Nvidia, the current tech darling, has had a historic run and is now one of the best performing large cap stocks of all-time – up almost 400% over the last three years (see chart below, the green line at the top)! This tech company, in the old days simply known for its high-performance graphics cards for gaming and video, found itself in an almost amazing business situation. Perhaps serendipitously, Nvidia found itself with a chip architecture and design that made it perfectly suited for a multitude of new applications other than gaming!
The new applications started with crypto and crypto mining… then, it migrated to self-driving cars, other devices and robotics needing video recognition. And now, the beginning of the AI revolution finds Nvidia with another large product niche that makes its chips highly in demand.
Combine this product demand with the very scalable manufacturing process of computer chips and you come up with drivers of both top line and bottom line growth. Sort of analogous to a drug maker who finds out that its one drug cures not only headaches, but many other maladies – all while production is hugely scalable!!
If the bottom up and top down drivers of stock return are so bullish, why didn’t D&A buy it for its clients? It is all about portfolio management and risk management!
D&A is philosophically committed to a globally-diversified risk-managed approach to portfolio management. This approach precludes buying specific stocks that could expose portfolios to overweighted positions that could have an idiosyncratic risk profile, i.e., stock-specific risk. For example, we are aware that Nvidia had a tough year in 2022 when it was actually DOWN -50%, but it recovered nicely in 2023 with an astounding +239% annual return. Also, year-to-date in 2024 Nvidia has added another +46% return! So lots of downside risk, but we have seen lots of upside risk, too!
D&A does believe that Nvidia should be a part of most investor portfolios, but only in a weighting that is consistent with a client’s risk profile and the broad indices that we follow. For example, since Nvidia makes up 4% of the S&P 500, a client with a 30% allocation to the S&P 500 (IVV) would have a 1.2% allocation to Nvidia. Additionally, since D&A believes in the momentum factor and invests in the iShares Momentum Factor ETF (MTUM) for some client accounts with a moderate/aggressive risk profile, since Nvidia stock makes up 6% of that ETF, a client with a 5% allocation to the MTUM ETF gains another 0.3% allocation to Nvidia.
So, most all D&A clients own Nvidia as part of the ETFs that we buy for client accounts; but only in an allocation that is consistent with the client risk profile.