The Dangers of Big-Tech Investing & Herd Mentality

Big-Tech investing has become an increasingly popular phenomenon over the past decade. This is strongly associated with herd mentality investing. While it is quite easy to fall victim to this state of mind, it is highly dangerous as complacency, pride, overconfidence, and extreme bias are some of the most unintended outcomes.

Prior to the COVID-19 pandemic, FAANG-M (Meta, Apple, Amazon, Netflix, Google, and Microsoft) were all experiencing slowing to negative growth. The pandemic masked a lot of things, notably, stock market valuations and performance. Today, FAANG-M, FANGMAT (addition being Tesla) and FANGMAT-N (addition being Nvidia) have become a core investing focal point.

Monopolies and consolidation of power is nothing new, as this is reminiscent of America’s titans of industry including the Morgans, Rockefellers, Carnegies, Vanderbilts, Boeings, Hersheys and others that rose to immense prominence. As competition ensued and government intervened breaking up titans who were unwilling to let go of their monopolies, free market dynamics and market fragmentation became a major catalyst of one of the greatest economic expansions in global history during America’s post-WWII period.

Wallstreet is a core driver of herd mentality as the game Wallstreet plays naturally serves as a game of musical chairs where the competition is geared towards long versus short stances attempting to lead the next market cycle. Wallstreet’s expansion of FANGMAT-N throughout most of their clients’ products has served as strong justification to continue to accept herd mentality as the norm.

Based on current circumstances, retail investors should be leery and cautious with respect to how Big-Tech will continue to return investments in the future. Much of Big-Tech’s recent success has been led by overvaluation which is not sustainable.

The pandemic has masked Big-Tech performance and inflation has justified it by Wallstreet’s standards. Much of today’s valuation for companies like Microsoft, Meta, Apple, and Alphabet is based more on hype and misguided expectations. Microsoft's growth-by-acquisition strategy, Meta's cyclical volatility, Apple's substantial dependency on hardware sales, and Alphabet's substantial dependence on its advertising have all been concealed by promises of 'the next big thing' for the future, ala, electric vehicles, the metaverse, AI, robotaxis, etc. with time showing little to no results. The market has been willing to buy this hype, due primarily to inflationary pressures and fear driven by it for Big-Tech being perceived as the alternative safer investment, while also benefiting from innovation and growth perceptions during up-cycles.

With inflation dropping, innovative technology leaders including smaller and mid-cap companies will likely see an expanded and accelerated increase in their business model opportunities that will naturally gravitate investment capital away from Big-Tech. This has already begun, but inflationary concerns have resurfaced with the next presidential administration being focused on stronger tariff policies, perpetuating Wallstreet's control of the few Big-Tech winners. Over time, the baton will pass from these tech giants to other companies that will witness exponentially stronger investment returns.

For any investor who has been a long-term benefactor of Big-Tech, simply continuing riding the train makes sense, especially for those fortunate to have invested in the 1990s or early 2000s.

For those with much longer investment time horizons and/or are newer to investing, there is arguably more risk associated with legacy corporations, which much of Big-Tech has become when it comes to potential future investment returns. Investors assuming Big-Tech will simply continue to grow robustly from the trillions in today’s enterprise value (EV) is a dangerous assumption, especially for companies whose stock performance has been solely tied to overvaluation.