The Warnings Were There About FAANG Stocks

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The spectacular underperformance of the FAANGs this year came as no surprise to investors familiar with the history of growth stock bubbles. As happened in the lead up to the dot com and Nifty 50 bubbles, P/E ratios increased without any material justification.

As we age, our long-term memory skills tend to remain strong, while our short-term memory skills erode. Unfortunately, individuals don’t benefit from that tendency when it comes to investing. It is an all-too-human failing for investors to fall prey to “recency bias” – the tendency to give too much weight to recent experience, believe that “this time it’s different,” and there is a “new normal.” That leads to ignoring long-term historical evidence, which many investors are sadly unaware of. Recency bias and the lack of historical knowledge lead to the mistakes of both overconfidence and treating the unlikely as impossible.