the market. 

 So once you do have spare cash in the end, even if you just self-invest by yourself online without the need of the help of a company, a rational long-term investor should be in the markets as they have outperformed other investments. 

 I hope you have a good weekend and take care”

Brutally honest, in a polite way, but also true.  Even for businesspeople who are more successful than the unfortunate person above, also remember one thing; over-performance doesn’t last. If it did last there would now be 120,000 billionaires in the US based on 1900 figures as per the explained in this podcast.

Getting rich investing often requires some humility.

The Minimalist Podcast and Documentary

This podcast speaks about the Minimalist podcast and documentary on Netflix, and especially how countless people engage in a false economy.

Namely; high income with long hours and lack of job satisfaction. This leads to stress and overspending, and therefore not much wealth.

The podcast also discussed the basic meaning of minimalism and why it shouldn’t be taken to the extreme.

Extra reading:

  1. Property vs stocks 
  2. How to get rich investing
  3. Why the wealthy spend less 

For questions about this post, please contact me – adamfayed@iamgltd.com