The Seductive Nature of Fat Tail Distributions

Market prices have shown us that certain companies have benefited from the way society has changed during the COVID-19 crisis. A group of tech-focused businesses, referred to as FAANG stocks, have seen their share values increase in ways that are challenging to put in perspective.1 As my friend and colleague Gene Fama said recently:

These firms are entirely different from one another. And they are the end result of a process that started back maybe before 2000, where companies involved in various aspects of tech, of which there were hundreds, or maybe thousands at that point, were all competing to boil to the top. And these five or whatever boiled to the top, so we tend to concentrate on them and forget about the fact that most of this industry died. If you were trying to pick out who were going to be the winners back then, you probably have an empty sack at this point. What we have now are basically the ex post winners. But going ahead, we do not expect them to have 20% returns, never mind 34% returns or whatever the number is. That’s out of the ballpark as far as an expected return goes.

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