Bad bets can turn out well… and seemingly wonderful bets can turn out poorly.
Yesterday, I told you about streaming giant Netflix (NFLX) and its recent slide in U.S. subscribers. I would say Netflix has probably been a bad bet that turned out well for a few years…
After all, no one had any reason to believe the company would have a great advantage in delivering video content over the Internet. The Internet tends to be a highly competitive place. The “winner-take-all” businesses like Amazon (AMZN), Facebook (FB), Apple (AAPL), and Google’s parent company Alphabet (GOOGL) tend to be the exceptions, not the norm.
Yet many investors still seem to believe Netflix can do no wrong.
And they believe the same about the other high-flying tech stocks above – collectively known as the “FAANG” stocks.
They don’t seem to wonder if it’s a good bet that these giants will see similar growth in the next decade… or if those days are done.
I believe it’s high time we turned back to the long-term investment strategies that have lagged lately.
Today, I’ll explain why…
Investing is hard in part because it involves elements of chance. Even when you’re one of the best of the best… operating under the perfect circumstances to outperform and make a perfectly rational decision… the situation can still go against you.
I can’t help being reminded of Ecclesiastes 9:11 from the Bible…
I returned, and saw under the sun, that the race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all.
It’s a humbling passage.
But even though “time and chance happeneth to them all,” the swift, strong, wise, or skilled should not change what they’re doing.
For the past decade, “value investing” has underperformed other strategies. Just look at a simple comparison of the Russell 3000 Value and Growth Indexes…
The index of growth stocks has risen about 260% over the past 10 years, while the index of value stocks has risen just under 140%. That’s a huge outperformance. And as you can see in the chart, growth stocks really took off around mid-2016. They’ve been on a tear ever since.
But eventually, we’re bound to get a reversion to the mean. It’s also worth noting that the index of growth stocks fell further during the late 2018 downturn than the index of value stocks.
I bet we’ll see something similar happen – and to a much greater degree – when a bona fide bear market finally occurs. All the stuff investors are stone-cold in love with right now – which still includes Netflix, despite its recent drop – will do much worse than all the stocks investors have shunned over the past 10 years.
Besides value investing, gold also remains an interesting bet these days…
The metal and companies that produce it still haven’t recovered from when gold reached an all-time high of $1,900 per ounce in 2011… when folks were still wringing their hands about the Federal Reserve’s extreme measures to “save the world” from the financial crisis.
The U.S. dollar had fallen 38% from its 2001 high against a basket of global currencies. It was a moment of great fear about the future of the country and currency. Gold was the no-brainer of the moment. And from there, gold went the way no-brainers eventually all go…
The metal bottomed in late 2015 at less than $1,100 per ounce. Gold stocks – leveraged bets on the price of gold, as measured by the VanEck Vectors Gold Miners Fund (GDX) – fell roughly 80% from their 2011 peak to their early 2016 trough.
GDX has more than doubled off that bottom. But I bet the next gold bull market – which could already be here – will take it well above its 2011 high.
There’s nothing like an asset with a five-year track record that tends to do well when bond yields are tiny or negative to make gold – a store of value with a 5,000-year track record – look much better.
I know what many readers who are familiar with my work are probably saying right now…
“OK, Dan… value investing and gold. We’ve heard this before. We get it. Sing a new song, pal.”
But that’s the thing… More than a decade into the longest bull market in history, with U.S. stocks trading at their highest valuations since 1929 by some measures, value stocks and gold are the new songs.
That’s what I meant when I wrote about gold in DailyWealth last week. In this market environment, Netflix and other hugely successful growth stories trading in the stratosphere with competition coming out of the woodwork are the tired hits of yesteryear.
Am I telling you that if you don’t sell your FAANG stocks today, you’ll lose half your money tomorrow? No. I suspect a reasonable use of Stansberry Research’s most recommended risk-control tool – trailing stops – will get you out of the building before the smoke gives way to an inferno.
Until then, markets always go higher than anyone would have believed – and certainly much higher than a diehard value guy like me would ever believe!
No, I don’t think it’s time to panic and head for the exits.
I just think if you’re prudent, you’re already getting skeptical about assets priced well beyond perfection – and you’re getting a lot more interested in what hasn’t worked as well in recent years… like value stocks and gold.
If you’ve been into FAANG stocks for 10 years, keep holding them… but learn to see the world differently. Learn to seriously assess different asset classes.
It might save your financial life.
Good investing,
Dan Ferris
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Source: Daily Wealth