Tag Archives: AMZN

Client Question: What do you think about the FAANG stocks?

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This year, the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) have enjoyed an average 47% return, well above the market averages. The reason we don’t own them is three-fold:

  1. They make up a large portion of the Dow Jones Industrial Index and the S&P 500 Index, meaning every ETF owns them. What you usually end up with is a reversion to the mean. The more shares that must be bought with each investor purchase of an index fund, the more the performance tends to follow an “average” return.
  2. Stocks like that usually signal their price peak before a precipitous fall. Just ask shareholders of Nortel, Royal Bank and Valeant. They once were the largest holding on the TSX Index but soon fell in value after the peak.
  3. We prefer to own stocks that aren’t widely held by investors. This gives us a chance to get in early. We can enjoy gains based on the company’s own performance and when they are added to an index or grow enough to attract more eyeballs to the stock, the returns can continue to rise at a greater rate for a longer time. In our US stock portfolios are 5 names that have outperformed the FAANG stocks this year:
FAANG Stocks 2017 Performance (YTD at 12/01/17) US Liberty Stocks 2017 Performance (YTD at 12/01/17)
Facebook 52% Cognex 115%
Amazon 55% Graco 55%
Apple 47% Globus Medical 49%
Netflix 51% Raven 47%
Google 29% Atrion 33%
Average Return 47% Average Return 60%
Data courtesy of Bloomberg LLP

Client Question: What’s the biggest risk in my DIY portfolio?

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Here’s a commentary by Cormac Mullen of Bloomberg News on September 14, 2017 about “cluster” risk:

“Cluster risk, occurring when performance patterns become correlated among a group of stocks with similar business profiles yet different sector classifications, is a hazard that can often slip under a risk manager’s radar, AB’s David Dalgas, Klaus Ingemann and Thomas Christensen wrote in a blog post.”

“Facebook Inc., Amazon.com Inc., Apple Inc., Netflix Inc. and Google owner Alphabet Inc. — collectively known as the FAANGs — are a prime example, AB said. Together the mega-cap stocks accounted for more than a quarter of the gains in the S&P 500 from the beginning of the year through August and have become increasingly correlated.”

The danger of this correlation risk is when the market falls, this group will fall together with similar losses. It’s also like owning all the Canadian bank stocks.

The moral of the story is to buy one but not all the FAANG stocks or Canadian banks. Most do-it-yourself investors and even some professionals fail to protect their overall portfolio risk by owning stocks that are similar in nature to each other.

It’s better to have a compilation of names that are in different industries, different countries and are of a different size. This diversification should help protect the risk of a big loss. After all, investing is not about how much you make but how much you avoid losing. It’s the latter statement that keeps you in the game for the long term.