Here We Go Again
In our “Just do Something” series, we have written about several companies that experienced a substantial run-up following March 2020, only to see their prices drop dramatically in 2022 with some continuing into 2023.
Today, we want to focus on Nvidia (NVDA) which is now the 4th largest holding in the S&P 500 at 1.95%. It has seen a substantial runup beginning in late 2022 and into 2023.
Nvidia (NVDA) is an American technology company. It designs, manufactures, and sells graphic processors and related software. The company is credited with inventing the graphics processing unit (GPU) that is used in computers and other electronics. Its products have powered a variety of computer devices. It has even moved into newer technologies, including artificial intelligence (AI) and virtual reality. Investopedia
On October 14, 2022, NVDA closed at $112.27 and “Risk-Off” issued a 100% Buy rating on the same day. NVDA closed March 23, 2023 at $271.91 up 142% in 6 months (up 280% annualized). Clearly NVDA was “firing on all cylinders”. The question is whether this growth is sustainable or should investors reap some of their paper profits?
At first glance, selling any of the stock would have led to underperformance because executing on DynaLogic’s sell signals results in raising cash while the stock was moving higher and missing out on some gains. However, we like to say that, “The DynaLogic sell signals are preparing you for the future”.
We saw this movie once before with NVDA. On 3/16/2020, NVDA closed at $49.00. On 11/29/21, NVDA closed at $333.66, up 581% over that time period. Selling any shares during that runup would have resulted in underperformance. However, what happened next justified those sells. By 10/14/2022, NDVA had dropped to $112.27, down 66% from its peak.
Let’s look at both scenarios in more detail.
Scenario 1- Buy & Hold
Invest $100,000 in NVDA at $49 on 3/16/2020. With a buy and hold strategy, NVDA is worth $203,204 on 10/14/2022 after factoring in unrealized capital gains tax.
Scenario 2 - Follow DynaLogic’s Sell Signals
Invest $100,000 in NVDA at $49/share on 3/16/2020. Execute sell signals and with after-tax proceeds of $120,411, buy SPY (S&P 500 ETF). The remaining NVDA shares are worth $117,812 after applicable unrealized capital gains tax. SPY is worth $147,597 after applicable unrealized capital gains for a total value of $265,409. That’s a 30.6% improvement over the buy and hold strategy.
Even if you hadn’t reinvested the sale proceeds in SPY, you would still be up vs the buy and hold strategy. Additionally, instead of still holding 100% NVDA and being exposed to the greater volatility of an individual stock, you would own 44% NVDA and 56% S&P 500, and would have experienced a much more enjoyable emotional ride.
We have continually espoused using concentrated investing to create wealth and diversified investing to preserve wealth. DynaLogic helps you own individual stocks (and their greater upside) with confidence, while helping you minimize risk and manage emotions to achieve better outcomes.
Today, NVDA is one of the darlings on Wall Street. As we said earlier, it is up 142% in 6 months. Maybe its time to “Just do something” by taking some chips off the table.
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