In the US stock market, investors have been conditioned to hold onto their winners. The Magnificent Seven were so-named because most of them — both individually and collectively — have delivered consistently extraordinary returns for a decade or so. But when your Nvidia Corp. stake sextuples in just a year and a half, it’s probably worth taking some chips off the table, no matter how much you believe in the company’s story. Just ask billionaire Stanley Druckenmiller.
In Druckenmiller’s telling, he entered his Nvidia position in 2022 and expected to hold it for 2-3 years. He decided it was time to cut the stake in late March after the stock went from around $150 to over $900 a share. Here’s how the former George Soros money-manager put it in an interview on CNBC’s “Squawk Box” (emphasis mine):
"Long-term we’re as bullish on AI as we’ve ever been... If we were all sitting here in 1999 talking about the Internet, or anybody was talking about it, I don’t think anybody would’ve estimated it would be as big as it got in 20 years. We didn’t have the iPhone, we didn’t have Uber, we didn’t have Facebook, yada yada. And yet if you bought the Nasdaq in ’99, it went down 80% before that all came to fruition. That’s not going to happen with AI, but it could rhyme. AI could rhyme with the Internet. As we go through all this capital spending we need to do, the payoff while it’s incrementally coming in by the day, the big payoff might be 4-5 years from now. So AI might be a little overhyped now but underhyped long term."
Yes, yes and yes!
Selling shares of a market juggernaut is often prudent risk management. When a stock outperforms in dramatic fashion, it can end up occupying an unduly large portion of many portfolios. Rebalancing is just logical. It’s also healthy to let adrenaline levels normalize and ensure that our rational brains are still in charge.
Across the stock market, we’ve been seeing similar anecdotes from legendary investors and insiders. My Bloomberg News colleague Ben Stupples wrote this week that nearly a dozen executives and directors at Magnificent Seven firms sold shares, “earning more than $160 million since late 2023 after not cutting their stakes in as long as nine years.” Ben’s reporting highlighted recent sales from Alphabet Inc.’s Chief Executive Officer Sundar Pichai and Nvidia director Mark Perry, not to mention better-known transactions from Amazon.com Inc.’s Jeff Bezos and Meta Platforms Inc.’s Mark Zuckerberg. Apple Inc. Chairman Arthur Levinson filed in February for his biggest sale in more than two decades.
Warren Buffett — who famously likes to hold onto positions for decades — has been trimming exposure to Apple as well. At the Berkshire Hathaway Inc. annual meeting last weekend, he made clear that he still thought it was a wonderful company and that it would probably remain his largest investment. But he suggested that a confluence of factors made the sale sensible, including his concern that the federal deficit may lead to higher capital gains taxes on sales realized in the future. Here’s Buffett:
"I don’t mind at all, under current conditions, building the cash position. I think when I look at the alternative of what’s available in the equity markets and I look at the composition of what’s going on in the world, we find it quite attractive."
It’s tempting to see these developments ominously, particularly the moves by insiders. Across decades of research, University of Michigan Ross School of Business finance professor H. Nejat Seyhun has made the case that investors can, in fact, take signal from insider transactions. Speaking by phone on Thursday, he told me his research has unearthed one of the few market anomalies that’s stood the test of time, in a landscape in which most people remain convinced that you generally can’t beat the market. While investors tend to focus on insider activity in a single stock, his research suggests that the transactions on the whole can also be predictive of aggregate returns across the market.
The informational value from insider sales can, of course, be confounded by executives’ personal desire for liquidity and portfolio diversification, and it’s important to always look at the broad context. While insider selling picked up meaningfully earlier in the year, it seems to be trending in a less concerning direction lately, according to an index published by Insider Sentiment Dashboard, which is based on Seyhun’s research and which he collaborated on. “I thought, ‘this is horrendous,” Seyhun said of the earlier uptick in selling, noting that the signal was as strong as it had been since 2021. “But it recovered at the end of April.”
As for the Druckenmiller comments, I tend to agree about the potential of artificial intelligence: it’s an exciting development that probably brings tons of long-term potential, but it may well be a bumpy ride to mass adoption and, ultimately, profitability.
It’s also hard to know if the early winners (the “picks and shovels” firms like Nvidia) will necessarily prove the best ways to profit from it in the long run. Cisco Systems Inc. is remembered as one of the hottest early plays on the Internet, but it still trades below its March 2000 peak some 24 years later.
For most of us, that probably just means we have to stay invested in diversified portfolios that capture the upside wherever it may emerge. The best investors know what they don’t know, and they know when it’s best not to push their luck. I wouldn’t be surprised if some more lucky winners of the Nvidia sweepstakes start to cash in a few chips as well, but that’s not necessarily a sign that the end of the AI boom is nigh.
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