"If you took our top fifteen decisions out, we’d have a pretty average record. It wasn’t hyperactivity, but a hell of a lot of patience. You stuck to your principles, and when opportunities came along, you pounced on them with vigor."
- Charlie Munger
During a press conference, President John F. Kennedy was asked whether he got impatient at being unable to accomplish everything he wanted. He smiled and discussed how important it was to be ready to act when an opportunity came along to further his goals. He then told the following story.
“The great French Marshal Lyautey once asked his gardener to plant a tree. The gardener objected that the tree was slow-growing and would not mature for 100 years. The marshal replied: ‘In that case, you better plant it this afternoon’.”
A Tale of Two Returns
For those who have invested in the markets over the past several years, many have seen a trend in bifurcated returns. The so-called Magnificent Seven (Microsoft, Nvidia, Google/Alphabet, Apple, Meta, Amazon, and Tesla) achieved roughly 92% of the total gains of the S&P 500 in 2003 alone. As seen in the graphic below, the returns of the Not-So-Magnificent 493 were nothing to write home about. (Please excuse the rather gaudy nature of the Goldman graphic!)
- Charlie Munger
During a press conference, President John F. Kennedy was asked whether he got impatient at being unable to accomplish everything he wanted. He smiled and discussed how important it was to be ready to act when an opportunity came along to further his goals. He then told the following story.
“The great French Marshal Lyautey once asked his gardener to plant a tree. The gardener objected that the tree was slow-growing and would not mature for 100 years. The marshal replied: ‘In that case, you better plant it this afternoon’.”
A Tale of Two Returns
For those who have invested in the markets over the past several years, many have seen a trend in bifurcated returns. The so-called Magnificent Seven (Microsoft, Nvidia, Google/Alphabet, Apple, Meta, Amazon, and Tesla) achieved roughly 92% of the total gains of the S&P 500 in 2003 alone. As seen in the graphic below, the returns of the Not-So-Magnificent 493 were nothing to write home about. (Please excuse the rather gaudy nature of the Goldman graphic!)
Looking at the returns of the Magnificent Seven (M7) over the past several years, it becomes clear that you need to invest in several of these stocks to beat the S&P500. It would be much easier to beat the S&P493, but unfortunately (or fortunately, depending on your investment position), that’s not what the index follows.
But you don’t have to broaden things that much to see how crazy the returns have been with the Magnificent Seven. If you look at the next 42 companies – not 493 – here’s how they compare against the M7.
But you don’t have to broaden things that much to see how crazy the returns have been with the Magnificent Seven. If you look at the next 42 companies – not 493 – here’s how they compare against the M7.
Compared to the next largest 42 stocks, the M7 looks inflated by market value, sales, and profitability. These companies have 2.5x the sales and 2x the profitability.
Fear of Missing Out (FOMO) Syndrome
I bring this up because Nintai Investments has been one of the investment companies focusing on a much smaller market cap portfolio mix (unfortunately, in our case!). Not all of our underperformance over the past few years can be attributed to this, but it certainly hasn’t helped. Watching day after day as the M7 companies reach new price highs, year after year, hasn’t been the easiest experience. I must admit to having a slight tinge of Fear-of-Missing Out Syndrome (FOMO). Having said that, I think not having FOMO is probably one of the top characteristics of successful investors. It is nearly impossible to retain your investment strategy and invest for the long term when under the influence of it.
In this age of Bloomberg/CNBC 24/7 business news, Reddit stock boards, MEME stocks, etc., it seems FOMO has become a driving force in modern 21st-century investing. It seems unlikely that an investor (is that what these people are? Or would gambler be a better description?) who invests in GameStop (GME) stock and sees its daily price go from $17.46/share on May 1, 2024, to $30.45 on May 13, $48.75 on May 14, $39.55 on May 15, $27.67 on May 16, and finally $22.21 on May 17 (continuing down to $18.32 on May 23), will outperform in the long run.
