“Have the purchase price be so attractive that even a mediocre sale gives good results.”

– Warren Buffett

It is no secret that the U.S. stock market has been completely addicted to discounting the future success of the most popular technology stocks. Momentum-based growth investing has had many bouts of success in the past, but this is the first episode in an era where indexed mutual funds and exchange-traded funds (ETFs) were the largest aggregate owners of the largest capitalization companies. In comparison, as recently as 20 years ago, individual and institutional investors were the biggest aggregate owners of the nation’s largest companies through direct ownership. It is almost like the old-time owners of individual stocks were smoking cigarettes and today’s owners are vaping.

We say vaping because a massive amount of market cap is perched on futuristic hopes tied to fast-growing internet-based companies. Facebook’s (FB) stock fell 19.6% from the close of trading on the 25th of July 2018 to the opening on July 26th. On July 27th of 2018, Twitter’s (TWTR) stock opened 13.25% lower than where it closed on July 26th. There were no open market trades which occurred between those price levels. This means that a massive amount of capital was vaporized, disappearing into thin air.

Understanding the ramifications of this trading activity explains the risk being assumed by owners of expensive/popular securities, as well as index owners and exchange-traded fund investors. The Facebook re-pricing was the largest single market capitalization loss in the history of the S&P 500 Index and in U.S. stock market history. We should not confuse what happened here with looking at a stock having the same decline over many months. When a stock declines gradually, capital is being pulled out of it by existing investors, in many cases to go off to another portfolio holding. However, when a stock gets vaporized the capital just disappears.