While it’s difficult to say whether Big Tech is past peak growth, investors should start thinking beyond 5-10 ticker symbols, no matter how incredible they are.

An obvious point needs to be made: If you have been investing for the past 10 years and have yet to own at least one of the big tech companies, you likely have been missing out. Any fund manager who has ignored these names has committed financial malpractice. The most significant single-day market cap gains in the past four years have come from Meta, Apple, Amazon, Nvidia, and Microsoft.

If you don’t own one of these names, you might ask yourself, “Why?”

These companies have a significant competitive advantage, allowing them to maintain their market share. They are well-positioned to benefit from several long-term trends, such as cloud computing and artificial intelligence.

It also helps that these companies can write blank checks to fight against regulatory scrutiny. They also can burn through a lot of cash on projects or initiatives that are unprofitable yet still maintain pristine balance sheets.

If you already own these names, there must be a compelling reason to sell them, and I don’t see any obvious red flags. These are companies you typically hold and don’t trade. However, strong evidence shows these names are no longer must-buys at any price.

• In 2022, Facebook’s user base stagnated for the first time.
• Apple’s revenue growth has been 5.5% from fiscal years ending in 2019 to 2023
• Digital advertising, which accounts for over 80% of Alphabet’s revenue, slowed down in 2022. While Google Cloud revenue is still growing, the growth rate has slowed compared to previous years. The same goes for Amazon Web Services (AWS).

Although these are not necessarily signs that these companies are in peril, they signal cracks in the foundation. These companies still have high expectations for future growth. Yet, there is clear evidence of saturation and slowing growth in their core markets.

Revenue growth has already slowed, and it will get more challenging for them to get bigger. Acquisitions are a costly way to grow, but with regulatory pressures, that is not likely a realistic option anymore.

Meta also authorized its first-ever dividend, joining Apple, Microsoft, and Nvidia. A dividend usually means transitioning from a volatile, high-growth company to a stable, slower-growing one. Anytime a company offers a dividend, it gives away value to become more widely held by large institutions like pensions and mutual funds. This is the trade-off a company makes when issuing a continuously growing dividend.

What’s happening is that these companies are maturing. They are more predictable and closer to the consensus, aligning closer within parity to the general market. The Magnificent 7 is no longer a group of companies that produces alpha; it is a risk management group. The days of these names creating outsized gains in your portfolio are likely over. These companies will succumb to the law of large numbers, even Nvidia.

Is this a bad thing? Not necessarily. However, the ability of these companies to grow in size in the next ten years will likely be slower than in the past ten years. Looking at these names for supercharged growth is the wrong mindset for an investor. It’s wrong on both a fundamental and a valuation viewpoint.

Probabilities, Probabilities, Probabilities

The secret is out. These are high-quality businesses, and much of the value has been priced. The more new money you add to these names, the higher you will have to pay and the lower your future return.

There is still a place for adding stable, high-quality businesses in your portfolio, but better strategies exist to build a portfolio that outperforms.

Valuation and Quality Matters

An investor aims to find undervalued assets and dislocations in the market. Undervalued in valuation and fundamentals. Investing is not always about zigging when everyone else is zagging. An investor should also buy and hold quality, even at a premium price. Not every move is a contrarian bet, but a well-rounded investor must be able to do both. Having flexibility in thinking but a structured discipline process. Investors that can do both of these things will likely rise above the median.

As an investor, you must think like a general manager of an NFL team. Not owning a company in the Magnificent Seven is the equivalent of trying to win a Super Bowl without a star quarterback or pass rusher. Teams need quality players, but cost and value matters.

Patrick Mahomes is the best quarterback in the NFL. You can call him the Nvidia of Quarterbacks. That doesn’t mean the Kanas City Chiefs should trade him for draft picks and sign a lesser quarterback to save money. It also doesn’t mean the Miami Dolphins or Chicago Bears should mortgage their future and take on Mahome’s salary by trading for him.

