Well That Was a Surprise

First let me apologize to the two readers who genuinely look forward to my columns. It’s been a very long time since my last post, and I am sorry. 

I want to tell you what I got wrong.

 

I didn’t write explicitly about my expectations regarding US election outcome, but I was incorrect in my assumptions and that likely colored the comments I did make. I thought the Harris-Walz campaign would eke out a tight win, finally beginning to close the door on the Trump Republicans and kleptocratic plutocracy in the US. Clearly that did not happen. Good grief did I misread the national mood. 

 

I was also wrong to think the markets would be basically calm following the election. It’s normal to see a flurry of trading in and out of various sectors in anticipation of a new administration’s economic goals and business priorities, but it usually relaxes and leaves relatively little changed. 

 

But in this case the new Trump administration has such radical economic plans that investors are moving huge volumes of money into the industries and asset classes that look to benefit most from presidential actions— with help from an allied Congress and an indifferent Supreme Court. From Big Tech to cryptocurrencies to retail to AI to corporate mergers, investors are betting on big changes. So markets have been climbing since November 5: in only 24 trading days, the S&P 500 index is up 5%, and the Nasdaq has risen over 8% and both are clocking repeated record highs.

 

Sure, I could jump in with both feet to find some interesting plays for you— what to sell, what to buy, how to leverage this moment. But today I want to caution you. 

 

Because I do not believe this will last. (I could be wrong on this as well, so take it with salt.) I do not believe we are going to see substantial increased profitability, giant long term gains for shareholders or any kind of American business renaissance. I do not believe what’s happening right now will continue because it is not based on reduced costs or new products or market-changing ideas or business expansion or the slaying of foreign competition. Some companies are indeed doing great, but what we’re seeing in the markets— which by definition are forward looking— is merely an expectation of what is to come from the Trump White House. Yes, there will be deregulation and miles of open road for some of the most powerful industries in our economy, and that will reap shareholder benefits. Yes, businesses with ties to the administration will probably realize outsize gains. (Elon Musk’s Tesla and SpaceX? Of course! Amazon thanks to Chief-Suck-Up, Jeff Bezos. Zuckerberg’s Meta has donated to the Inauguration Committee. Tim Cook’s Apple always gets a pass. New crypto-friendly regulators will push Bitcoin …). Investors are literally banking on those changes. 

 

But what are not yet being factored into market prices are the counter impacts we should expect from other promised Trump administration policies:

• Deportation of ‘illegals’ by the millions, which will leave industries dependent on migrant populations without a workforce: think agriculture and meat processing, heartland manufacturers, all kinds of construction, the entire restaurant/hotel sector. Prices for those goods and services will skyrocket with fewer workers to provide them, and the job market could implode from the stress. 
• Deregulation of big business will benefit shareholders at the cost of consumers and small businesses. As large companies consolidate power and resources, effective monopolies will raise prices, widening the wealth gap and forcing more average folks to hold a second or even a third job just to get by. Meanwhile American families will continue to be weighed down by the rising cost of housing simultaneous with a deeply dysfunctional health care system which perennially underperforms even as it overcharges. 
• Tariffs on imports from around the globe, which will raise prices for consumers and stress US businesses struggling to fill the resulting demand gap. Making it worse, tariffs bring trade wars, with other nations slapping their own tariffs on American made products and commodities, further gumming up global supply chains and reducing affordability and access to goods. 
• Tax reductions on businesses and the wealthy will mean not only shrinking federal government coffers and necessary cuts to social programs (hard on seniors and the lower and middle classes), but also more spending power to affluent consumers. That will drive spending in an era of already-higher prices and reduced availability, which could in turn start us down an all new inflationary path. Prices finally coming down after 2021-2023 would go right back up. 

Taken together, these effects will be an albatross around the neck of American business and on our economy. These things will take time to play out, so it won’t happen overnight. But in a year or two, we could be right back where we were. Plenty of manual labor jobs but far fewer workers to fill them in our fields and restaurants, and both fewer options and higher prices on much of what we need to live— food, medical care, transportation, housing.

