Possible contra-indicator for Nvidia; Reader feedback on Vanguard versus Fidelity
1) When a company with a hot, richly valued stock like Nvidia (NVDA) shows up on 60 Minutes, I start to get a bit wary...
The chipmaker has been one of the popular stocks in the media and the market in recent years.
In fact, Nvidia is up a staggering 1,291% since I pounded the table on it to subscribers of my former newsletter Empire Stock Investor on February 5, 2020, back at my former firm Empire Financial Research. Take a look at the incredible move higher since then...
And last night, 60 Minutes profiled the company and its CEO, Jensen Huang: Meet Nvidia CEO Jensen Huang, the man behind the $2 trillion company powering today's artificial intelligence. Excerpt:
Only four companies in the world are worth more than $2 trillion: Microsoft, Apple, Alphabet – parent company of Google – and computer chip maker Nvidia.
The California-based company saw its stock market value soar from $1 trillion to $2 trillion in just eight months this past year, fueled by the insatiable demand for its cutting-edge technology – the hardware and software that make today's artificial intelligence possible. We wondered how a company founded in 1993 to improve video game graphics turned into a titan of 21st century AI. So, we went to Silicon Valley to meet Nvidia's 61 year-old co-founder and CEO Jensen Huang, who has no doubt AI is about to change everything.
At Nvidia's annual developers conference this past March, the mood wasn't just upbeat... it was downright giddy. More than 11,000 enthusiasts – software developers, tech moguls, and happy shareholders – filed into San Jose's pro hockey arena to kick off a four-day AI extravaganza. They came to see this man: Jensen Huang, CEO of Nvidia.
The segment explored how artificial intelligence is revolutionizing moviemaking, drug development, and robotics... and it covered the inspiring story of how Jensen and two co-founders decided to launch Nvidia 31 years ago in a Denny's where Jensen once worked as a dishwasher.
Nvidia is an incredible company that appears poised to ride the AI boom for years to come. But the question is: How much of this is built into the stock – which is trading at 35 times trailing revenues and 74 times trailing earnings?
Those are nosebleed numbers, but they'll shrink quickly if Nvidia can keep growing anywhere close to what it has been. In its most recent quarter, reported on February 21, revenue soared 265% year over year and adjusted net income rocketed up a mind-boggling 491%.
Countless studies show that buying the most richly valued stocks is a terrible investment strategy, as is chasing the most popular stocks – like the ones profiled on 60 Minutes.
That said, when 60 Minutes aired its interview with Tesla (TSLA) CEO Elon Musk on December 9, 2018, the stock was at $23.86 per share... So anyone who bought it then would be sitting on a massive 605% gain. Keep in mind, however, that Tesla only had a $78 billion market cap at the time versus Nvidia at $2.2 trillion today...
An old-school value guy like me wouldn't be buying the stock today.
But I have a different view for those who own it and are sitting on big gains (as most shareholders are). I'll repeat what I said in my February 23 e-mail because the lessons are so important...
Throughout my career, I've had a few of these "10-baggers in just a few years" – like Apple (AAPL) and Amazon (AMZN) at the turn of the century and Netflix (NFLX) in October 2012. And in every case, I sold too much, too soon.
As I've written many times, the key to long-term investment success isn't just being smart – and lucky – enough to own a few huge winners. You have to let your winners run.
There are a handful of reasons why the S&P 500 Index beats nearly all active managers over time – but the single biggest is that it never sells its winners.
After Nvidia, Apple, Amazon, Netflix, Microsoft (MSFT), etc. doubled, it didn't sell.
And it didn't sell after these stocks went up 10 TIMES.
Nor 20 times, nor 50 times, nor even 100 times!
Index funds, with their passive approach to investing, let their winners run and run and run...
If you look at the math behind long-term investment success, take any portfolio of 20 stocks or more, and you'll find that it's not generally driven by a high batting average (e.g., 80% of the stocks go up), but rather a high slugging percentage (a few huge winners).
But this math, of course, doesn't work if you sell those winners – thereby cutting off the long right tail of the distribution.
And as I continued, when it came to Nvidia (and other monster performers):
As an investor, you could maybe sell 10% if it has become such an oversized position that it's disrupting your sleep at night. And maybe put in stop losses to protect half of your gains – for example, sell 10% if the stock drops 10%, another 10% if it falls another 10%, etc.
There's no "right" answer here – this is more art than science.
But don't make the mistake of taking all your gains just because a stock doubles. Like I said... You have to let your winners run.
2) I've gotten more reader feedback than anything I've ever written on my e-mail series on how Charles Schwab (SCHW) was "screwing me over" on the interest it was paying me on my cash in my brokerage account...
As I explained, the situation prompted me to move my accounts from Schwab to Fidelity.
On April 19, I also shared some of the most insightful comments from readers about brokers and accounts. And today, I'll share a few more in which readers discussed a particular Fidelity money-market fund for taxable accounts and compared Fidelity and Vanguard...
