Was The Magnificent Seven All That Magnificent?
Many financial headlines focused on the outsized returns that the Magnificent Seven stocks delivered in 2023. Superb as they might have been, in order to correctly assess their investment merit, we’ll need to look beyond 2023’s returns.
For example, any investor holding onto these stocks since 2022, three of Magnificent 7 would still be sitting on losses — with the largest loser being Tesla: two-year total return of -32.58%, and this is despite posting a whopping +102% gain in 2023.
The two stocks with the smallest losses in 2022 were Microsoft and Apple, other than Nvidia, these two stocks also have the largest two-year returns. In 2 Steps Forward, 1 Step back, we show that keeping losses small is necessary to maintain positive returns across your investment journey, and that large losses can be catastrophic for your investments, and subsequently your overall wealth.
From this perspective, it seems like the outsized returns of the Magnificent Seven in 2023 seems to only be a reversal of losses from 2022.
Observant readers might quickly point out that Nvidia bucks the trend. Despite having large losses in 2022, it had even larger returns in 2023 that made up for it. This might lead them to the conclusion that we should focus our investments in companies like Nvidia. However, that can be incredibly risky because economics 101 tells us that when firms earn abnormal profits, new players come in to compete for them.
The Rise of Nvidia
Nvidia’s rise brings back memories of Cisco from the Dot Com era. Both firms are dominant players in their respective niches. Cisco’s routers and switches were the critical infrastructure of the modern internet age. In comparison, Nvidia dominates the market for GPUs. Just as Cisco eventually faced stiff competition from firms like Arista, Brocade, and Juniper in the early 2000s; Nvidia will face competition from firms such as Advanced Micro Devices (AMD), Intel, and yet other unknown competitors that will likely surface. Cisco eventually lost its dominant position and after more than two decades, Cisco’s stock price has yet to recover to its early 2000 highs.
Will Nvidia go by the way of Cisco or continue its dominance? There hasn’t been a company that has been able to rise to the top, and stay on top forever. History shows us that innovation, competition, and creative destruction is the only constant in this world of change.
If you would like to know how we can help you ensure that your investments are targeting tomorrow’s winners and dropping yesterday’s losers, read on.
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