 

All of which is to say, enjoy the market bump while you have it. Plan ahead for a rainy day. If I’m right this time, it will be a downpour. Please note, I do not advocate selling and waiting for a safer time! (Never ever ever ..)

 

In poker, a smart player who’s up will continue to play but might take a little cash off the table. The stock market— really another form of gambling— is no different. When I see unexpected price jumps, especially those that are hard to explain or defend, I try to trim a few positions and pocket those gains. If you’ve been investing a while, you’re probably doing well too. So take a couple percentage points off your most-successful holdings and convert to cash. Then stash it in an interest-bearing savings account where you can access it for unexpected expenses (medical need, job loss, automotive breakdown, emergency travel …). A year from now I expect you’ll be glad for your prudence.

 

Making Sense of the News

As a stock investor, you are a stakeholder of a business, a minority owner. Which means that while you’re likely not making day-to-day operational business decisions, you must keep up with the goings on of every company you own. If one of them launches an important new product, or is fending off a tough competitor, or is named in a federal lawsuit, you want to know that. While it’s unlikely that on any given day there could be news which affects your decision to buy/sell/hold, you nonetheless must stay abreast of relevant information. The days of “No one ever got fired for buying IBM” are over. “Set it and forget it” only works on indexes.

In fact, the vast majority of the time I spend on my stock portfolio is reading the news. Business news, financial news, economics, politics, even a little style and entertainment. Most money managers and professional investors depend heavily on a combination of quarterly and annual reports, press releases, earnings calls and executive speeches and interviews— all of it issued by the company in question and all of it subject to its self-interested spin. Systematic, by-the-numbers investors will distill all this information, along with some competitive and market analysis, into an expected valuation. And that informs their expectation of price increases or decreases ahead and drives their investing behavior.

But I generally don’t spend much energy on what the business tells me or wants me to think (beyond its statements regarding strategy, focus, executive rotation, and its own projections of profits). I believe real-world valuations must be more nuanced, must incorporate sentiments already noticeable that might have nothing to do with a dense spreadsheet. I believe Mr Market invests in one stock over another partly for expectations of profits and rates of growth, and partly due to a much more subjective story. But notably, story is difficult to define. It’s driven by a combination of founder narrative, competitive positioning, spin, news cycles, and I think, investor and employee hope. 

 

Bloomberg terminal

To some degree, story is what they say in the news. Business tales told by The Wall Street Journal, CNN, CNBC, Bloomberg, Investors Business Daily, Fox Financial, The New York Times, Reuters, The Financial Times. Founder and exec profiles in Wired, Vanity Fair, Forbes, on Verge, MarketWatch, and so on. Their articles are made of a combination of factual data and some sort of narrative structure. This may not be the world of analysts from the big Wall Street banks, but it is the stuff of rationality and decision-making for investors large and small. Even Blackstone managers and Goldman Sachs traders read news on the train.

  

Obviously, there is a great deal of news. And you must decide what not only the authors of your news but the source. Did you find it on a social media platform? On TV? An actual printed newspaper or a news website?

I don't consider news that I found on Instagram, TikTok or the like. I also don't watch financial TV. This policy gets lots of pushback from inhabitants of that universe. TV folks like to believe they are the center of the media landscape for something which moves as fast as markets. How else to get minute-by-minute updates and analysis? They might be right about that, and certainly there are some super smart TV journalists who do a great job explaining what's happening in the stock market. But for me, as a delivery medium, TV with its always-on breaking-news bent encourages trades. On TV, there's always a reason to buy a stock to take advantage of a moment, or to sell a stock to get ahead of a bad turn:

"Obviously a merger between these two industry giants could completely alter ..."

"Just this morning we started getting word that Congress is looking into unfair practices  ..." 

"If we look at where this business was just weeks ago, today's stop-down would indicate .."

Yet I don't want to trade more. I want to trade less. Study after study shows that trading on news equals more churn in a given portfolio, and more churn— trying to catch and leverage those daily bumps up and down— negatively impacts returns. I'm not buying stocks, I'm buying businesses. The goal is to own those businesses for many years.

