Bob’s Journal for 9/7

Lessons from the Nvidia Surge

The top-returning stock of the year so far is NVIDIA (NVDA). The second-best stock isn’t even close.

NVDA also is the top-performing stock of the last 10 years, according to Bespoke Investment Group. Again, second place isn’t close.

NVDA was up 230% in 2023 through the end of August. Over 10 years, it is up 13,275%. The second-best returning stock also is a computer chip company, AMD, which is up 3,120% over 10 years.

Most investors say that they want to find the next NVDA to buy now and hold for the next 10 years. But even if you can find the next NVDA, executing that plan won’t be so easy because of some traits built into most of us.

A top-performing stock like NVDA has a lot of ups and downs during its lifetime.

NVDA went public in 1999 as part of the first tech stock boom. It had a nice surge, but it suffered during the tech stock bust. In October 2022, it was 90% below its all-time high to that point.

NVDA surged again after the surviving tech stocks recovered from the tech stock crash. But it suffered again in the financial crisis. At the bottom of the financial crisis crash, the stock was more than 85% below its high price.

The stock then essentially was flat for an extended period and didn’t surge again until around 2015.

The result is that over its lifetime, on average, NVDA has traded 40% below its previous all-time high, according to Bespoke.

Even in the last decade, the stock’s had worrisome periods. It traded above $300 before the pandemic only to fall to just above $100 during the pandemic bear market.

The long-term chart for Amazon (AMZN) tells a similar story. Many people kick themselves for not buying the stock after they made their first purchases on the website and realized what a great service it was.

But AMZN’s earnings were very low for a number of years. The stock price was flat for a long time after the tech stock crash and only after the financial crisis did it begin generating the returns that made Jeff Bezos the richest person in the world for a while.

What many people don’t realize is that AMZN doesn’t make a lot from its retail operation. Its earnings improved only after it began selling its infrastructure to others through its Amazon Web Services.

In the pandemic, AMZN fell from over $180 to about $80. The stock still isn’t back to its pre-pandemic high.

While it’s difficult to find the next NVDA or AMZN, that’s not the hardest part. The hard part is buying and holding. Many people buy such stocks only to cash in after earning solid returns of 20%, 30% or 40%. They made good investments but left a lot of money on the table by selling early.

Others bought the stocks near what were then the all-time highs. They became frustrated and sold during one of the major downturns.

The real difficulty to profiting from such stocks is buying and holding. You have to expect the crashes and ignore the negative opinions expressed during the crashes. You need to hold for the long term (or even add to your position) even though your position is well below the previous high and probably your purchase price.

Will Your Estate Plan Be Followed?

An estate plan can be too detailed or rigid. When that happens, there’s a good chance at least some of it won’t be followed.

That’s especially true when assets are left in a trust or to charity.

A good example is the continuing saga of the Barnes Foundation.

Albert Barnes was a chemist and business owner who accumulated some wealth by developing treatments and preventive medicines for certain diseases. He used the wealth to purchase a collection of paintings that often is regarded as one of the great private collections.

He established the Barnes Foundation in Merion, Pennsylvania in 1922 to own and display the art. Barnes passed away in 1951.

The foundation’s documents state that all the paintings in the collection are to remain in the exact location and arrangement in the foundation’s buildings in Merion that they were in at Barnes’ death.

Over time, the trustees of the foundation determined they couldn’t generate enough revenue to sustain the collection because of the restrictions. The trustees asked the courts to loosen the restrictions.

In particular, the trustees wanted to move some of the paintings to Philadelphia, either on loan to established museums or in a new location of the foundation. They believed being in or near a major metropolitan area would generate more traffic and revenue. They also wanted the curators to be able to rearrange how some of the art is displayed.

The Pennsylvania courts generally agreed to the requests, with the most recent decision being delivered in August. There’s a documentary on the dispute that goes through about 2008 titled “The Art of the Steal.”

The Barnes Foundation saga shows the importance of avoiding conflicts in an estate plan.