The one luxury of being an investor in your portfolio is that you are the GM and Owner. You can enact your vision and strategy without the fear of being fired. If you want to “win,” you must make good decisions and not think in such a pedestrian matter.

Expensive players come at a high price that can and will diminish when they can’t keep up with overhyped expectations. Continuously overpaying, even for quality players, is a losing strategy because teams will run out of cap space. You will get less bang for your buck and likely cannot field a well-rounded team. The Chiefs’ success largely depends on getting production from their core stars and signing and drafting overlooked players in free agency and in the draft.

Buying stocks based on the market’s direction is not an investing strategy but a gambling strategy. You are not investing in companies; you are betting, period. You are falling into the trap of the allure of the market: Chasing gains and buying based on superficialities. This is emotionally a draining investment strategy when the inevitable business cycle fluctuates.

• Nvidia was trading below 120 in October 2022. How many analysts had buy ratings on the company then?
• Meta was trading below 100 in November 2022. What was the mood and sentiment of the market back then?

Who was pounding the table to invest in these names?

Finding quality value

As a long-term investor, think about sleepers and good bargains. Will it work every time? Of course not, but this is a proven winning investing strategy.

Build core positions in high-quality companies and add to them when undervalued. It also requires pulling the trigger when the street sits on the sidelines. There is absolutely zero edge or creativity when you follow the consensus agreement.

Every investor should, at minimum, look at the company’s balance sheet they invest in. While a balance sheet is valuable for understanding a company’s financial health, it doesn’t capture everything.

Characteristics of a good company that goes beyond the numbers:

• Strong leadership: A clear and inspiring vision from ethical, transparent, and accountable leaders.
• Brand reputation: A robust and positive brand image that resonates with customers and stakeholders.
• Intellectual property: Valuable patents, trademarks, and other intellectual assets.
• Customer & Supplier Relationships: Strong and collaborative relationships with key customers and suppliers.

These characteristics are not found in a balance sheet or screener. It requires more unconventional research and abstract thinking. I still have certain investing principles. If a company has negative gross profits (Revenue minus cost of goods), It’s almost an automatic no-touch investment. When revenue cannot cover the basic expenses incurred to create a product or service, it’s like a diner paying $6 for raw materials to sell a $5 burger. Fundamentally, the business needs to be fixed and likely won’t scale. This may seem rudimentary, but money continues to be poured into Rivian, Lucid Motors, and many other unprofitable businesses.

My playbook? I will only add to specific names in the Magnificent Seven if they become significantly undervalued, which will eventually happen, but less often than before. These names are becoming in lock-step with the herd, which means less opportunity. I will not be shy about adding to these names when the herd and the street flood out of these names. This strategy is a lot easier said than done. Heavy buying is usually best when you don’t hear a company like Nvidia is a “must-buy” stock, even though it has been up almost 2,000% in the past five years. I am OK with holding these names and increasing my ownership through a dividend reinvestment plan but not adding to them at these levels with fresh money.

Good solid investing requires creativity and outside-of-the-box within a framework. Look at traditional metrics, but be willing to go against the grain.   

Two examples of looking beyond the numbers:

WWE fans are dedicated and incredibly loyal. The amount fans spend on scripted sports entertainment is quite astonishing. The revenue growth since the company went public in 1999 has been consistent. You would think fans’ interest would drift towards another form of entertainment, but it hasn’t. Fans of the product in the 90s and 00s are still engaged and driving consumption today. Pro Wrestling still hooks newer and younger fans, even though the format hasn’t changed. 

WWE fans are dedicated and incredibly loyal. The amount fans spend on scripted sports entertainment is quite astonishing. The revenue growth since the company went public in 1999 has been consistent. You would think fans’ interest would drift towards another form of entertainment, but it hasn’t. Fans of the product in the 90s and 00s are still engaged and driving consumption today. Pro Wrestling still hooks newer and younger fans, even though the format hasn’t changed. An entire book could be written about pro-wrestling fanaticism, but the popularity is likely to continue for a long time.

