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YOGI BERRA IS MY favorite guru. His quip, “It ain’t over till it’s over,” pretty much sums up my losing battle with technology stocks.
The saga all began with an upbringing that bred a need for achievement that could never be satisfied, coupled with a prohibitive anxiety over risk-taking and failure. This family tape has played over and over again in my head as I’ve struggled to steer a course as a mutual and exchange-traded fund investor. During the lurching but inexorable bull market of my young adulthood, I would hide out in bond, balanced and option-income funds, on the outside looking in.
I’ve been feuding with technology stocks for decades. In the late 1970s, I dabbled in T. Rowe Price New Horizons (symbol: PRNHX), which invests in emerging companies on a high-growth-at-a-reasonable-price basis. But it’s not a dedicated technology fund.
Then came 1980, when investors anticipated the election of business-friendly Ronald Reagan and drove the S&P up a raucous 32%. I was flush with my New Horizons success and brimming with overconfidence as Fidelity Investments launched its suite of sector funds in 1981.
I was the perfect patsy, redeeming my New Horizons shares and plowing the proceeds into shiny new Fidelity Select Technology (FSPTX) to ride out the raging bull without a saddle. Soon enough, I bailed out of my tech fund at the behest of those old demons—need for achievement and anxiety—cleverly sidestepping 20%-plus gains in each of the next two years.
I had to concede that my fear of failure doomed me to being a lousy trader, while the writings of Eugene Fama and later Jeremy Siegel brought home the logic and power of long-term investing in the broad stock market. What to do? Where to go?
My solution has been to invest primarily in index funds, but with tech stocks underweighted. According to Morningstar’s X-Ray tool, my family’s combined portfolio has 21% tech exposure, versus the S&P 500’s 31% weighting. Given the strength of technology stocks since my “conversion,” I’ve moderately underperformed the market. On the one hand, my conservative stance has allowed me to stay invested and still get a large slice of the market’s gain. On the other hand, I’ve always thought my success with funds has fallen well short of my knowledge about them.
Enter the artificial intelligence mania and my newest nemesis, Nvidia (NVDA). I hate that stock. For goodness sake, it was up 240% last year, and has continued to soar in 2024. According to Morningstar, my combined position in Nvidia is 1.9%. Are you kidding me? That’s all, less than 2% in a company with a blockbuster future and a stock on steroids?
Now, don’t all you fellow broad index-fund investors guffaw over my piddling allocation to Nvidia. You’ll find that even Vanguard Group’s S&P 500-index fund (VFIAX) holds just a 5.1% position in the stock. That’s more than twice my participation and quite sensible in a highly diversified portfolio. But it’s certainly a very tepid stake in a company touted as the technology revolution’s next bellwether stock.
You probably see where I’m going. That family legacy—unreasonable achievement demands along with heightened anxiety—make me a sucker for FOMO, or fear of missing out. Disguising that fear as innocent curiosity, I did a little research on VanEck Semiconductor ETF (SMH), a zippy little sector fund that has a 20% exposure to Nvidia. To my credit, I’ve so far abstained. But pray for my deliverance.
Then, just recently, my good friend Jerry told me a story that sounded alarm bells. His wife Judy bought a Tesla during the 2022 Christmas holiday, just about the same time she discovered CNBC.
Titillated by both her politically correct car and a bullish commentator, she stashed $200,000 in Tesla (TSLA). Carried in part by last year’s raging bull market, the stock doubled and Judy sold for $400,000. CNBC became her divine source, the pundits were oracles and she was a star trader. In the words of market observer Nassim Nicholas Taleb, Judy was fooled by randomness.
Now devoted to CNBC, she’s informed Jerry she wants to put the whole $400,000 into Nvidia. Almost half a million in one stock? What if the artificial intelligence story proves to be overblown? Suppose the company’s earnings disappoint and the stock no longer warrants its giddy price tag? Might it be struck by one of Taleb’s black swans, like corporate malfeasance or product liability. What if the company is overtaken by Advanced Micro Devices (AMD), its primary competitor?
I warned Jerry about the riskiness of his wife’s plan—a warning that, I hope, was driven more by my concern for their finances than any fear that Judy scores another windfall while I dawdle in diversification. I beseeched Jerry to stand firm against his wife’s plan and, if that fails, perhaps get her to compromise with VanEck Semiconductor, while lightening up on their other technology exposure.
Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve’s earlier articles.
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Just a couple of years ago several prominent “value” investors were touting the much-hyped ARK Innovation ETF with 0.75% fees and a 10% weighting in TSLA. Cathie Wood was touted as the new Goddess of Wall Street. No one escapes FOMO.
Yup, she’s quite the entrepreneur. Remember Elaine Gazarelli, who “called” the 1987 market crash. Her subsequent “calls” earned her a spot in the guru graveyard alongside Joe Granville and likeminded ilk.
CNBC perpetuates the gambling inclination among novice investors who often overlook the significance of risk and the element of luck in their equity selections. A considerable portion of these investors lacks familiarity with fundamental financial metrics like Return on Equity (ROE) or Price-to-Earnings (P/E) ratios.
Meanwhile, Tesla is as an exceptional automotive company, its merits transcending the personal politics of individuals like your friend Jerry’s wife. The stock and its stratospheric value is another story 🙂
Regarding the exceptional automotive company referred to as Tesla. Per CNBC “The stock is 60% below its peak reached in November 2021”. Also yesterday they announced layoff of 10% of their employees.
That’s the thing about the fear of missing out. New (and often the most unsophisticated) investors are seduced by the momentum until the last ones jump in right before the reversal. Momentum ETFs are notoriously vulnerable at the turn. Of course, the market is up about 60% of the time, making it slightly more likely that uninitiated will catch some of the final thrust. They believe they’ve solved the market riddle and dive into another fund only to be caught by the other 40%. Because it’s 60% up and 40% down, it may take several round trips before the more rational ones recognize they had been fooled by randomness.
For sure. The future of the stock prices of the Magnificent 7 will eventually have to reconcile, one direction or the other, to the reality test of reported earnings..
“What if the company is overtaken by Advanced Micro Devices (AMD), its primary competitor?”
The battle of the cousins.
https://edition.cnn.com/2023/11/05/tech/nvidia-amd-ceos-taiwan-intl-hnk/index.html
Just read the article. Thanks for the tip!
“Now devoted to CNBC, she’s informed Jerry she wants to put the whole $400,000 into Nvidia.”
From 1995 to March 10, 2000 this siren song was referred to as “chasing the hot dot” (i.e. the prettiest “.com” meme stock which would surely be the final “dagger in the heart” in killing off in-person shopping by consumers).
Yes – I’ve seen this movie before – it typically does not end well. For each true market disrupter corporation that emerged and prospered during the period of the late ’90s (Apple and Amazon being prominent) their are literally hundreds of internet commerce startups (e.g. pets.com, webvan.com) and their supporting tech companies (Lucent, Cisco) that left a trail of tears for those falling under the spell of internet-themed promises of quick riches. These folks opted to chase short-term returns in the absence of using common sense and looking at the underlying investment fundamentals.
Yes, Nvidia is tantalizing (FOMO is indeed, a powerful force). But I can hear the late, great John Bogle whispering gently into my ear from heaven above: “…reversion to the mean, my son…reversion to the mean!”
A great lesson. Just a word about regression to the mean. I think it could be stated even more specifically than that. The most important fundamental is probably earnings. Over time, a stock will ultimately revert to its earnings (or projected earnings). In the short-term, all hell can beak loose. Same with the market. Nvidia will eventually rise or fall, I believe, according to how well it delivers.