Choose news sources you trust, because while the facts might (or might not) be the same from most media outlets, how the story is told will affect your view of the subject company. You’ll learn to separate information relevant to  your long term share ownership from information whose impact will fade in days or weeks. You’ll learn that both market corrections and economic recessions are temporary conditions. You’ll start to recognize that today’s scandal could turn out to be tomorrow’s publicity. That one or two quarters of lousy earnings generally will not break a business. That business leaders are humans and so sometimes make mistakes or act like idiots. Likewise, that a brilliant leader in one arena is probably not a genius in a totally dissimilar field.

 

As I’ve written here, presidential elections rarely move equity markets much over time. Wars overseas too, unless you’re heavily invested in commodities— or defense contractors. Tariffs change things considerably for many companies and even for the economy, but they are unstable, usually imposed and dropped in a few years. Interest rates are cyclical. Some businesses do well with lower rates while others do well with higher ones, and when the cycle changes so, to some extent, do those businesses’ prospects. Some next big things are just momentary fashions (3D printing, ‘atheleisure’) while others can completely redefine the economy (online retail, artificial intelligence).

 

When I’m reading news, I’m looking for mentions of companies I own, of course. But also for news of their competitors, and news of their industries which could impact my businesses. I want to know that both the European Union and our current administration are serious tech watchdogs challenging monopolistic behavior. I want to know that social media reach continues to grow and is becoming our most dominant consumer advertising platform, and misinformation source. I’m looking for warming business trends that might have legs (computer and network security, big data analysis, luxury goods in China). I’m looking for what’s maybe not as hot (environmental social & governance investing, or ESG). I want to know what’s expected to happen in medical and bio-tech and real estate as the baby boomer generation reaches old age. And I want to know what teenagers are doing with their time and money, because they drive tomorrow’s consumer spending, which ultimately drives markets. I look for clues. I try to see around corners.

 

It's a lot of reading. I’m at this nearly full time, and I can’t begin to absorb it all. But even when I’m on vacation I check the headlines. I’m almost certainly a news junkie. But that makes me a better-informed individual, and that makes me a better investor.

______

As always, tell me what you think. Send your thoughts and reactions here: robin@zagaco.com. 

Your Portfolio in an Election Year

The S&P 500, which I mention regularly here, is typically used a stand-in for the entire US stock market. It is of course only one of three such major financial indexes, but it’s broad and diverse, tracking 500 large U.S. businesses that span all 11 market sectors (utilities, energy, health care, etc). 

 

Since its inception in 1957, the S&P 500 has returned about 12,000% not including dividend reinvestment and depending on how it’s measured. That’s a compound annual growth rate (CAGR) of 7.4%. Add in all dividends issued in that time and the totals would be substantially greater. 

 

So which US presidential administrations saw greater returns in the last 70 years? Again, it depends on how you measure. Average CAGR? Median CAGR? 

 

The S&P 500 managed an average CAGR of 6% under Republican presidents but 9.8% under Democratic presidents. However, the index has achieved a median CAGR of 10.2% under Republican presidents and only 8.9% under Democratic presidents. So when you’re listening to the political blowhards, remember that both teams can correctly claim superior returns.

 

Statistics are fun (and frustrating) precisely because it’s often possible to facilitate the desired outcome by approaching data from different angles. What if instead of looking at the entirety of each administration’s time in the White House, we look at every individual year? From that perspective, the S&P 500 achieved an average annual return of 7% under Republican presidents and 11.4% under Democratic presidents.

 

A touch clearer right? But wait— note two points. First, by looking at each year separately, we are unable to account for compounding, which is a powerful tailwind to any long-term portfolio and without which we are left with generally inaccurate data. Second, by far the two most impactful market ‘crashes’ in the last 70 years occurred under Republican presidents: the 1973 oil crisis and the 2008 Great Recession (2020’s pandemic crash was smaller and much shorter-lived). These outlier events completely skew the numbers— and arguably neither was directly the fault of the sitting president.  

 

What about Congressional control? Do Democrats or Republicans have a better track record of market gains?

