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I think you've missed an important point here: when you invest in the SP500, you're investing in an algorithm. And that algorithm is cap-weighted. FAANG is roughly 12% of the SP500 already and that will likely grow.
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But a classic investing fallacy is assuming an indefinite gravy train when times are frothy. Cap-weighted passive investing protects you from that cognitive misstep.
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In the first place, it's generally accepted that FAANG are growth stocks, heavily analyzed, and priced efficiently and almost certainly relatively expensive by sheer virtue of their preeminence in the retail investor psyche.
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Beyond that, you could easily construct a compelling 'anti-case' for every stock in FAANG. E.g. Amazon: their core business depends on rapid shipping and there's a lot of innovation happening to make this generally available to e-tailers. AWS is in a competitive space.
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So will Amazon ever be able to raise margins or will price-sensitive consumers go elsewhere as soon as they try? Will their slice of the market go down as competition increases and D2C goes up?
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These are among the many open questions that are presumably priced in by the many institutional analysts who devote their entire lives to understanding Amazon's business in very precise detail.
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When you invest in a passive index, you get to leverage the work of those analyst at basically no additional cost. They are intelligently establishing the relative worth of FAANG against the broader market.
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I did not miss that point. I understand how indices work and how analysts affect things. I'm saying investing more in a stock already represented in a cap-weighted way in an index is a way to bet that the market is efficient but *wrong*
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If a million analysts all share the same wrong assumption that is undermined, then the 2 billion hours of analysis they've put into driving the market to its current efficient "equilibrium" can be undermined by that one wrong assumption being recognized. Effort != value.
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I can see why you feel this way. I guess I have a quite dramatic difference of opinion. The analysts are, collectively, a gigantic meatspace ensemble model with a lot fo computing power. Departing from their projection is by definition a contrarian view, with attendant risk.
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This is a bit like saying, in the 14th century, that the Catholic Church has a lot of computing power in the form of theologians debating doctrine and angels on a pin, and therefore everybody should just accept their religious rule of law. Amount of computation != being right.