As Jon Z. writes:
The default option at Fidelity, the Fidelity Government Money Market Fund (SPAXX) is fine for your retirement accounts. But for your taxable account, you should use the Fidelity Treasury Only Money Market Fund (FDLXX) which will produce income exempt from state and local taxes and pays roughly the same, currently 4.94%. (SPAXX also owns government agencies and repos, which means 59% of the interest earned in 2023 (and 100% in New York, California, and Connecticut) – it will vary somewhat by year – was state and local taxable).
Unfortunately, Fidelity doesn't make it easy. You can't make FDLXX your "core" cash position, so your cash will sweep automatically to SPAXX. This means you have to enter buy orders for FDLXX. On the plus side, SPAXX will liquidate automatically to pay for your buy of FDLXX, and FDLXX will liquidate automatically if you buy securities, write a check, use the Fidelity debit card, or use the online billpay.
This recent article, Which Fidelity Money Market Fund Is the Best at Your Tax Rates, highlights other Fidelity alternatives that high-income residents of high-tax states might want to consider:
Fidelity offers tax-exempt money market funds specifically for investors in higher tax brackets in California, Massachusetts, New Jersey, and New York. These funds invest in high-quality, short-term municipal securities issued by entities within the state. Income from these funds is tax-exempt from both the federal income tax and the state income tax. They're sometimes called "double tax-free" funds.
The yield on these single state tax-exempt money market funds is lower than the yield on the seven taxable money market funds but the federal and state tax exemption makes up for it when you're in a high tax bracket.
Meanwhile, Lloyd V. explains why he switched from Vanguard to Fidelity:
You made a good choice with Fidelity. They pay very competitive rates on their money market fund, so no worries about idle funds. They also have top-notch customer service.
I had accounts at Vanguard for many years. They also have great customer service, but they do not cater to active investors.
In 2020 I began more active investing, including options. At that time Vanguard did not have a mechanism to do [multi-leg] options trading. You had to book both sides separately and hope you could achieve the net debit or credit you were looking for.
They also did not allow buying leveraged [exchange-traded funds ("ETFs")], such as UGL, UPRO, etc. (I do not know if this is still the policy).
So I moved all my accounts to Fidelity, which also makes it easier to buy foreign stocks and fixed income securities. They have Active Trader Pro and other great tools to facilitate investing. I now manage 15 portfolios for myself and family members. Fidelity makes my life easier.
And Mark R. adds that Fidelity has bitcoin ETFs, while Vanguard has taken a stand against this (see this Los Angeles Times article: Vanguard, one of our top investment firms, shuns crypto 'like the plague.' That's good for its customers):
Welcome to Fidelity. As we all evolve and continue to learn, you may not realize an additional benefit to having moved your accounts all to Fidelity. I know your position on Bitcoin. Porter Stansberry had a similar position in the past and thinks differently today. When I went down the Bitcoin rabbit hole in 2017, I purchased positions in Bitcoin, Ethereum, and Ripple. I still hold those positions today in an [individual retirement account ("IRA")]. In 2020, I began to make additional purchases of Bitcoin only. With the rise of Bitcoin since 2017, the position has become sizable.
The reason that Fidelity is a good choice in brokerage accounts is that with the 10 new Bitcoin ETFs, the only one I have and will ever purchase is the Fidelity Wise Origin Bitcoin Fund (FBTC). Why? Two reasons. The first is that Fidelity has been involved in the Bitcoin market for years and has a thorough understanding of the asset. The second is that FBTC is the only Bitcoin ETF that purchases Bitcoin on the available exchanges but is the only one to move their Bitcoin from the exchange into cold storage. They will not suffer fools like those who invested on the FTX exchange!
Here's a Wall Street Journal article from last month with more on this: Best Bitcoin ETFs.
Lastly, Dave A. highlights that his bank, Capital One Financial (COF), did the right thing:
As rates crept up, Capital One reached out to me, informing me that if I changed the type of savings account I had it would earn me 4-5% compared with the under 1% I was earning in another account. It was easy to move the cash and well worth it.
It makes me wonder what would happen if enough people responded as you did, what type of impact would that have at big companies like Schwab, Wells Fargo (WFC), or Citigroup (C), etc.
Thank you to all of my readers who took the time to share their thoughts!
Based on everything I've read, I don't see a clear winner between Vanguard and Fidelity. Vanguard might have the edge if you're a long-term, buy-and-hold investor who wants low fees and the highest interest rate on your cash (5.29% currently versus 4.96% at Fidelity).
But if you want a higher level of service, are trading a lot, and/or want to buy things like options and bitcoin (all bad ideas for most investors, in my opinion!), then Fidelity might get the nod.
(As a reminder, remember that we here at Stansberry Research do not recommend or endorse any brokers, dealers, or investment advisors. We aren't affiliated with any brokerage and don't receive any compensation for mentioning a particular broker. As I've done in past e-mails, I'm sharing my personal experiences and those of my readers.)
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.