Say hello to Nvidia Bro – my name to him, not his – who says he’s sitting on what looks like a cool half a million dollars to Nvidia
NVDA
stock.
Write about Reddit, he says he received the stock as compensation — “restricted stock units” — while working for the company. He is now gone.
The story caught my attention because it involved Nvidia, Wall Street’s latest flavor of the month, and because it raised a question that never seems to get old, although it should.
Nvidia stock, if you haven’t watched the market, has meanwhile gone crazy. It’s up 900% since just before the pandemic, most of the upside recently. Wall Street has become giddy with the prospects of artificial intelligence – and Nvidia, whose computer chips are used for all sorts of AI applications, is the current flavor of the month.
All of this, naturally, is great news for Nvidia Bro.
I hesitate to call it “free money” because it worked for it. But it’s kind of free.
But now he has a problem.
His booming stock soared to 50% of his entire portfolio, he says. And so he asked Reddit: Should he cash in?
“I am at 33% of my retirement goal. Plan to work about 10 to 15 more years if nothing unusual happens,” he says. His retirement goal, the number he wants by the time he retires, is $5 million.
“Ideally, I myself would advise anyone not to hold such a large percentage of investment in one company,” he admits. “But I have a lot of ideas about the business and the AI industry in general, which I feel strongly about betting on NVDA. rose only about as much as the market. This could still be wrong, but I’m comfortable betting on it. If my NVDA appreciates even 10%, I’ll be very close to my target in 10 years.
His own point of view: He is inclined to keep all the stock.
My opinion: uh… what?
To his credit, Nvidia Bro asked other posters what they think and says he’s keeping an open mind.
But his arguments for keeping the stock — along with one or two offered by other people — almost constitute a Greatest Hits of classic cognitive errors.
All the favorites are here. Like: Overconfidence. To think that we know more than we do. Thinking that we can predict the future. Being too optimistic. Reject “known unknowns”.
There is the “endowment effect”, which means that we are less likely to sell a stock we already own (even in a tax-sheltered account) than to buy that stock if we don’t don’t own it. (Several Reddit posters have made this point: If you had $500,000 in cash right now, and that’s half of your wallet, would you invest all of that in Nvidia?)
Meanwhile, others urged him to hold on to his stock, citing examples of people who had worked for Facebook
META
,
Google
GOOG
,
or apple
AAPL
in the early days and sold too early. And look at all the money they lost.
Hello, hindsight bias. And hello, basic sampling errors.
Yeah.
Nvidia Bro: Keeping this stock doesn’t make sense.
But this trap presents itself with every bubble and boom. Each.
Betting half your savings on just one company is taking a ton of risk with no extra rewards. Sure, the stock could double, but it could also halve. Or worse. After the last tech bubble in the late 1990s, hundreds of stocks fell to zero.
Think bad things can’t happen to the stock of a really good company like Nvidia? Think again.
Network equipment giant Cisco Systems
CSCO
was the Nvidia of the internet boom. It was the pick and shovel game on the dot-com gold rush. He was highly regarded on Wall Street. He couldn’t lose!
What happened next ? Since 2000, Cisco has increased its net income by almost 400%. Meanwhile, the stock has fallen 85% from its peak during the dot-com meltdown. Today an investor is still down about 50% when adjusted for inflation.
Then there was rival Juniper Networks
JNP
.
It has increased its sales by 700% since 2000 and tripled its net profit. The stock? It’s down about 90% in inflation-adjusted real dollars.
An investor who kept Microsoft
MSFT
peak of 2000 has not fallen back into the black, when adjusted for inflation, for 16 years. The actual return over this period was 0%.
Amazon
AMZN
fell by more than 90% between 2000 and 2001.
In their day, Nokia, Palm and BlackBerry were the surefire winners of the future smartphone revolution. Where are they now?
And then there were people like Enron and WorldCom, and later Lehman or Countrywide Financial. Large established companies that have disappeared.
For every employee who sold their Facebook or Google shares “too soon,” there are legions who sold their Enron shares too late.
Being an Nvidia and AI expert cannot make you a stock market expert. The secret is that no one is an expert in the stock market. Even Warren Buffett isn’t trying to predict what will happen next.
Of course, the AI mania may just be getting started. Let’s even say probably. And Nvidia can keep going up. And, perhaps, more and more. The old joke is that bubbles don’t burst until the last bearish has turned bullish.
But Wall Street is already predicting that the company will triple its sales over the next five years, and the stock is about 50 times better than forecast earnings for the next 12 months. So it’s safe to say that a lot of the expected good news is already reflected in the stock price.
Meanwhile, I did a double take when I saw that Nvidia Bro was hoping the stock would earn them 10% per year for a decade.
If history is any guide, you can get it from stock index funds with a fraction of the risk. Since the 1920s, the S&P 500
SPX
gained an average of 9.6% per year, or about 6.4% after inflation. One should expect smaller company stocks and international stocks to produce comparable returns – and could do even better because they currently look cheaper.
And as you say you are happy to invest in real estate, Find out what owners are doing on Wall Street.
Of course, none of this takes into account the issue of taxes. Nvidia Bro needs to talk to a good tax lawyer.
Yes, Nvidia Bro is going to kick itself if it sells all of its stock and it keeps going up.
Many people in this situation cash in slowly, in stages. A former colleague used to use a stop-loss system and ride a booming stock until it fell 20% from its peak, at which point he would sell completely, without hesitation. It seemed to work pretty well. But all that bets.
If Nvidia Bro doesn’t want to let go completely, it also has another option: Literally, “options.” He could cash out his bet, put most of the money in the usual index funds, but set aside a small sum and use it to bet on Nvidia in the options market. This keeps him involved in case the stock continues to soar.
Call options give you the right, but not the obligation, to buy the stock at a later date at a pre-agreed price. They are usually quite expensive and only make you money if the stock really explodes. But if you didn’t think it would happen, why would you hold all that Nvidia stock anyway?
A call option is like a down payment on the stock. If the music stops and the stock goes down, the most you can lose is your down payment of $50 or $100, rather than the full $460 you currently have invested in the stock.
