What Does the Biggest Crash in This FAANG Stock Tell Us? - Chart Of The Day 27 July 2018 - Equitymaster
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What Does the Biggest Crash in This FAANG Stock Tell Us?
Jul 27, 2018


As discussed above, the Indian share markets are behaving funny with a disconnect between BSE Sensex and the mid and small cap space.

In fact, within the Sensex, few stocks are holding on the markets... people call them 'HRITHIK stocks'.

These HRITHIK stocks are just like FAANG (Facebook, Amazon, Apple, Netflix, and Google) stocks in the US markets.

In fact, these tech stocks command around half of the total market capitalisation of US S&P 500.

The quality of the business and the growth they promise kind of makes them the best stocks to own in the world.

Many investors have argued about their high valuations. But unfortunately, nobody cares if the stock price only knows the north direction.

And the stock market analysts assume huge growth to justify the valuations. They build in assumptions of straight line growth. If it has grown at 20% in last 2 years, it will grow at the same rate for years to come!.

And when a business slowdowns a bit which is normal, these stocks get punished.

Take the recent example of Facebook Inc. It is one of the fastest growing companies in the world.

The stock had fallen a bit since it was caught in the Cambridge Analytica data breach.

However, the recent slowdown in the growth made Facebook's shareholders life miserable.

The stock crashed and lost US $119 billion in one single day. This has become the largest one day fall on Wall Street.

One might wonder what were the reasons for such a dramatic fall. The answer is simple - the stock did not meet analyst's growth estimates and the management guided for slower growth going ahead.

The fall has even extended to some of the other FAANG stocks with Amazon down 3%.

Now, this may be an exaggeration and perhaps a good time to buy for those who missed it earlier. But what we learn from these kind of incidents is - always have a margin of safety in your investments.

We see same incidents happening in Indian markets as well. Recently, I wrote to you about why I rejected KRBL.

A strong business model and growth sometimes makes valuations of some stocks insane.

And if there is no margin of safety in the investments you make, it can lead to these kinds of drawdowns.

At Smart Money Secrets, we always try to find margin of safety in the stocks we recommend. In fact, this has led us to reject many good businesses that we would have recommended otherwise.

And we are happy to reject good businesses if there is no margin of safety because a great business may not necessarily be a great investment.

Food for thought - be careful while buying HRITHIK stocks.

Happy Margin of Safety Investing!

Data Source: Yahoo Finance

This Chart Of The Day was published in The 5 Minute WrapUp - Sensex @ 37,000. Why Are Your Stocks Still Down?

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