Fear of Missing Out (FOMO) Syndrome
I bring this up because Nintai Investments has been one of the investment companies focusing on a much smaller market cap portfolio mix (unfortunately, in our case!). Not all of our underperformance over the past few years can be attributed to this, but it certainly hasn’t helped. Watching day after day as the M7 companies reach new price highs, year after year, hasn’t been the easiest experience. I must admit to having a slight tinge of Fear-of-Missing Out Syndrome (FOMO). Having said that, I think not having FOMO is probably one of the top characteristics of successful investors. It is nearly impossible to retain your investment strategy and invest for the long term when under the influence of it.
In this age of Bloomberg/CNBC 24/7 business news, Reddit stock boards, MEME stocks, etc., it seems FOMO has become a driving force in modern 21st-century investing. It seems unlikely that an investor (is that what these people are? Or would gambler be a better description?) who invests in GameStop (GME) stock and sees its daily price go from $17.46/share on May 1, 2024, to $30.45 on May 13, $48.75 on May 14, $39.55 on May 15, $27.67 on May 16, and finally $22.21 on May 17 (continuing down to $18.32 on May 23), will outperform in the long run.
If ever there was a case of FOMO driving a stock price, it would be MEME stocks like this. I would argue that much of the Magnificent Seven gains have been MEME stock-like writ large.
Conclusions
As an investment manager, your primary goal is to outperform the greater markets over the long term. To meet that objective, sticking with the process that has brought you success is critical. Sometimes, that process will underperform. As I’ve said many times, to outperform, it is occasionally necessary to underperform (unless your name is Bernie
Madoff). But chasing returns driven by FOMO is an almost assured way to chase highly volatile, short-term returns, driving up trading costs, increasing your tax bill, and frittering away the chance to let compounding do its work. At Nintai, our first four years in business were outstanding, generating significant outperformance nearly every year. The last three have been a roughly mirror image. However, we refuse to change our methodology and begin loading up on M7 stocks like Nvidia (NVDA) or meme stocks like AMC Entertainment (AMC). Instead, we will take the advice of President Kennedy’s Marshal Lyautey and not just continue researching our long-term holdings like Veeva (VEEV) or iRadimed (IRMD). In fact, we’ll probably start this afternoon.
As always, we look forward to your thoughts and comments.
DISCLOSURE: Nintai Investments currently has holdings in Veeva (VEEV) and iRadimed (IRMD). We do not, nor do we intend to take a position, in Microsoft, Nvidia, Google/Alphabet, Apple, Meta, Amazon, Tesla, Berkshire Hathaway, Broadcom, JP Morgan Chase, United Health, Eli Lilly, GameStop, or AMC Entertainment.
Conclusions
As an investment manager, your primary goal is to outperform the greater markets over the long term. To meet that objective, sticking with the process that has brought you success is critical. Sometimes, that process will underperform. As I’ve said many times, to outperform, it is occasionally necessary to underperform (unless your name is Bernie
Madoff). But chasing returns driven by FOMO is an almost assured way to chase highly volatile, short-term returns, driving up trading costs, increasing your tax bill, and frittering away the chance to let compounding do its work. At Nintai, our first four years in business were outstanding, generating significant outperformance nearly every year. The last three have been a roughly mirror image. However, we refuse to change our methodology and begin loading up on M7 stocks like Nvidia (NVDA) or meme stocks like AMC Entertainment (AMC). Instead, we will take the advice of President Kennedy’s Marshal Lyautey and not just continue researching our long-term holdings like Veeva (VEEV) or iRadimed (IRMD). In fact, we’ll probably start this afternoon.
As always, we look forward to your thoughts and comments.
DISCLOSURE: Nintai Investments currently has holdings in Veeva (VEEV) and iRadimed (IRMD). We do not, nor do we intend to take a position, in Microsoft, Nvidia, Google/Alphabet, Apple, Meta, Amazon, Tesla, Berkshire Hathaway, Broadcom, JP Morgan Chase, United Health, Eli Lilly, GameStop, or AMC Entertainment.
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