Why We Don't Try to Read Political or Economic Tea Leaves

Torsten Sløk, an economist at Apollo Group Management, recently highlighted what we think are some mind-blowing facts about NVIDIA. He noted:

• NVIDIA’s market capitalization is now bigger than FIVE of the G7 countries.
• Only the U.S. and Japan have a higher overall market cap greater than the AI darling.
• This means NVIDIA surpasses the value of entire equity markets for Canada, the U.K., France, Germany, and Italy. In fact, you could combine Germany and Italy and you’d still be smaller than NVIDIA.

About one year ago, NVIDIA was flirting with a ceiling around $500 per share (i.e., equivalent to $50 per share in today’s post-10:1 split world). It has now hit new all-time highs that are almost 3x that level (i.e., $140 per share or $1,400 on a pre-split basis)! The impressive increase in value has no doubt boosted many investors’ returns but also now represents a meaningful risk.

The rise and risk of NVIDIA can be used to illustrate what we believe are two of the most unheralded benefits of systematic trend following for investors:

1) Staying the course (in a repeatable way) when your brain is screaming, “run!” At $500 per share ($50/share post-split) our portfolios were overweight to NVIDIA and can vividly recall multiple clients expressing concern about the risk of a steep decline in the stock, which could negatively impact a portfolio. Very few (if any) were confident in the prospects of remaining overweight at that level. We will not take any personal credit for staying the course, as the decision had everything to do with our repeatable trend-following rules and nothing to do with our powers of prediction. Fast forward a year, and that systematic overweight stance has arguably provided the largest attribution to positive performance during the last year and beyond.

2) Providing a kill switch to exit a trend. Not only does trend following provide what we believe is the most reliable way to capture outliers, but in our opinion, it also allows investors to have a RELIABLE exit strategy for when the tide eventually turns. One of the tools we use for this purpose is the 100-day exponential moving average (EMA). At the end of 2023, NVIDIA closed the year a little above $49 per share and its 100-day EMA was around 45 — that was about $4 away from the sell-point if someone were to use the 100-day EMA as their sole rule for when to sell. While our exact exit would not have necessarily been that price, we certainly would have been standing by, ready to reduce exposure if all the data we monitor called for it. And here’s the more important part, in our view: As a stock’s price increases, so does its 100-day EMA. Therefore, NVIDIA’s EMA has now increased to around 110 per share. This means that our approximate reduction point has automatically increased in a way that RELIABLY adjusts for volatility, gives the stock room to continue running, and doesn’t require giving up a large portion of the gains from the last year.

The key concept from the last two paragraphs is RELIABILITY. It is one thing to capture returns. It is quite another to do it in a way that the same set of facts can produce a consistent outcome over and over. That is our goal at Blueprint Financial Advisors.

It is not enough to provide solid returns. For clients to be able to lean on us and rely on us, we have to produce returns in a way they can expect now, next year, 10 years from now, and beyond.

We believe a day of reckoning is coming for NVIDIA, and investors with overly-concentrated portfolios and no plan will likely pay the price. However, no one knows when that day will occur. In our opinion, it is better not to guess, but rather to have a process that is agnostic and indifferent. We have no emotional connection to NVIDIA but are happy to benefit from its rise for as long as the trend permits. We continue to be thrilled to extend this measured, resilient approach to our clients, empowering them to navigate markets with clarity and conviction.