For the last few months, I’ve been writing and talking about the fact that I believe the Nasdaq is in a classic market bubble. The narrative this time has been optimism on the impact of AI. The central stock in this drama has been Nvidia, which surged to a $3 trillion dollar market capitalization. As I write this, the stock is now down over 23% from its closing high on June 18th but has still been one of the greatest stocks in history of course. This sets up the classic conundrum.
The stock is in a current bear market, but the valuation is still at extremely elevated levels. Margins and future growth prospects are extremely hard to forecast moving forward, because current AI spending from Nvidia’s customers is not generating sufficient revenue to move the needle, so there is the risk that like with Cisco in 2000, the infrastructure gets overbuilt leading to a slowdown. For the investor, do you buy more, hold, or sell? It’s not an easy call, which is why at T&T Capital Management, our investment North Star is valuations. We only buy securities that are trading at large discounts to intrinsic value, justified by extensive fundamental analysis. This can undeniably cause us to miss the excitement of various bubbles, but thankfully, it also means avoiding the painful and financially destructive busts.
Yesterday, I took my family hiking. It was my 5-year-old daughter Adriana’s second hike, and this was going to be the longest at 4 miles with hills. My wife and my 11-year-old Stella were running ahead, and Adriana wanted to keep up, but I stayed with her and told her just to pace herself as I knew the hike and the heat would test her, and I didn’t want to have to carry her a mile or so if things went badly on the last part of the hike. I also really admire her mental strength and I didn’t want her to have a bad experience by struggling to finish. I told her the story of the tortoise and hair and it was a good learning experience, as she indeed finished the hike with flying colors, and felt very accomplished and good about herself. Investing is the same way. Believe me, the biggest braggarts and market “geniuses” have the biggest blowups. It’s a story as old as time. Keep your eyes on accomplishing your goals and ignore the noise. Don’t sacrifice your successful retirement plan by gambling your hard-earned funds trying to chase a speculative bubble.
The blatant reality staring us in the face is that the stock market exhibits signs of a classic bubble. Meanwhile, we have the most attractive bond and REIT rates in the last 20 years, both which should react favorably if the Federal Reserve does indeed cut interest rates setting the table for substantial appreciation and less risk of permanent loss of capital than stocks. Value stocks and small caps are starting to perform exceptionally well relative to growth, and as I write this, small caps are now actually outperforming the QQQs for the year, when just a few weeks ago, the disparity was nearly 20% the other way around. These trends can always change quickly, but over the very long-term, value stocks have outperformed by nearly 4% per annum, because valuations are the most important determinant to investment success.