What If You Actually Had Invested in the “Magnificent 7"?
That is, if you had gotten in at square one.
I am no different from you. When I am bored, my mind will wander into flights of fantasy – the great “What if?” scenarios we conjure that we always optimize with perfect time, location, and performance.
Investors are as susceptible to these flights of perfected fantasy as anyone. And why not? Most of us have read a compliment of articles whose titles titillate with either the verbatim wording or a similar riff on “Had You… or What If…” and then give you the particular scenario or the stock – with it all optimized, of course – and then proceed to regale you on how high the cotton you would be sitting atop today “Had You….”
And because I’m bored and my mind seeks a fantastical diversion, let’s imagine you are the most prescient investor of the day and you focused your prescience on the Magnificent 7 we all know and worship: Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta Platforms.
Though Magnificent 7 is another contrived coinage of recent minting (actually, a hackneyed re-striking of an old minting), you could have assembled your Magnificent 7 portfolio in May 2012, the month and year Meta Platforms hit the public airways. And because you are the most prescient investor, you did just that. You allocated $10,000 (chump change to you, of course, but work with me) equally across the Magnificent 7 in May 2012. (Allocated with Meta Platforms absorbing the rounding error. After all, seven does not go easily into 100.) You then sat back and let the damn thing run.
Let’s delve into the obvious: How far has your Magnificent 7 portfolio outpaced its benchmarks – the NASDAQ 100 (with the Triple-Q ETF as the proxy) and the S&P 500 (with the SPY ETF as the proxy) over the past 12 years?
We know the Magnificent 7 are the largest constituent stocks of the NASDAQ 100 and the S&P 500, but jettisoning the stragglers and other flotsam sure goosed return. The Magnificent 7 portfolio’s terminal value is seven-and-a-half times larger than the NASDAQ 100’s terminal value and nearly 13 times the S&P 500’s terminal value.
Your portfolio has grown at a 41.5% CAGR compared to the 19.8% CAGR for the NASDAQ 100 and the 14.7% CAGR for the S&P 500.
Because we’re fantasizing, let’s assume you said, ”To hell with the Magnificent 7, I’m whittling it to the Supreme 1.” You have this strange vibe something big awaits this niche gaming-chip designer, so why let the other six hold you back? You go all in on Nvidia. Welcome to retirement, if you so wish.
Let’s ease our way back to reality. To own the Magnificent 7 stocks concurrently, even before they were so christened, resided within the realm of possibilities. You’ll find these stocks have resided among the top 10 in the more popular large-cap growth mutual funds for years.
Maximum drawdowns (peak-to-trough drops) infuse more reality. We’re all fortified with false bravado when markets are rising. We get lulled into a stupefying confidence and perceive risk as we perceive death, as some theoretical abstract that always afflicts the other person.
But market corrections and the accompanying drawdowns are real. Nvidia didn’t lose two-thirds of its value in 2022 due to panic buying. When we see everyone else heading for the exits, our nature implores us to join the queue. We’ll ask questions after we’ve exited the building.
We’ll continue our return to reality with a real-world (well, “realish-world”) actual stock portfolio – mine. I have a legacy portfolio of eight stocks – my Legacy 8 – I have owned for years. I would have never been so prescient to own a Magnificent 7 portfolio. I’m too much of a Luddite.
The portfolio comprises Exxon Mobil, Starbucks, CSX Corp., Paychex, Eaton, Ares Capital Corp., Qualcomm, and Oracle. I didn’t buy all eight as a group, but my initial investments in each are close to equivalent.
Let’s see how my portfolio stacks up to the Magnificent 7, assuming I went all in 2012. I’m sure we all know the answer, but let’s look anyway.
OK, so the Magnificent 7 is the equivalent of the Kenyan marathon runner who wraps it all up in two hours. My Legacy 8 is the equivalent of the 50-year-old weekend duffer shuffling across the finish line two-and-a-half hours after the Kenyan had received his congratulations and now sits in his Uber ride headed to the airport to catch the next flight to Nairobi.
That said, the Legacy 8 beat the S&P 500’s CAGR by 180 basis points over the past 12 years. It beat Berkshire Hathaway’s A-shares CAGR by 200 basis points (no kidding). A 16.5% CAGR is respectable for a portfolio composed of the antediluvian.
I suppose we’ve burnt enough time fantasizing about lottery tickets, so back to the real world we go building portfolios with stocks, ETFs, and mutual funds that offer us the potential to generate 10%-to-12% CAGR that enable us to endure real-world volatility and faith-shaking drawdowns.
DYR – Do Your Research. I have opinions, but I am not your personal investment advisor. Always remember the buck stops (and starts) with you. What works for me might not work for you.
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