Taylor Swift: Her current “Eras Tour” has an average ticket price of $1,088.56. Compare that to Dua Lipa for her past Future Nostalgia Tour, the average ticket price was around $97, or Olivia Rodrigo’s Current Guts Tour, which falls between $117-$637.

Explaining why a fan would spend so much on a Taylor Swift ticket is based on a combination of the artist, music, physical presence, and live experience. Explaining Swift-fandom is a complex phenomenon beyond rational or conventional thinking. Life itself is not static, and you must look at investing similarly. Swift’s meteoric rise wasn’t an accident or purely based on luck. In a different life simulation model, Swift is likely to be successful, even under worse circumstances. That’s because her success is influenced by various personal factors, not just based on one or two songs. Good investing is a process, not just being lucky in 1 or 2 ticker symbols. Investors who can develop a framework for success will likely avoid the pitfalls that the majority fall into.

Myth #1: Quants, sophisticated algorithms, and the brightest minds in the world struggle to beat the market, and most do not. The odds are that Sam from Nebraska will not outperform the market and is better off not playing around with individual stocks. Just invest in index funds.

The problem you have, and will continue to see, is the word “invest” being interchangeably used with trading, gambling, speculating, etc…

Not everyone buying stocks is investing, certainly not long-term investing.

Many fund managers or professionals you read about do not even invest in their own fund.

Why would you invest in a fund if the fund manager isn’t doing the same?

Wall Street’s strategies differ from what you should mimic.

Investors need to understand the fundamental difference between generating income and building wealth. Typically, stocks are a wealth-building tool. Generating income from stocks requires more short-term thinking and trading strategies. 

The more I see investors tinker with their portfolios or trade in and out of positions, the more confused I become. Price movement in the short term is often volatile and unpredictable. It also can be stressful and gut-wrenching. Emulating Jesse Livermore or Steve Cohen is more challenging than being the next Ronald Read or Geoffrey Holt.

As for index funds, the fundamental problem with this instrument is that it is a self-defeating investing practice. You have chosen to match the market rather than outperform it. The technical framework of most index funds is capping your gains by taking on less risk. This investment vehicle may suit some people, but I find it unacceptable.

Investing in index funds that follow a benchmark may be suitable for those who can generate a lot of income or have multiple income streams. It also may work if your portfolio is already large enough to live off without supplemental income.

You get what you deserve: The equity investor is entitled to a bigger reward because they took on more risk. Investing primarily in an index also does not change behavior or protect investors from the psychology of investing. Remember, future returns are not guaranteed. Index investing is popular because it has done well historically. Once again, a 10-15% average annual return is not guaranteed, and there is no way to assess the probability of future annual returns with pinpoint accuracy.

“A really wonderful business is very well protected against the vicissitudes of the economy over time and competition. I mean, we’re talking about businesses that are resistant to effective competition…”

“There is less risk in owning three easy-to-identify wonderful businesses than there is in owning 50 well-known, big businesses.”

– Warren Buffett

I never understood the attraction to wanting to own the entire market. It insulates yourself against a particular risk, but this diversification is unnecessary and can show a lack of focus and conviction.

Diversification could help against risk, but over-diversification will likely hurt performance.

• Diluted returns: Being right on a particular holding in a fund or index won’t make a material difference. The percentage of your portfolio is too insignificant to make a meaningful move.
• Unnecessary risk protection: Some companies have a market cap equal to greater than the GDP of a small country. Not wanting to own these companies individually due to their potential to go to zero is not the best way to assess probability and risk.
• The Brock Purdy/Tom Brady effect: The 49ers got lucky when they drafted Brock Purdy in round 7, pick #262. The Patriots got lucky when they drafted Tom Brady in round 6, pick #199. If these teams were confident that these quarterbacks would turn out the way they did, they would have drafted them in much earlier rounds. These teams took a small risk that paid off handsomely. Investing has similar scenarios. Investing $5,000 isn’t a lot of skin-in-game or conviction. A $5,000 investment in Microsoft in the 90s would be well over one million dollars today – and guess what? Microsoft is, by many analysts, rated a must-own stock today! These types of gains you will never see solely investing in an index.

