Rolling Stone magazine named Nirvana’s “Smells Like Teen Spirit” the best song of the 1990s. The idea for the song title was sparked during a drunken evening with Kurt Cobain and his friend Kathleen Hanna of the band Bikini Kill.
According to Hanna, after the two returned to Cobain’s apartment, Hanna scrawled “Kurt smells like Teen Spirit” in Sharpie all over his walls, referencing how Cobain smelled like his girlfriend’s deodorant. Cobain loved the line so much that he incorporated it into the song we now know as the ultimate 90s anthem.
The tune captures the essence of rebellious teenage angst, and we have been inspired by this song while pondering one of the biggest investing questions of 2024 — should investors sell Nvidia (NVDA)?
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Investing today feels a touch like the 90s. Not just because we are listening to the same music, but because of the resurrection of the single stock concentration dilemma. AOL was the posterchild of widely held stocks that made many wealthy in the late nineties. In 2024, the baton has been passed to Nvidia (NVDA). NVDA has experienced a meteoric run — up 170% this year (as of 7/11/24) after being up 240% last year. This run is like few other stocks in history. The market capitalization of NVDA is now just shy of $3 Trillion (in Dr. Evil voice). Investors are now faced with the hardest decision in the business — when and how much to sell.
We believe NVDA is a good stock to own, but the gains are now limited by the laws of large numbers. It is the second largest company in America. If you think the stock can double again, then you must believe the company is worth $6 trillion. As a point of comparison, the GDP of India is $4 trillion.
Before you get turned off by the mention of selling NVDA…
We are big fans of the company. We value their leadership and revolutionary technology. This is not about NVDA, but about over concentration in one company, human nature, and portfolio management (risk/reward).
Get Off My Lawn — We are not grumpy old men, but we are experienced investors. In 1999, I lived in San Francisco working for an investment company focused on the technology space. Please pay close attention to experiences from the last time single stock concentration was prevalent. Human nature does not change, and patterns develop over time. We witnessed thousands of good people lose it all because they did not listen to lessons of the past. They were acting like rebellious, confused teenagers.
I feel stupid and contagious,
Here we are now, entertain us.
It is an investor’s dream to achieve a 5x return ($200K turning into $1 million). Once you win the stock lottery, do NOT buy more tickets. The goal has been achieved; take some of the gains off the table and declare the mission accomplished. Don’t let the probability of losing enter the equation. The details of the stock (or company) do not matter. It is not a question of “liking” the stock — most love a stock after a 500% return.
As a side note, my prior position in the nineties involved analyzing concentrated single stock positions, developing exit strategies, and then creating investment portfolios for the proceeds. We wish it was possible to provide a list of people that decided not to sell their concentrated stock despite our detailed analysis of what could (and did) happen. The majority watched their wealth disappear as the tide shifted. No one believed their darling stock could decline because they thought they were the “chosen one.”
The Hypothetical — A $200K investment in NVDA grew to a $1 million position.
At the quarterly earnings release, the company provides a new piece of information. Nothing horrible, but something that does not live up to lofty expectations. The stock price declines 10% before the market even opens. Your net worth is now $900K. “Okay, no big deal,” you utter reassuringly to yourself and continue to hold the stock. Then the stock falls another 10% as there are now more sellers than buyers. Now your net worth is $800K. This is still strong, but not the same as $1 million.
In short order, the stock falls another 20% as it is clear this is a stock that moves with economic cycles and the money spent on the data center build out is taking a pause. Your net worth is now around $650K. Please note, the 20% correction already happened in real life while drafting this note.
The illustration above stops before the bad part. The decline of the massive wealth generated from a single stock position can happen gradually then suddenly, leaving investors frozen with fear.
Eggs in One Basket — NVDA is a good holding at a reasonable amount of your net worth. This message is for those investors with NVDA (or any stock) as over 30-50% of net worth. This includes Apple, Google, Microsoft & any other company. Be prepared for the emotional roller coaster ride of a lifetime. Fear could soon replace greed.
Akin to the good people acting like irresponsible teenagers in the 90s, the investment decisions you make today could affect the rest of your financial life. Now, let’s dig into the research part of the program.
Part 2 – Deep Dive into the Stock
The History — The stock first traded in 2001. The following is a list of annual returns for NVDA. Source: Portfolio Visualizer
NVDA has been a remarkable stock, but note, the stock had negative returns in seven years (or 30%) of the time. Most notably the negative 50% return in 2022. Further, the full drawdown of the decline was 70% during that year.
Many investors respond by thinking, “but I will hold during the decline, and the stock will come back.” That sentiment is so 90s. The ride back down is emotional and then the ride back up is not certain and can take many years.
The goal is not to scare investors but educate. The fact is that this stock has a history of being volatile in down markets or economic slowdowns. In other words, it is cyclical, it moves in cycles, just like the economy and capital spending.
The Tech — As an important side note, we are BIG believers in the NVDA technology and its place in the buildout of this exciting digital future, but there is a difference between a good piece of tech and a perpetually good stock.
Out the Window — We have conducted the traditional fundamental and technical analysis of this stock. Please let us know if you would like to schedule time to explore the numbers in a different medium.
Tax Angst — Not wanting to pay capital gains taxes is the number one reason for not selling a concentrated stock. We certainly understand, but the taxes are not going away in your lifetime. Taxes are personal and we have developed an algorithm to weigh the tax bill versus the reduction in risk.
In summary, Nvidia is an amazing company and will be a big part of the future. The same story is true for Apple, Google, Amazon and Microsoft. If you find yourself fortunate enough to have amassed a large gain in a single stock, please consider selling a portion of the holding. It is not about the company, but about locking in the victory and not getting too greedy. The emotional ride back down is not fun and can cause investors to make bad decisions.
While much has changed since the 90s, one thing is the same — it smells like teen spirit. We encourage NVDA (or any other single stock) investors to work with a professional to create a plan to lock in some gains.
Lear Investment Management (“LIM”) is a Registered Investment Advisor based in Dallas, Texas and registered with the Securities and Exchange Commission. Registration does not imply a certain level of skills or training. This content is for informational purposes only, contains the observations and opinions of LIM, is not intended to provide investment advice, and should not be relied upon for investment decisions. Past performance is no guarantee of future results and information pertaining to LIM’s processes is subject to change at any time without notice.