FANGA or Jenga®?

Jim Cramer coined the FANG term a few years ago because of Facebook, Amazon, Netflix and Google (now Alphabet).   Adding Apple to FANG creates FANGA.   FANGA sounds like Jenga®!  Jenga® is a game where you stack wooden blocks on top of each other to create a tower.  After the tower is built players start to pull out blocks one by one until it collapses. The player who makes the tower crumble loses the game.   

It’s hard to argue with the returns for Facebook, Amazon, Netflix, Alphabet and Apple.  These five stocks, as a group, have averaged a 26.96% return since 2012 routing the Standard & Poor’s 500 Index[1].  Investors continue to pour money into these stocks hoping to benefit from future gains.  With the strong performance of these five companies why would an investor want to buy anything else?

It takes courage to invest in a new company and even more to hold onto it forever.   Amazon went public in 1997 and dropped 80% in value in 2000 followed by a 30% decline in 2001.   Facebook came public in 2012 and promptly fell 30%.   Netflix went public in 2002 and quickly lost 34% of its value.  Two years later it dropped another 54%.  In 2008 Alphabet lost 55%.   Apple has lost more than 30% of its value six different times.  Its worst loss was a 71% drop in 2000[2].

I journeyed back to 1972 to purchase five stocks:  Boeing, Coke, Intel, McDonalds and Walt Disney.   These five stocks generated an average annual return of 15.8% from 1972 to 2017 – 45 years!  A $50,000 investment is now worth more than $18 million!  These five stocks crushed the Standard & Poor 500.  In addition to their phenomenal dollar gain, the portfolio is generating over $500,000 per year in dividend income.   The dividend income alone is 10X the original investment[3]. 

If Intel is removed from this portfolio, the annual rate of return drops to 12.7%.  The ending value of the portfolio is $4.5 million, an impressive number, but a far cry from $18.4 million. The dividend income also dropped from $500,000 to $200,000.  The remaining four stocks of Boeing, Coke, McDonalds and Walt Disney also failed to outperform the S&P 500 over 45 years[4].

In 1972, you also had the opportunity to own Bethlehem Steel, Eastman Kodak, Owens-Illinois, Sears and Woolworth.   These stocks were in the Dow Jones Industrial Average and considered industry titans.   Your original investment in these five stocks is all but worthless.

How can you find the next FANGA?  It’s not easy and you won’t know you own a life changing stock until many decades from now.  If you’re going to hunt for the next great stock, make sure your other assets are well diversified and commit no more than 3% to 5% of your portfolio to these moon shots.   Happy hunting.

The real key to making money in stocks is not to get scared out of them. ~ Peter Lynch.

Bill Parrott is the President and CEO of Parrott Wealth Management.  For more information on financial planning and investment management please visit www.parrottwealth.com.

May 17, 2017

Note:  Your returns may differ than those highlighted in this blog.  This blog is not a recommendation to buy or sell the stocks listed in this blog.  I currently own shares in Alphabet, Am

[1] Morningstar Office Hypothetical Tool.

[2] Ibid.

[3] Ibid.

[4] Ibid.