A plan also shouldn’t be inflexible and have many restrictions. Otherwise, someone’s likely to resist or circumstances will change. Either event could trigger legal action. The courts are likely to balance the interests of the different parties and find the plan should change because the developer of the plan didn’t anticipate current circumstances.

Households Betting Big on Stocks

Several measures show that households have a lot riding on a continuation of the stock bull market.

The percentage of the total financial assets of households in stocks is at its highest level since 1998 at 24.42%. In 1998, the percentage of stock ownership reached 24.31%, and soon after that, the stock indexes declined and the percentage fell to 13.80%.

Another peak in the measure was 1968, when it reached its all-time high of 26.15%. It quickly fell to 17.78% in the second quarter of 1970. After a brief recovery, it fell to 10.15% in 1974.

Another measure to consider is household ownership of corporate stock as a percentage of gross domestic product (GDP). That peaked at 1.32% in the second quarter of 2021, which was well above the previous high.

Even the recent measure of 1.05% is well above the pre-pandemic high of 0.97%.

By any measure, households have more of their net worth invested in stocks than in the past. It is not clear how much of the current levels are due to the rapid increase in stock prices since the pandemic bottom and how much is from households deliberately putting more of their money into stocks.

But it is clear that there’s more risk in household balance sheets than in the past, especially at today’s stock market valuations.

The Data

Personal income increased 0.2% in July after increasing 0.3% in June. Compensation increased by 0.4% but income from assets was unchanged.

Personal spending surged 0.8% in July after increasing 0.5% in June. July’s increase was the highest monthly spending increase since January. Spending increased for both goods and services in July.

The Fed’s preferred inflation measure, the PCE Price Index, increased 0.2% in July, the same rate as in June. Over 12 months, the index was up 3.3% through July after being up 3.0% through June.

The core PCE Price Index, which excludes food and energy, increased 0.2% in July just as it did in June. Over 12 months, the core index was 4.2% higher through July after rising 4.1% through June.

Factory orders declined 2.1% in July after increasing 2.3% in June. But after subtracting the volatile transportation sector orders increased by 0.8% in July after rising 0.3% in June.

The ISM Manufacturing Index improved to 47.6 in August from 46.4 in July.

The ISM Services Index also rose to 54.5 in August from 52.7 in July.

But the PMI indexes indicated economic activity was weaker in August than in July.

The PMI Manufacturing Index declined to 47.9 in August from 49 in July. The PMI Services Index fell to 50.5 in August than 52.3 in July.

That brought the PMI Composite Index for the economy down to 50.2 in August from 52 in July.

The Chicago Purchasing Managers Index improved to 48.7 in August from 42.8 in July.

For each of those indexes, a reading below 50 indicates a contraction while a reading above 50 indicates expansion.

Nonfarm payrolls increased by 187,000 jobs in August, according to last week’s Employment Situation reports. In July, 157,000 new jobs were created. August was the third consecutive month the number of new jobs was less than 200,000.

Average hourly earnings increased 0.2% in August, down from the 0.4% increase in July. Over 12 months, average hourly earnings were 4.3% higher through August after being up 4.4% through July.

The unemployment rate popped up to 3.8% as of August from 3.5% in July.

New unemployment claims declined by 4,000 to 232,000 in the latest week.

Continuing claims, which lag a week behind new claims, increased to 1.725 million from 1.697 million.

The Markets

The S&P 500 rose 0.02% for the week ended with Tuesday’s close. The Dow Jones Industrial Average lost 0.47%. The Russell 2000 declined 0.74%. The All-Country World Index (excluding U.S. stocks) fell 1.20%. Emerging market equities retreated 1.21%.

Long-term treasuries lost 2.60% for the week. Investment-grade bonds declined 1.39%. Treasury Inflation-Protected Securities (TIPS) dropped 0.66%. High-yield bonds fell 0.57%.

The dollar gained 1.46%.

Energy-based commodities increased 2.88%. Broader-based commodities rose 1.14%. Gold declined 0.60%.

Bob’s News & Updates

My latest book is “Retirement Watch: The Essential Guide to Retiring in the 2020s.” Learn more and order by clicking here and here. You can be among the first to write a review.

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