Why Nvidia's Boom Isn’t a Missed Opportunity (EP.142)

0:29We all need to make smart decisions with our money. that NVIDIA, a chip maker that has become synonymous with the AI revolution, became just the third company to reach a$2 trillion market capitalization. The first two companies being Apple and Microsoft. And it's wild. I mean, just 12 months ago, NVIDIA shares traded at just under$239. And as of this recording, it sits at$853 per share. But here's the question that's probably gnawing at the minds of many investors out there. If the AI boom was so clearly on the horizon, why didn't more of us see NVIDIA's potential sooner? Why did so many of us overlook the signs that NVIDIA was a key player in the future of AI?

1:17In this episode, I'll delve into the heart of NVIDIA's recent surge and why it's not the missed opportunity it might seem. Let's start the conversation quickly explaining what it is that NVIDIA Corporation actually does. As I mentioned, NVIDIA is a chip maker, but it's not the type of chip maker most people think about. When most people think about computer chips, they're usually thinking about central processing units, or CPUs, which act as the brain of a computer performing a variety of tasks needed to operate the computer, such as running your operating system or browsing the internet. CPUs are incredibly versatile, which makes them capable of handling a wide range of computing tasks, but they mostly work in a sequential manner, executing one instruction at a time.

2:07NVIDIA specializes in a different type of chip, known as a graphics processing unit, or GPU. Originally, GPUs were designed to render images and graphics for video games, which requires processing a huge volume of simple, repetitive tasks simultaneously. Unlike the CPU, a GPU is made up of thousands of smaller, efficient cores designed for multitasking at a lower level, making it exceptionally good at processing many parallel tasks at the same time. The GPU cores are like having thousands of workers who each do a small, specific task quickly, whereas the CPU cores are like having a few highly skilled workers who can do a wide range of tasks one at a time.

2:53What's powered NVIDIA's meteoric rise is their ability to harness the parallel processing power of GPUs, not just for gaming, but for a broad array of complex tasks, allowing it to become a pivotal player across several high-growth markets, such as artificial intelligence, data centers, autonomous vehicles, and professional visualization. Hearing this description, you're probably thinking, of course NVIDIA will be a prime beneficiary of these secular trends. When I was a stock analyst at the beginning of my career, one of the things that I quickly learned was that the massive success stories seem incredibly obvious after the fact.

3:34And anyone who's invested in individual stocks has almost certainly uttered the words, I said it would happen. It had to happen. I knew it would happen. Investor or not, probably everyone has made statements like these at one point or another. And that's because once an event occurs, our brains immediately connect the new information from what happened to related knowledge stored in our memory. And by making those connections, the facts we store in our brains strengthen one another. The more we see things fitting together into a cohesive narrative, the more we feel as if we knew it all along. And the more time that passes, the more difficult it is to accurately recall the way an uncertain situation seemed to us at the time it was actually happening.

4:21We forget what information was available at the time of the event, as well as our own initial reasoning in support of or against any particular decision. What I'm describing here is what's known as hindsight bias, which is the tendency to exaggerate what could have been known in advance. And as you can imagine, hindsight bias can cause problems and mistakes when we need to evaluate investment decisions. You're not going to be able to stop your brain from working the way it does. I mean, remember, there's really good evolutionary reasons to things like hindsight bias, but there are some practical ways to prevent it from hindering your decision-making ability in the modern world.

5:02For example, you can keep track of past decisions and reasoning. Writing out your predictions, your forecasts, your investment ideas can create a valuable source of objective feedback. Because when you review these past decisions, both good or bad, or a decision to take action or inaction, it improves the quality of our decision-making feedback and reduces the chance of repeating past mistakes. You can also think probabilistically because thinking probabilistically allows us to make rational decisions in the face of an inherently unknown future. But because the future is unknowable, assigning probabilities to potential outcomes allows us to make the best decisions we can given what we know and what we don't know.

5:46Then you can look back at those probabilities you've assigned to the potential range of outcomes at the time of the decisions. And it can reveal whether you acted appropriately based on what you knew at the time. Now, in the case of NVIDIA, both of these things, the keeping track of past decisions, the thinking probabilistically, those are pretty hard to do after the fact. But what you could do right now after knowing an outcome is talk about the outcomes that didn't happen but easily could have. because this helps prevent your natural tendency to throw out information that doesn't fit with your narrative.

6:21And as a result, you can gain a more nuanced perspective of any particular chain of events. The other thing I think you can do right now and is a good practice overall continually along with that keeping track of past decisions, thinking probabilistically, discussing what could have happened is that you just try to inoculate yourself from regret because there is this very close relationship between hindsight and regret. And beating yourself up for not buying a winning investment or for not knowing when you should have cashed in before an investment turns into a loser are probably the two most common ways I see this play out for investors.