 

 

When Republicans held the majority in the Senate or the House, stocks averaged 11.9% and 11.0% respectively. This far exceeded the 6.3% and 7.7% returns when Democrats had the majority. When Congressional control was split (which occurred 26% of the time), stocks performed the best, averaging 13.3% per year. When one party held the White House and the other controlled all of Congress, stocks also did well, averaging 10.1% per year. Stocks' worst performance was anytime one party held all three— the White House and both branches of Congress— no matter which party.  

 

So if a Democratic president and split Congress are the combination generally better for markets, is that the outcome we should hope for? Vote for? Sure, if the only variable we’re interested in is market movement. But most of us cast our votes on a variety of policy preferences. Which would seem to leave us in a quandary facing a major election. Which party is better for broad market gains? Answer: It doesn’t matter!

 

The question itself is absurd, and unhelpful. Markets move based primarily on two complex factors: macroeconomic trends and investor sentiment. The economic side is statistical and measurable:  Are interest rates higher than recent trends? Is borrowing dropping or are debt levels stable? Are we in a military conflict, or a trade war, or a pandemic or housing crisis? But the sentiment side is notoriously difficult to lock down: Are consumers feeling confident or assumptive? Cash-heavy or cash-poor? Greedy or fearful? Markets generally don’t move much (or don’t continue moving) based on the party in power. 

Which means the best advice I can give is the same as ever. Say it with me: 

Always be buying

Ignore the noise

Don’t fret over Trump’s promised tariffs against China or his likely tax cuts for the rich. Don’t worry about Harris’s desire to double down on the child tax credit or to increase housing construction. It won’t mean much to your returns over time. Just keep socking your money away in a simple index ETF like the S&P 500 (SPY) and focus on taking care of your health, your family, your community. 

 

Vote, of course— it’s your duty as a citizen. But when it comes to your porfolio, don’t worry about the elections. 

 

Some Thoughts on Market Turbulence

A wonderful little piece by my colleague Joe Wiggins came in this morning. If like me, you are trying to make sense of the awful market drops the last few trading sessions, this is a reminder of what matters. Link to the article below, and I've reprinted some of the gems. 

https://behaviouralinvestment.com/2024/08/06/i-cant-explain/

I Can’t Explain

AUGUST 6, 2024 / JOE WIGGINS

So, what was it that caused the sell-off in risky assets and sharp increase in volatility? The Fed? The Bank of Japan? The end of an AI bubble? A soft employment number? The yen carry trade unwinding? All of the above? Something else entirely? 

Who knows? The truth is that financial markets are a complex, chaotic and deeply intertwined beast, which makes both predictions and explanations impossibly difficult. Not that this stops us attempting both. For most investors a rationalization of events doesn’t even matter— markets are volatile; sometimes uncomfortable and inexplicable things occur. What’s more important is what happens to us during bouts of market turbulence. This is where the real damage is done.
Here are a few things to bear in mind:

– The fact that people are scrambling around to decipher what happened in recent days should be a salutary lesson in the folly of market predictions. We can’t even give confident explanations for events after they have occurred; what makes us think we can do it before!?

– People who didn’t predict the market sell-off will confidently foresee what is to come: “I didn’t see this coming, I cannot explain what caused it, but I am going to tell you what happens next.”

– When an unpredictable event occurs it unfortunately makes us increasingly susceptible to forecasts. We feel anxious and uncertain, so become even more desperate than usual for a comforting guide to the future.

– Everyone will start to say that “uncertainty has increased”. This cannot be true. It makes no sense to claim that we were more certain about things before an unpredictable occurrence. Markets are always uncertain; sometimes we are complacent.

– Living through periods of market tumult is always challenging, even over short horizons. It is far easier to deal with such spells in theory than in practice.

– A new market narrative will take hold incredibly quickly and everyone will start using a fresh set of buzzwords that are consistent with the current set of events.

– Everything seems obvious after the event. Of course US employment was weakening, of course the Magnificent 7 would come under pressure, of course the yen carry trade was a tinderbox. 

What is happening right now will be the most important thing, and we will easily and quickly extrapolate into the future. Living through periods of turbulence is taxing. It is easy to talk about the long-term, staying invested, and compounding returns when markets are going up. It is an entirely different story when the reverse is true, but these are the times when behaviour really counts.

