Everyone wants to find the next FAANGM (Facebook, Apple, Amazon, Netflix, Google and Microsoft) stock. Is there a logic to focusing on companies whose huge growth potential has caused them to be valued at extraordinarily elevated levels?
That question is explored in a Man Group paper, The Wisdom of Buying Absurdly Expensive Stocks.
Many investors seem to think so: the number of “extraordinarily” expensive stocks in the MSCI World index is at all-time highs. Some such bets will be big winners, the paper noting a few large successes can offset multiple losers. Most of the time, however, expensive stocks badly underperform.
“While it may not be totally fair to say these companies are uninvestable, historically the odds have been stacked against them,” it says. Investors should “think hard before launching into the frantic scramble to uncover the next FAANGM miracle stock”.