Customize Consent Preferences

We use cookies to help you navigate efficiently and perform certain functions. You will find detailed information about all cookies under each consent category below.

The cookies that are categorized as "Necessary" are stored on your browser as they are essential for enabling the basic functionalities of the site. ... 

Always Active

Necessary cookies are required to enable the basic features of this site, such as providing secure log-in or adjusting your consent preferences. These cookies do not store any personally identifiable data.

No cookies to display.

Functional cookies help perform certain functionalities like sharing the content of the website on social media platforms, collecting feedback, and other third-party features.

No cookies to display.

Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics such as the number of visitors, bounce rate, traffic source, etc.

No cookies to display.

Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.

No cookies to display.

Advertisement cookies are used to provide visitors with customized advertisements based on the pages you visited previously and to analyze the effectiveness of the ad campaigns.

No cookies to display.

Loading...
Most Recent Stories

Go FANG Yourself

Bull markets are annoying. Not because I hate making money. I like making money. But they’re annoying because the whole time the stock market is going up there is a group of people making excuses for why it’s all irrational. Consider this list of narratives for instance:

  • Quantitative Easing manipulated stock prices.
  • Low interest rates manipulated stock prices.
  • Buybacks are the only market driver.
  • Low volume means a crash is imminent.
  • High frequency trading will cause a market crash.
  • The bull market is only because of a few stocks.

You get the picture. Now, in fairness there’s a shred of truth to each one of these narratives. But the thing is, the stock market is always risky. Yeah, it becomes riskier at certain times than others, but these narratives, in solitude, rarely tell the whole story.

Take that last one for instance. During this bull market we’ve seen acronyms created to symbolize how the bull market is being driven by a few big names. FANG, for instance, is the acronym used for Facebook, Amazon, Netflix and Google. These four stocks make up 35.2% of the Nasdaq 100. That’s a lot and it’s because their market caps have gone bonkers as the stocks have surged.  But if you pan out a bit you will see that these stocks are only 10.7% of the S&P 500. Not a small number, but much smaller than 35.2%. Pan out some more and you realize that they’re just 4.3% of the Vanguard Total World Index. Now, that’s not really that much. So, if you’re into diversifying across the global stock market then the FANG stocks aren’t actually that important. On the other hand, if you’re into trying to pick stocks and beat the market then, well, good luck. According to SPIVA you will need it.¹

These kinds of narratives are almost always fallacies of composition where the narrator is using a small part of an aggregate to imply that the aggregate is more dangerous than it really is. Now, don’t get me wrong. As I mentioned in my recent speech in Las Vegas I think there are perfectly rational reasons to be underweight stocks these days (valuations, risk tolerance, etc), but beware of these fallacies of compositions that result in narrow-minded conclusions about the state of the world.

¹ – As I described in my paper “Understanding Modern Portfolio Construction”, this whole concept misses the point in the first place. You can’t really diversify within the stock market. Yes, you can reduce single entity risk, but all of those entities are still going to be risky in the aggregate. That’s just how stocks work. When stocks fall substantially in years like 2008 even the safest industries and stocks will get sucked down with the rest of them. In order to truly diversify the risk of the stock market you need to hold other non-correlated instruments like bonds.