What's Holding You Back

First up: as of today August 5, Nvidia is down 30% from its June peak—and my post in which I said it was time to start selling. (Apologies— I’m usually more modest. Not often I nail the timing so perfectly!)

 

Now, on with the new post.

 

 What’s Holding you Back

 

It's time.

 

You've been thinking about investing toward retirement forever. You can’t help but know about how fast the market has been moving, how much more can be made in the stock market than in any other investment vehicle. You've noticed a few hero companies whose stocks you wished you owned (Nvidia, Apple, Microsoft..). You've even tucked a little of your paycheck away, preparing to make a move.

 

But you have not actually hired a financial advisor, or opened a trading account, or have any idea what to do. It seems like a lot of work, it's frightening, you're not sure you have the money, and you wouldn't know where to start. What are you going to have to sacrifice? What if you screw it up? 

 

Your path to wealth has been blocked. You’ve been ducking it, putting it off. Let's take a look at your top excuses. 

 

I don't know where to start, or how to set it up, or who to trust.

 

This is so much easier than many people realize. Setting up a portfolio account at an online brokerage like E*Trade or TD Ameritrade is simple and straightforward. Both are easy to navigate, offer a quality, trustworthy service (they are owned by financial giants Morgan Stanley and Schwab, respectively), and they offer lots of online help and service reps available by phone if you get stuck. Both provide loads of information about the market, how it works, trading parameters, and about any particular stocks you're interested in. Both platforms have a relatively tiny minimum account size. They don’t charge for trades— buying and selling equities is free. You'll need to link your existing savings or checking account and then transfer in the opening balance. It’s about as complicated as setting up an account on Amazon. 

[Robinhood, too offers an easy-to-use format, quick setup and no fees. But Robinhood ‘gamifies’ its platform, rewarding you with digital confetti and trumpets, even points (!) each time you buy or sell. Similar to the ‘Likes’ you get following a popular post on Instagram or Facebook, which unavoidably drive when and what you post, I believe all of them incentivize the wrong behaviors. The last thing you want to do is start trading more often. Avoid.]

Of course, you should decide at some point if you want professional help. It’s not generally necessary at the start of your investing career, as your needs are straightforward and simple to achieve on your own. But as your portfolio grows and becomes more diversified and complex, it might make sense to seek assistance. The Wall Street Journal’s Is a Financial Advisor Worth It? (paywall) is a great starting point. The piece describes various types of advisors, benefits and concerns, and expected costs. In some cases, you might not even need or want one. Do a little research to determine whether your needs would benefit at this stage from pro advice.

 

But the biggest hurdle for most folks is actually sitting down to deal with it. It never seems easy or convenient, so it’s like steam cleaning the carpet or painting the laundry room— it gets forgotten or put off until years have gone by. Don’t let that happen.

 

I haven't done it because I don't have enough cash to invest. 

 

But you do. Most working people can find at least a few hundred or even a few thousand per year if they get just a little more disciplined— and if they transfer a little cash into their investing account automatically with each paycheck. 

 

It doesn't take much to begin: there are plenty of great companies with share prices under $100. Even when a share is more than that, most brokerages allow purchases of partial shares: you enter how much you have to invest, and the system tells you how much you can buy. Once you do, sit back. 

 

Watching your money earn for you, while you're busy working or sleeping or vacationing or otherwise completely ignoring it, is among the greatest pleasures. Why toil endlessly for your income when you can eventually teach your money to the heavy lifting? You'll want to do it more. Unlike nearly any other activity, the secret to investing is not to do more, it’s to do less. The harder you work, the more you trade in and out, the worse your returns. Learn to let it ride.

 

I usually advise to invest any and all funds you are confident you won’t need for at least three years. Rainy-day fund, nest egg stuff. Then set up your checking account so that 5% of your direct-deposited paycheck automatically transfers into your portfolio. You’re a lot less likely to spend money you don’t see, and you can probably withstand a 5% hit to your cashflow to pay yourself forward like this. You might even throw in part of a bonus, or ‘found money’ from finally selling that stuff in the basement. It will add up! Then increase the dollar amount or even the percentage over time as your income rises. 

