"It seemed to be a good idea at the time."
In 2023, Bank of America analyst Michael Harnett began using the phrase “Magnificent 7” to describe the biggest seven stocks in the US (Apple, Microsoft, Alphabet, Amazon, NVIDIA, Tesla and Meta Platforms).
The returns in 2023 and 2024 were:
Source: CNN and Y Charts
FoMO
Fear of missing out (FoMO) is a unique term introduced in 2004 to describe behaviour observed on social networking sites. The first observation is the perception of missing out, followed by a compulsive behaviour to respond.
This applies as much to investing as to all aspects of our lives. However, FoMO can be a “dangerous” approach to investing:
Tulipmania—1630s: There is some debate about the truth around this. However, according to research by UCLA economics professor Earl A Thompson, the tulip bulb price soared twentyfold between November 1636 and February 1637 before plunging 99% by May 1637.
The Dot-com Bubble – 1990s: The NASDAQ Composite Index, home to most of the technology/dot-com stocks, rose from 750 at the start of 1990 to a peak of over 5,000 by October 2000. By October 2002, it had plunged 78%.
There are many other examples, and every bubble is different. Still, they carry the same behaviours: a desire to ignore cautionary signs, even to the end when the bubble bursts, and the damage this inevitability causes.
The Magnificent Seven
The table below shows the movement of the top ten developed global companies from 1980 to 2020:
To demonstrate how this has changed in 2024, and considering all global companies (including emerging economies):
Source: The Motley Fool (June 2024).
Even in the space of four years, the make-up has changed.
Risks of Chasing the Magnificent Seven
Nothing lasts forever; investing in the Magnificent Seven today doesn’t guarantee future returns.
There are also additional risks:
Overconcentration: One of the most significant risks is overconcentration on one sector and the economy. When these companies do well, as we can see, they do very well, but the converse does happen. Therefore, having a more diversified exposure will reduce that risk.
AI: There are parallels to the Dot-Com Bubble. If the reality of AI doesn’t meet the hype and regulation slows growth, then the momentum behind many of these stocks will fade.
The main message is that although the stories of outsized returns can lull us, the danger is to assume we can predict the future. History and evidence show that the top companies rarely stay at the top forever. Additionally, thinking we know the future and can predict the path of factors outside our control is a brave approach for any investor.
To conclude, it may be worth reflecting on the exposure within the Ifamax portfolios. We do have some exposure, but this does not dominate the holdings. This ensures that the portfolios benefit from some of the performance but are protected should this reverse.
General disclaimer: The data has been sourced from external sources. Although we have looked to ensure this is as accurate as possible, we are not responsible. The blog is written personally and reflects the author's view; it does not necessarily reflect the opinions of Ifamax Wealth Management. Individuals wishing to buy any product or service because of this blog must seek advice or conduct their research before making any decision. The author will not be liable for decisions made because of this blog (particularly where no advice has been sought). Investors should note that past performance does not guide future performance, and investments can fall and rise.