Myth #2: I would have to spend countless hours researching individual companies and monitoring the market daily. Why invest in stocks with the odds out of favor in beating the S&P and its proven returns?

As I explained earlier, investors who primarily invest in an index are entitled to a lower return than a direct equity shareholder in companies who take on more risk.

The research barrier people make not to invest has always perplexed me. Looking at a company’s balance sheet is a relatively simple exercise. Earning reports are quarterly events and typically get recapped in a 1-page article.

Should an investor pay attention to current events and occasionally read business news? Everyone should be doing this, but is it necessary to spend several hours a day of research to be a successful investor?

Monitoring the market is a behavioral choice, not a requirement of being an investor. If you are a long-term investor and have already committed to holding a stock for an extended period, watching the price movement of a ticker symbol every day or every hour is an addictive habit that doesn’t help advance your investing skills. A company’s fundamentals do not change daily, even monthly, so worrying about daily price fluctuation is an unnecessary risk of losing your sanity.

No one can accurately predict the future. Every investment is a bet. You will likely succeed if you have a consistent framework for investment decisions and can understand the basic plumbing of how a company makes a profit. In most cases, the research advantage is not a true advantage. There is no significant correlation between time spent researching investments and investor performance.

Investor A: Invested $100,000 in Apple Stock in 2007 due to how innovative the iPhone looked during its launch.

Investor B: Invested $100,000 in Apple Stock in 2007 after doing hours and months of research in the company, reading balance sheets, plugging numbers through several financial modeling tools, reading articles, etc.

Investor B has more formal education than Investor A. Most people would consider Investor B “smarter” than Investor A. Investor B is an extremely hard worker, shrewd at business, and knowledgeable about the stock market.

The result is the same if both investors sell at the same time. Investor B may have been likelier to sell the stock, trying to time the market by mistaking research for market noise. For a long-term investor, selling Apple stock in the past 15 years would have been a mistake, even if the reason was valid.

Putting hours of research into investments doesn’t give you a guaranteed edge in investing. Having high cognitive intelligence doesn’t correlate to investing performance. 

Investing does not require you to write a 200-page dissertation to be successful. “Time in the market” refers to the holding period, not time spent researching.

Being a highly-rated brain surgeon requires years of studying and training. The same goes for being a world-class athlete or chef.

Investing is a rare activity where sitting on your ass and doing nothing pays off more than trading in-and-out of stocks. The investor’s hidden superpower comes from having discipline, patience, and emotional intelligence. The stock market is auction-driven, where you cannot drive the outcome of the results outside of buying, holding, or selling a stock.

The skillset required is a behavioral one. That is the secret weapon needed to beat the market. In all likelihood, investors A and B have already sold their positions in Apple stock for various reasons.

“On the other hand, although I have a regular work schedule, I take time to go for long walks on the beach so that I can listen to what is going on inside my head. If my work isn’t going well, I lie down in the middle of a workday and gaze at the ceiling while I listen and visualize what goes on in my imagination.”

-Albert Einstein

The problem with the research argument:

• Investors must understand that this game of critical thinking. Being an investor is a thought-job. Success comes from curiosity and continuous thought work.
• Research/Investing is subjective. One person can determine Bitcoin as ‘rat poison,’ and another person can evaluate it as the future of money.
• Investment returns directly correlate with how much risk you are willing to take, not how many hours of research you have done. No matter how much research an investor does, it cannot accurately predict future prices or events.