 

 

I haven't done it because it's tons of work and it's scary. What if I blow it?

 

What does your savings account pay you in interest per year, one one-hundredth of a percent? Why don’t the banks just admit that’s effectively zero? And in the US, the average annual inflation rate has generally been 3-6%. Which means if you're keeping your cash in savings you're constantly losing money. 

 

Doesn’t it make you mad that your savings is worth less every year? Of course! But if instead you put that cash to work for you, even in a simple S&P 500 index fund you’ll average 5-10% per year more or less forever.

And you absolutely don’t have to pick stocks to achieve impressive returns. Stock-picking is more art than science. It requires study and experience to choose well and you need a strong stomach to endure the inevitable slides. But investing your hard earned savings in a couple of broad stock indexes over time turns out to be a low-risk high-reward way to capitalize on the markets. At very low cost, exchange traded funds (ETFs) trade just like stocks but offer broad exposure to an entire index with one trade.

• SPY or VOO for the S&P 500 index
• ONEQ for the Nasdaq composite index 
• QQQ for the Nasdaq 100 index 

A broad-index ETF like these will rise and fall week to week but will grow over time. In the long term you basically take on broad economic risk but get rid of individual-company risk. If you always put in cash you don’t need for a few years, and you ride through a few inevitable recessions without panic, there will always be more in the future.

 

I won't pretend it isn't scary. It’s not Monopoly money. If you choose individual stocks instead of or alongside your index funds, you will inevitably make some bad choices (after 30 years I still blow it regularly). There will be some losers among your investments. That’s normal, and it an essential part of learning to do this, so don’t let it get to you. But if you read or reread this blog (start here), you'll have a good idea what you're looking for and how overall you can make big gains over time. That's the key: over time. You don’t want to get rich quick; you want to build wealth slow.

This chart demonstrates the estimated value of the Dow Jones Industrial Average stock index from George Washington’s presidency to now. Wouldn’t you want your money to do that?

There is no faster-appreciating asset class than stocks, no better way for your dollars to multiply on their own than by purchasing shares of a smart and growing company or a broad and stable index. If you're looking for overnight riches, as I've said before, look somewhere else. But we already know you're patient, or you wouldn't have read this far. You can succeed in the stock market. 

 

You just need to get started. Right now: heck, compared to last week, the whole market is on fire sale this week! What a great time to begin!

 

Nvidia Forever! ...Really?

The Magnificent Seven to The Magnificent One

I'm getting nervous about Nvidia. Our Icarus is getting a little too close to the sun.

In 2023, Nvidia shares rose 239%. Not a typo, for-real 239%. In one calendar year. 

In 2024, which obviously is just half over, Nvidia is already up 156%— so on an annualized basis this makes last year's outrageous performance actually look a little slow. It's now effectively in a 3-way tie for the world's most valuable public company with Microsoft and Apple, two massive businesses which are older, more established, operate in more countries, and have many more lines of revenue. Can Nvidia possibly keep up this kind of valuation growth? 

I mentioned last week that I own Nvidia stock and have been selling it down to diversify. But I'm literally not keeping up: currently my NVDA position is 1.6x my next-largest holding (Microsoft). It's growing too fast to manage. 

Boo-hoo, you say, champagne problems. You're right! But it also means I'm not sleeping as well and since a portfolio should build both wealth and health, I need to manage better. 

Not convinced the company might be flying too high? How about this: at the 2024 Computex Taipei computer and technology expo, Nvidia founder-CEO Jensen Huang signed a woman's chest. So now he's Bruce Springsteen, or Ryan Gosling. I'll bet Elon Musk gets that. But really, when did executives reach this level of star status? What universe is this? They're icons now, the super-rich, taking us with them to the stratosphere. Oh Jensen! Sign my bustier!! 