6:59And when you understand how regret works, I think that can help as well because we often feel regret when we can clearly envision the alternative paths we didn't take and decide that those paths would have been better than the one we ultimately chose. And it's particularly easy to see these alternatives after the fact when you're an investor, because winning investments like NVIDIA always find their way to the center of attention. They're the subject of financial news segments, social media posts, and even conversations with friends or coworkers, family. The other thing about investing is that it's highly quantifiable, which can lead us to believe that there is always an objectively optimal decision out there.

7:41And if we just spend enough time thinking or researching or looking, we could find it. And if there's an optimal choice, there's also a wrong one in our mind. The problem with this mindset is that when you know that something can go wrong, it leads a lot of investors to put so much pressure on themselves to get it right. Getting it right is largely an illusion, of course, because there's no perfect portfolio. we can't know in advance what investments will win over any given time period. So if we kick ourselves for missing an obvious opportunity, it's probably because we've conveniently forgotten it was only obvious after the fact.

8:24Here is the good news. If you're broadly diversified and own something like a total U.S. stock market index, you actually did own and benefit from NVIDIA's gravity-defying rise. Now, it's common that proponents of diversification, including myself, will often highlight the benefits of diversification such as preventing a catastrophic loss in one investment that materially impacts your overall portfolio. But the other, less talked about benefit of broad diversification, particularly when you own the entire market, is that you effectively guarantee that you won't miss out on the winners. If you're holding a total U.S.

9:07stock market index fund right now, you have a 3 % weight in NVIDIA. And if you're globally diversified, as I think you should be, then a market cap weighted index approach still leaves you with about a 2 % weighting in that company. In both circumstances, that is not an insignificant weight and leaves you well positioned to benefit should NVIDIA's outsized gains continue. Look, most people would agree that a 2 % to 3 % position in any one stock would represent a pretty decent-sized bet. And I realize not every listener has the same portfolio. But the average investor owns the market portfolio, so the average portfolio has a 2 % to 3 % weighting in NVIDIA going forward.

9:52And sure, the average investor's position wasn't that size 12 months ago when NVIDIA's share price was about 3.5 times lower. But to go out today and add to such a large position would just be so aggressive. And owning individual stocks, regardless of the company, is a lot riskier than most people realize. I have a number of resources on this insight that I'll share in the show notes at the long-term investor.com. I routinely find myself repeating these same statistics over and over and over just about how individual stocks are so much riskier than you think. And it's not really only that, but picking winners is so difficult that even professional investors whose explicit objective is to do that consistently fail to meet their objectives.

10:43I think it's important to remember that when you boil it down to its simplest first principle level, the purpose of investing is to grow your wealth at a rate that is greater than inflation without taking undue risk. And when you learn enough about how markets work and the implications of the stock market being a complex adaptive system, it is all but impossible to see buying individual stocks as something that doesn't fall into that bucket of undue risk. And when it comes to growing your wealth at a rate greater than inflation, remember that inflation in the U.S. has historically averaged 3%.

11:23Meanwhile, owning the entire stock market has averaged a long-term return that is roughly 7 % above that rate of inflation. And isn't that enough? There really shouldn't be a portfolio that exists without a financial plan at its foundation, but there also shouldn't be a financial plan requiring you to find investments that earn a rate of return materially higher than the long-term real return, which is in this case 7%. It's really boring advice. So boring that it's easy to understand why newspapers don't plaster that on the front page every day. But good investing is boring. And good investing is mostly about minimizing mistakes.

12:07When you saw the headlines about NVIDIA, or maybe you didn't see them and this is the first you're hearing of it, you might feel like you missed out on huge gains. But if you were a diversified investor, first of all, you probably didn't miss out because you had some exposure. And second, you got that exposure by minimizing the chances of making an unnecessary mistake. That's all I have for today. If you found this episode useful, please rate and comment on the episode in your podcast app. It just makes it so much easier for others to discover not just the episode, but the overall show so that they can follow along in the future.

12:46As always, thanks for listening. And until next time, to long-term investing. Thanks for listening to the Long-Term Investor Podcast. To access free financial resources and submit questions to be answered on the show, visit thelongterminvestor.com. Peter Lazaroff is an employee of PlanCorp and BrightPlan. All opinions expressed by Peter and any podcast guests are solely their own opinions and do not reflect the opinions of PlanCorp or BrightPlan. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of PlanCorp and BrightPlan may maintain positions in the securities discussed in this podcast.