Myth #3: Pick the right company takes a lot of work. It is simply too risky, and the odds are not in your favor.

It is an easily debunked myth because the proof is an investor’s brokerage statement. Many professional and retail investors correctly invested early in companies like Nvidia, Apple, Amazon, and Tesla. These investors correctly picked the right company that generates life-changing results. These companies are well-known and have recognizable brands.

The problem is that most of these investors sold out too soon, indicating poor investment behavior. Investors frequently let fear and other emotions guide their strategic investment process.

Many investors also incorporate too much of a “market timing” tactical approach in their investment strategy, leading to how powerful psychological forces play into investing decisions. If the secret to wealth building is to buy and hold companies like Apple and Nvidia for a long time, why do so many people refuse to do so?

The answer is complex and simple at the same time. It would be like asking why don’t all poor free throw shooters in the NBA use the ‘Granny Shot’ free throw motion, where the player holds the ball at his waist with both hands and hoists the ball at the hoop in an underhand motion, with arms spread apart.

There is actual evidence that the Granny-style form works:

One argument in favour of shooting underhand, compared with traditional overhand, is that it requires less movement and is therefore easier to repeat. There are physics behind the form as well. Shooting underhand creates a slower, softer shot, because a two-hand shot, gripped from the sides of the ball, allows a player to impart more spin than a shooter launching the ball forward with one hand.

John Fontanella, a professor at the Naval Academy who wrote “The Physics of Basketball,” said most shots spin at two revolutions per second, but an underhand free throw will rotate three or four times per second. The additional backspin means more shots that bounce on the rim fall through.

NBA rookie brings back ‘Granny-style’ free throw

Shaq attempted 13,569 free throws in the regular season and playoffs for his career. He made 7,103, just 52.3%, which is pathetic.

If Shaq worked on and adopted the granny shot the day he started the NBA, say, his career free throw percentage would improve to 70%. That’s 2,395 more points. How many more games and championships does Shaq win by doing this?

Despite the empirical and analytical evidence, no NBA star has adopted this shooting style since 1980. 

Why? The answers players give are silly:

Shaq: “I’d shoot zero percent before I’d shoot underhanded.”

“They’re gonna make fun of me.” 

“That’s a shot for sissies.”

The reasons why most poor free throw shooters don’t adopt a technique that is proven to work are similar to the same reasons why most investors can’t buy and hold stocks for a long time:

Fear of standing out

Outside of your comfort zone

Pride and ego 

Herd mentality

Many investors invest like Shaq shoots free throws. 

Shaq didn’t want to shoot underhanded because it wasn’t for him, even though it would have dramatically helped his free throw percentage.

People want to invest successfully, but they want to do it on their own terms. The rewards are life-changing, but it requires you to embrace chaos and uncertainty. Outside of your emotions, an investor has no control over the economy or geopolitics. For many investors, long-term investing means: “If I make money, I’ll stick with it, and if I don’t, I’ll sell and do something else.”

The most significant risk factor for investors is themselves.

It is not the economy, interest rates, or the threat of war. The biggest threat to your portfolio is your behavior.

My advice:

• Do not get too cute with your overall portfolio strategy.
• Stay focused and adopt long-termism.
• If you have the discipline, adopt something similar to the coffee can strategy, an investing strategy where you mostly stay still during market volatility and sell recommendations.

Do not sell winners like Nvidia or Apple simply because someone says it is time to sell. These are companies you buy and hold, not trade. Selling a stock because someone said it’s wise to trim your position has been dud advice for high-quality companies. Keep asking yourself, “What is the bigger picture?”

People managing funds are investors at heart. They research solid companies in attractive industries that can grow from a long-term perspective. But they inevitably engage in profit-taking and market-timing based on news/rumors, drastically shortening the time horizon. We then become hyper-influenced by analysts’ recommendations and hyper-fixated on valuation metrics. Long-term investing involves holding during downturns, but letting your winners run is equally important.