Video of the event here: Huang isn't sure its a great idea to sign this particular autograph

A huge portion of the rise of the S&P 500 index both last year and this year is due to Nvidia. 2024 to date the index is up 14.6%— again, it's only June. And because the S&P 500 is weighted by valuation (market cap), 32% of that entire index's rise is directly due to Nvidia. Since the start of 2022, Nvidia is responsible for 44% of the entire index's gains. Not due to AI businesses, due to Nvidia alone. As a manager of risk, that makes me very uncomfortable.  

It's an incredibly unusual situation. Of course there are large established companies whose valuations rise enormously in short time frame. But they tend to fall into two categories: meme stocks, which are wildly volatile in part because those huge moves are not based on foreseeable business fundamentals like growth or profitability (GameStop 2021-2023, AMC Entertainment 2021-2022); or they are businesses with huge competitive wins in the real world marketplace, and they generally fall off soon after because investors decide the sudden growth was unsustainable (Moderna 2021-2022).

What's particularly crazy about the Nvidia story today is that until the last couple of months, its profitability kept up with its stock surge. Meaning, the stock price was justified all along based on the business's sales and profit margins. A strong component of those profits however is outsized demand: the company literally cannot keep up with the orders of its customers, and no one else makes chips as capable. So effectively, deep-pocketed customers are competing for whatever chips Nvidia can produce, driving up prices. Nvidia is busily adding manufacturing capacity by building new plants, and many of its best customers— other members of 'big tech'— are racing to produce their own super-chips rather than pay for Nvidia's. All of which is to say,  Nvidia is wearing a huge target. How long can the company outrun the wealthiest and most powerful players on earth?

If we poke gently into the actual numbers around the business: at 45 times the next 12 months' earnings, the stock is 11% pricier than its average multiple over the last 5 years. It's 35% more expensive than it was just in March on that basis. And Nvidia at this price has only 20% of the trailing 12-month free cash flow of Apple, perhaps the most-studied company in big tech and seen generally as a decent value today. That looks like froth.

This can't go on forever. At some point, the company will trip, on its own shoelaces or due to the extended ankle of a cunning competitor. Perhaps they'll release a line of dud products and the stock will collapse with reduced demand. Or Amazon or Microsoft will show up with something better— or even something similar that's far more affordable. Or AI could turn out to be less astonishing and game-changing than we thought. Or maybe investors will all already own enough of the stock, so today's prices can't be supported.

For now I'll let it continue to dominate in my portfolio. But I'm going to keep selling it down a little at a time for peace of mind. 

Related articles here (pay-walled): 

https://www.barrons.com/articles/mag-seven-nvdia-tesla-microsoft-apple-stocks-18f0dc4c?mod=djem_b_Feature_6212024%2064539%20AM

https://www.wsj.com/finance/investing/nvidia-is-no-cisco-but-it-is-getting-expensive-1938fcc0

https://www.wsj.com/finance/stocks/nvidias-success-is-the-stock-markets-problem-d72e9cbb?mod=djem10point

Markets Are Surging. Is Anything Still Reasonably Priced?

The S&P 500 index is at an all-time high. A tiny handful of tech companies are running the table. Are prices just too high, or is there anything left still at a realistic price? Is it all just AI? Here are a few things I'm optimistic about right now. 

Investment Advice on TikTok

If you're an investor and you're on TikTok, doubtless you've seen them: astonishing claims and advice from the 'financial professionals'. They claim techniques and tax breaks and little-known tricks to make you tons of cash fast. Sadly, most of it falls in the too-good-to-be-true bucket. If it doesn't pass the sniff test ...

"They can't just be making it all up?" you ask. Yes, actually, they just make it up. They are all chasing the elusive virality which they can trade for ads and influence. And some of this stuff is downright dangerous. 

My colleague Barry Ritholtz of Ritholtz Wealth Management wrote a column on this the other day. I can't improve on his take, so I'm reprinting it here for you. 

TikTok is for entertainment. 

Enjoy your spring!

— Robin

TikTok Investors

May 9, 2024 9:00am by Barry Ritholtz

Nestled in between lip-sync dancers and fashion influencers, financial fraud lurks on TikTok.

