You probably know that “FANG” have been pretty good investments over the last 10 years.
But “pretty good” would be an understatement.
In reality, “FANG” has been fantastically good.
Leaving aside Netflix (which had truly staggering returns even relative to its highly successful tech peers) and Facebook (which had equally good returns but did not go public until 2012), a modified “FANG” group of Apple, Amazon, Google, and Microsoft not only materially beat the S&P500 but also the Nasdaq / QQQ.
Even the poorest performer of this modified bunch – Google – returned ~860% or 23.5% annualized since the beginning of 2011.
What’s amazing is that none of the investors that owned these stocks any time between 2011 through today have any edge in these stocks.
These companies are likely the most well-known and well-followed companies in the entire investment universe with tens of millions of “analysts” – professionals and amateurs, alike – that pick through every bit of relevant information out there.
Everything that matters that is knowable about these companies is already known. And this has been true every single day for the past decade.
In the investment universe, there seems to be an unhealthy obsession with acquiring an “investment edge” before making a decision.
The Orthodoxy seemingly requires investors to have an “edge” before buying or selling.
Doing either without an “edge” is either foolish…or potentially heretical.
I’ve personally known many very smart people turning away from “FANG” because they couldn’t understand how making money is possible if everyone already knows everything about them.
Like, the derisive responses I received every year between 2011-2014 when I suggested every investment decision needed to measure up to the opportunity cost of not buying Apple, which I viewed as the highest risk / reward investment available in the market.
The question is always – How is it possible to make money when you have no edge, when you are not any more informed than everyone else?
The reality is that this concept of “investment edge” is a perversion of the original concept of gambling edge:
Casino games provide a predictable long-term advantage to the casino, or “house” while offering the player the possibility of a large short-term payout. Some casino games have a skill element, where the player makes decisions; such games are called “random with a tactical element.” While it is possible through skillful play to minimize the house advantage, it is extremely rare that a player has sufficient skill to completely eliminate his inherent long-term disadvantage (the house edge or house vigorish) in a casino game. The common belief is that such a skill set would involve years of training, extraordinary memory, and numeracy, and/or acute visual or even aural observation, as in the case of wheel clocking in Roulette. For more examples see Advantage gambling.
Example: In American Roulette, there are two zeroes and 36 non-zero numbers (18 red and 18 black). If a player bets $1 on red, his chance of winning $1 is therefore 18/38 and his chance of losing $1 (or winning -$1) is 20/38.
The player’s expected value, EV = (18/38 x 1) + (20/38 x -1) = 18/38 – 20/38 = -2/38 = -5.26%. Therefore, the house edge is 5.26%.Source: Wikipedia
In games of chance, you have an edge when the expected value is positive.
Note that this has nothing to do with knowing something that the House does not. This does not require you (and only you) knowing that you have the edge.
Both the player AND the House can agree and know who has the edge.
These are games with defined rules and outcomes, after all…
The only thing that matters is that the game can be played.
The same thing is true in the investment realm.
What matters isn’t whether you know something that someone else does not. The only thing that matters is that the expected value is positive. And that the game can be played when the expected value is positive.
Of course, we should ask why the market continues to present us with the opportunity to invest in companies like Amazon, Microsoft, and Google that can continue to grow profits at 20-30% per year for a very long time at only a slight premium to the market, but who am I to judge how the world works?
All that’s necessary is an observation that the world continues to work and that the opportunities continue to exist (and to diversify against catastrophic risk just in case).