Stelian Mitu @stelianx: "𝐖𝐡𝐲 𝐈'𝐦 𝐀𝐯𝐨𝐢𝐝𝐢𝐧𝐠 𝐭𝐡𝐞 𝐌𝐚𝐠𝐧𝐢𝐟𝐢𝐜𝐞𝐧𝐭..."

Romania

𝐖𝐡𝐲 𝐈'𝐦 𝐀𝐯𝐨𝐢𝐝𝐢𝐧𝐠 𝐭𝐡𝐞 𝐌𝐚𝐠𝐧𝐢𝐟𝐢𝐜𝐞𝐧𝐭 𝐒𝐞𝐯𝐞𝐧 📉 Seven stocks now make up roughly 33% of the entire $SPX500 . That's up from 12.5% in 2016. These are household names: $AAPL (Apple) $NVDA (NVIDIA Corporation) $MSFT (Microsoft) $AMZN (Amazon.com Inc) $TSLA (Tesla Motors, Inc.) $GOOG (Alphabet) $META (Meta Platforms Inc) When a handful of companies carry that much of the index, every pound flowing into a passive fund like $SPY (State Street SPDR S&P 500 ETF) mechanically buys more of them, regardless of whether they're fairly priced. Great on the way up. Less great on the way down. This feels familiar to me, and not in a comforting way. 𝗔 𝗟𝗼𝗼𝗸 𝗕𝗮𝗰𝗸: 𝗧𝗵𝗲 𝗡𝗶𝗳𝘁𝘆 𝗙𝗶𝗳𝘁𝘆 In the early 1970s, institutional money piled into about fifty blue-chip darlings: $KO (Coca-Cola) $DIS (Walt Disney) $MCD (McDonald's) $XRX (Xerox Corp) Polaroid $IBM (International Business Machines Corporation (IBM)) They were called "one-decision stocks" - buy them, never sell. By 1972, the group traded at an average P/E of 42x, more than double the $SPX500 19x. Then the 1973-74 bear market arrived. $KO fell 69%, $XRX 71%, $MCD 72%, Avon 86%, $DIS 87%, Polaroid 91%. From 1973 to 1977, the Nifty Fifty underperformed with five-year average returns of negative 4.4% annually, compared to the market's positive 2.5%. Many of these companies were genuinely superb businesses. Their earnings kept compounding. The problem wasn't the companies, it was the price people paid for them. Over-valuation hits back eventually. 𝗪𝗵𝘆 𝗜'𝗺 𝗦𝘁𝗮𝘆𝗶𝗻𝗴 𝗖𝗮𝘂𝘁𝗶𝗼𝘂𝘀 𝗧𝗼𝗱𝗮𝘆 🧭 A few things keep me up at night on the Mag7 concentration: • 𝗧𝗵𝗲 𝗽𝗮𝘀𝘀𝗶𝘃𝗲 𝗮𝗺𝗽𝗹𝗶𝗳𝗶𝗲𝗿. Passive investing has grown from roughly 1% of assets in the early 90s to over 50% today. Market-cap-weighted flows disproportionately reward whatever's already largest. That's a tailwind until it isn't. • 𝗖𝗼𝗻𝗰𝗲𝗻𝘁𝗿𝗮𝘁𝗶𝗼𝗻 𝗿𝗶𝘀𝗸 𝗰𝘂𝘁𝘀 𝗯𝗼𝘁𝗵 𝘄𝗮𝘆𝘀. In 2022, when the $SPX500 fell 20.4%, the Magnificent Seven fell about twice as hard, down 41.3%. Drawdowns tend to be nastier at the top of the weight table. • 𝗚𝗿𝗲𝗮𝘁 𝗰𝗼𝗺𝗽𝗮𝗻𝘆, 𝗴𝗿𝗲𝗮𝘁 𝘀𝘁𝗼𝗰𝗸, 𝘁𝘄𝗼 𝗱𝗶𝗳𝗳𝗲𝗿𝗲𝗻𝘁 𝘁𝗵𝗶𝗻𝗴𝘀. $NVDA $AAPL $MSFT and the rest are extraordinary businesses. That isn't the question. So were $IBM $XRX back in ages. The question is: what price reflects their realistic future, and what price reflects the story we're telling ourselves? 𝗛𝗼𝘄 𝗜'𝗺 𝗣𝗼𝘀𝗶𝘁𝗶𝗼𝗻𝗲𝗱 Personally, I'm keeping exposure trimmed, favouring businesses where I can defend the valuation with DCF and peer comparisons rather than narrative. Equal-weighted exposure, the "other 493", quality mid-caps, and international markets look more interesting to me on a risk-adjusted basis. Boring, maybe. But boring has its moments. 𝗬𝗼𝘂𝗿 𝗰𝗮𝗽𝗶𝘁𝗮𝗹 𝗶𝘀 𝗮𝘁 𝗿𝗶𝘀𝗸 | 𝗖𝗼𝗽𝘆 𝗧𝗿𝗮𝗱𝗶𝗻𝗴 𝗱𝗼𝗲𝘀 𝗻𝗼𝘁 𝗮𝗺𝗼𝘂𝗻𝘁 𝘁𝗼 𝗶𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁 𝗮𝗱𝘃𝗶𝗰𝗲 | 𝗬𝗼𝘂𝗿 𝗶𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁𝘀 𝘃𝗮𝗹𝘂𝗲 𝗺𝗮𝘆 𝗴𝗼 𝘂𝗽 𝗼𝗿 𝗱𝗼𝘄𝗻

Not investment advice. The author may have financial interests in the mentioned instruments.