At least one person1 has noticed the risks to young consumers of social media: Since August 2020, @TikTokInvestors has been curating the most outrageous money-losing and dangerous videos culled from the “financial experts” on the ByteDance-owned social network.

The advice ranges from wrong to risky to criminal:

-401ks? Dumb idea! 

-Want to earn more money? Day trade at home!

-Want to turn $100 into a million? Follow my strategy earning 2% a day! 

-Pay taxes? Not if you spend tax season on a boat!

No, no, no and Hell, no!

It is a massive Dunning Kruger exercise of inexperienced but overly confident “Finfluencers” reducing complex issues about money to slick but misleading sales pitches. No audited returns, mathematically improbable claims, and zero accountability But none of these TikTok influencers sell securities to clients, so they do not fall under the regulatory oversight of the Securities and Exchange Commission (SEC).2

Sure, sometimes mainstream media is bad, but social media is much worse. No editors or gatekeepers, just a Wild West of grifters mixed in with everybody else. Bad financial advice reaches naïve, impressionable consumers without any guardrails or controls. On Social Media, grifters can make outlandish claims without fear of reprisal. It is a bizarre set of circumstances that allows people to be defrauded on a regular basis. Only after people are conned can prosecutors pursue the scammers.

I reached out to the proprietor behind @TikTokInvestors for some background; they shared some of the more egregious TikTok posts, along with some background on each:

Max Out your 401K? The dumbest idea ever!

@TikTokInvestors:

“Apart from his misleading arrogance and the inaccurate market statistics mentioned, a 401K is possibly the best investment vehicle for the average American. I doubt he’s run the real numbers of being invested in the stock market tax deferred with an additional company match. Always be wary of social media influencers who use engagement bait tactics to sell a course or event.”

Then there is this brilliant and simple strategy: All you need to do is make 2% a day!

Turn $100 into 1 million dollars – I can show you how!

@TikTokInvestors:

“Turning $100 into $1mln by earning 2% daily in the market is nearly mathematically impossible. What’s dangerous here is that she’s well spoken, seems trustworthy, and comes across confident in her ability to do this for her clients. The reality is she can’t; the majority of professional investors in the world can’t even beat the S&P on an annual basis.”

Some of the more absurd claims date back to the pandemic. One of my faves is this handsome couple explaining “How do we maintain our lifestyle?”

A sneak peek of one of our top secret trading strategies

TTI noted:

“This was at the peak of the bull market during the pandemic and it still makes me laugh. It goes without saying that investing is not this easy; whether you’re trading or investing long-term there’s a variety of factors and risks to consider before putting capital to work. Assuming every stock goes up and to the right is hilariously ignorant.”

I heard through the grapevine that they no longer daytrade, and have since moved into Real Estate flipping…

There is lots more: A slew of bad tax advice likely to get-you-sent-to-jail-for-tax evasion: Live on a boat during tax season! (Nope); Spend $400k on a house, and the $189k depreciation offsets your taxable income (LOL). There were so many of these that the IRS had to post a list of 46 tax avoidance claims covering the most ridiculous statements, noting any that are “the same as or similar to the following are frivolous.”  Oops.

Two others worth mentioning: It’s probably better if you do not teach your home-schooled 10-year olds to day trade. And, I find the phrase “Index Bro” amusing:  Don’t index, just buy the best stocks! (why didn’t I think of that?)

This is not a comprehensive list, and there are too many others to mention, but these give you a flavor of what’s happening in the “Finfluencer” space.

While the government debates whether or not to ban TikTok, investors should consider making some changes on various social media themselves. A good start would be eliminating all of the terrible FinTok advice on taxes, day trading and investing.

See also:
Welcome to FinTok, Where Day Trading, Options Investing, and Misinformation Reign (Institutional Investor, September 25, 2020)

TikTok Influencers Promise They’ll Make You Rich. The Math Doesn’t Add Up (Rolling Stone, January 24, 2024)

How TikTok Is Wiring Gen Z’s Money Brain (WSJ, May 4, 2024)

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Previously from Barry:

Simple, But Hard (January 30, 2023)

One-Sided Markets (September 29, 2021)

The Price of Paying Attention (November 2012)