By now the news of Facebook’s ‘earning miss’, is, well, old news.  The fallout, however, is still cascading. Shares have fallen nearly 20 percent, knocking off close to $119 billion in market value, making it the largest market cap wipe out in the history of U.S. companies. $119 billion is almost 80% of Jeff Bezos' net worth, although he is having a fine day, as usual. $119 billion is more than the entire market cap of companies like General Electric (GE) or Texas Instruments and larger than the 2017 GDP of countires like Morocco and Ecuador.

Leadership in technology and in the markets in general, is being driven by a handful of companies that don’t really make many products we can put on our desks or in server closets, but we are not here to lament the rise of the FAANG stocks and all the good things they have brought into our lives. But, as responsible investors, we should be very aware of their outsized influence on the markets and in our portfolios whether we hold them directly, or not.

Crowded Trade?

Facebook shares had their worst day in history, and contributed to most of the decline in the Nasdaq. The Nasdaq 100 closed down nearly 100 points, and Facebook accounts for most of that. It is the fourth-largest component of the 100, behind Apple, Amazon and Microsoft, so when it sneezes, everyone gets the flu. Facebook is also one of the most widely held technology stocks among tech-oriented mutual funds, index funds and tech ETFs like the QQQ. It’s the most widely held stock on Robinhood, an app that is extremely popular among younger investors. In May, Goldman Sachs indicated that Facebook showed the largest increase in popularity among hedge funds in the first quarter of this year. That’s another way of saying that managers of money for the ultra-rich have been piling into the stock. 

Delivering On Returns

This is not to say that Facebook is not a good stock to own or has not been rewarding for investors who bought it early. That’s hardly been the case. Before today’s battering, shares were up 25% year to date and up 67% in the past year. Shareholders who have believed it in for the past 5 years have enjoyed a better than 400% return on their investment. The company has achieved extraordinary things for its age and, given the fact that it produces no physical goods or services. In fact, we, the user, are the commodity in Facebook’s profit machine, and having 2 billion of us connected to it and its offspring like Instagram and Messenger, have fueled its largesse. 

Source: FactSet

Diversification is Key

There is no denying Facebook’s supremacy as a stock…we know that. It’s concentration and outsized influence, however, are potentially very dangerous to investors and the market, as we see today. It is too late to stop the train of mutual funds, index funds and ETFs who have piled into the stock in recent years and ridden it to great gains. To wit, Vanguard and Blackrock, two of the biggest money managers on the planet, own a combined more than 11%, according to FactSet Data. I’m sure they and their customers have no regrets, despite today’s selloff. This is more a cautionary tale to individual investors who become obsessed with hot stocks and pour their hard earned dollars into one or two of them, hoping for endless gains that deliver them a happy retirement. Nothing lasts forever and it is supremely rare for one or two stocks to deliver on that promise for the lucky investor who bet big and bet right, at the opportune time. Most of us can’t do that, and none of us should try. We need to stay diversified, stay balanced and stay out of love with individual stocks.

Facebook may bounce back from this and continue its climb to many more market cap milestones. That’s great if you own the ETFs or funds that have leaned in to it excessively. But, don’t forget the sweet, yet poignant words of Jimmy Cliff the next time Facebook or another stock you love misses on earnings and gets the backhand from investors…”The harder they come, the harder they fall, one and all.”

#StaySmart