AFTER THE BELL
ROFLing at the LOLs, and other investment tips
We live in a world of acronyms. It’s amazing how they have taken over. They are a function of communicating on cellphones, and the facility of cellphones to send short messages. Once it was a kind of joke form, like Honda – Hang On, Not Done Accelerating. Or Volvo – Very Odd-Looking Vehicular Object. But now we are all ROFLing at other people’s LOLs. It’s almost become an art form.
The preponderance of acronyms has meant that it was only a matter of time before they invaded the world of investing. The Financial Times published an article on Monday morning with the hilarious headline, “Thanks but no Faangs – the folly of investing in acronyms.”
The Faang stocks are, of course, Facebook (as it once was), Apple, Amazon, Netflix and Google (as it once was). All of these stocks, apart from Apple, have been absolutely thumped over the past few months, so now the time has come for some ex-post facto I-told-you-so retribution.
The FT article by Ruchir Sharma argues that acronym investing is by definition a foolish strategy because marketers coin an acronym to capture a trend and it works well for a while. The theme seizes investors’ imagination, more investors flock to the idea, the trend matures and the fundamentals deteriorate. Instead of rethinking, investors keep rewriting the acronym.
And this has happened with Faangs. It started as Facebook, Amazon, Netflix and Google, then it was stretched to include Apple. It was stretched again to include Microsoft and Tesla (Fangmat) and then again to include Nvidia (Fangmant). At this point you could sort of guess the wheels were coming off, and so it has turned out.
All of the Faangs are down over the past three months, and the falls have been spectacular: Netflix is down 60%. But I’m not sure I buy this world-weary pessimism. Berkshire Hathaway, almost the definition of an anti-acronym company, is also down a bit over three months.
Over a three-year span, only Netflix is down – but all the others are up, and up big. Apple is up by over 200% and is partly the reason Berkshire Hathaway is up at all.
Although it’s obviously true that yesterday’s heroes become today’s also-rans, it strikes me that the utility of acronym investing is trying to point to something else.
The problem is not just that markets churn, it’s that acronym investing tends to reflect backwards rather than forwards. It elucidates an existing position rather than necessarily being an accurate predictor of the future. But that in itself is not a terrible idea.
As an indicator of a collection of attributes, I’m still amazed – not at the demise of the idea, but at how long it remained valid. The common factors among the Faang stocks are three notional underlying forces: market dominant positions; the network effect and innovation. If you look at it from that perspective, it’s slightly surprising that Netflix was there at all. But for the rest of them, the forces that gave them their boost still remain broadly valid – perhaps to a lesser extent.
You only have to look at Microsoft to realise how enduring becoming an industry leader can be, particularly in the tech space. Microsoft was at one point left behind by the Faangs, but has caught up with a vengeance, and its share price has doubled over the past three years.
So what will happen now?
My suspicion is that we can happily dump these acronyms, but not because they are intrinsically a terrible idea. We can and should dump them because they can obscure what holds companies within a growth trajectory, and concentrate on those things. And if you look at that, at least some of the Faang stocks, and a few that surround them, still have a lot of road down which to travel.
One last thing: acronym is also an acronym for A Coded Rendition Of Names Yielding Meaning. The meaning, not the acronym, is the point. BM/DM
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