A New Number 1

By: Michael Foster, CFA, CFP®

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I tried my best to relate this to music charts. It’s cool when a song or album reaches number one, but the charts move quickly as listener preferences change, new music is released, or the latest social media trend propels some random track to the summit only to be supplanted by what’s next. I love a good (horrible) play on words and tried to incorporate “New Kid in Town”, “All I Do is Win”, “Shining Star”, “Higher”, “Every 1’s a Winner”, and even “The Climb” before settling on the much more mundane title of this blog. You can hold your collective groans and enjoy the lack of song title puns.

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As of the time of this writing, Nvidia recently passed Microsoft to become the world’s largest company by market capitalization. They’ve seen massive growth in their stock price as a chip-making leader in the midst of the AI boom. Kudos to them!

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While this is undoubtedly notable for the company itself and its employees, should it matter to the way we think about investing as believers in long-term, strategic, and broadly diversified portfolios? 

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On one hand, I’d argue yes. Nvidia’s rise is a sign of markets continuing to function. This is hugely important! Companies should (and do) change in size based on the expectations of market participants in aggregate. I’d be concerned if companies stayed in the same relative places over time with little to no change. 

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The seller of Nvidia at any point on the way up got a price they likely thought was fair at the time of sale. Otherwise, they wouldn’t transact unless forced to for some reason. On the opposite end, the same buyer of those shares got a price they thought was fair at the time of purchase. While it’s easy to go back and see who “won” the trade, it’s hard to argue that the price at the time wasn’t fair to either party in my opinion. 

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This same fair market of buying and selling goes on constantly throughout the day, changing company market capitalizations rapidly. It just happens to be more notable when a company moves from 2^nd largest to largest in size instead of from number 1,587 to 1,586.

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I’d say Nvidia’s rise matters less in the way we think about investing or structuring portfolios. At the expense of sounding like a broken record from earlier, we aim to build long-term, strategic, and broadly diversified portfolios at a low cost for our clients. It’s certainly not as sexy as writing an article on “My 10 Hot Stocks for July” or “Ben’s Least Favorite Sectors for Q3”, but it’s what we believe works best over time for most people. 

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We start with a client’s goals and help build them a portfolio of thousands of stocks and bonds using funds that they can stick with through time. This means that our clients are likely invested in Nvidia, just not as a single stock or an outsized weight relative to their size. We believe having a sound investment philosophy that you can keep through good and bad times is likely to provide a better outcome than chasing performance or the latest fad. This can lead to lagging huge outperformers, like Nvidia this year. It also leads to avoiding over concentration to the critical mistakes or huge under performers that can ruin a financial plan. 

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If I, or anyone else in my opinion, knew what companies were going to greatly outperform or underperform, I’d manage my own money and be on a private island somewhere. It’s very hard (if not downright impossible) to consistently identify what’s going to do well or not. In an industry full of hubris, we believe the humble investor is better positioned to succeed.

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In conclusion, I think it’s great to celebrate the success of a company rising through the ranks to become the world’s most valuable through the free market. It’s exciting to see innovation and new technologies rewarded through buyers and sellers transacting at prices they believe to be fair. That being said, we don’t believe it should change how your portfolio is allocated for the long term. We believe that a sound investment philosophy that you can stick with through time can more reliably help you meet your goals. Feel free to build-your-own pun with “Stick Season” or  “The Long Run” here.