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How to resist the magnetism of “The Magnificent Seven”

by | Behaviour, Investments

Regular followers of the performance of stocks around the world will undoubtedly have heard of The Magnificent Seven (Apple, Amazon, Google, Meta, Microsoft, NVIDIA and Tesla) or The Enormous Eight (add NETFLIX into the mix above).

For those who are unfamiliar with these sobriquets, here is the summary of what the buzz is all about.

Artificial intelligence

Few people had heard of Chat GPT before its launch at the end of November 2022. Artificial intelligence was more of a dream than a reality. The rise of Artificial Intelligence (AI) is one of the most talked-about topics in modern technology. From automated cars and home assistants to facial recognition and smartphone apps, AI is increasingly being positioned as being a resource used to make everyday tasks easier.

AI is also driving advances in research and development, health care, education, and many other industries. Its potential to revolutionize the way we live, work, learn and play has made AI one of the most exciting and promising technologies of our time. As AI continues to grow and evolve, it will open up new opportunities for people worldwide to do more with their lives.

Tech giants

And it is this excitement, and enormous possibilities, which have driven investors to channel significant capital to companies they believe will best benefit from the “AI Revolution”.

These companies – some of the biggest companies in the S&P500 Index of US-listed stocks, have seen their prices rocket in 2023.














On one hand, these seven stocks have singlehandedly lifted the benchmark S&P 500 and Nasdaq 100 to phenomenal year-to-date gains of 12.5% and 34.4% respectively, (to 22 September 2023). On the flip side, the equal-weighted S&P 500 is up by a mere 1% on a year-to-date basis, suggesting that the rest of the stocks are not doing very well.

The Magnificent Seven make up a large portion of the market-weighted S&P 500, constituting 29.4% of the index’s total market cap (at 22 September 2023). This is a massive concentration as nearly a third of investors in that index are exposed to just 7 counters.

Touch something hot and you will probably burn your fingers

It’s human nature to want to get involved with things that are doing well, and many investors may be lured by the attraction of finding ways to invest in the Magnificent Seven. These investors will typically pin their future expectations on an extrapolation of past performance. This approach is fraught with difficulty and danger!

Think about it this way: consider an investment in NVIDIA, the US-based company which holds about 90% of the share for AI-driven graphics processing units used in high-computer data centres. At the start of 2023, it would have cost you about $143.15 to buy a share. At the end of August (just eight months later), you would have had to pay $493.55 (245% more). Assuming the same growth over the next 8 months would mean that the share price would need to rise to over $1,209. At the end of September, the share was trading at $434.99 (down 12% from its high the month before).

Themes and schemes

The perpetual appeal of thematic investing should seem somewhat puzzling given their track record of delivering disappointing returns to investors (and sometimes worse). Yet from a behavioural angle, it makes complete sense. Their composition exploits some of our most damaging psychological traits. No matter how many flavour-of-the-month funds fail, there will always be a new story to sell.

People longing to believe a compelling narrative that draws a comforting line between cause and effect is an inescapably human trait.  Thematic funds prey on our desire for clarity by making everything easy. Something significant is happening in the world (usually some seismic and profound change) and we can profit by investing in it.

Thematic strategies are built on three core components that form a (for a time) virtuous circle: strong performance, a convincing story and social proof. Each element feeds the next inflating a form of micro-bubble.

At some point, this circle of virtue (or profit) will turn vicious when each element will damage rather than support the next as the hype fades or shatters. In most circumstances we can be confident that this will happen, we just don’t know when.

Keep a lid on your FOMO

The Fear of Missing Out (FOMO) is a natural characteristic we all possess. Fear is an incredible motivator and hard to suppress.

Our advice to investors (and what we practice with our clients) is to ensure that you take a long-term view to preserve and grow your capital and to focus on diversification (avoiding excessive concentration) to reduce risks.

Whilst many of our clients will have had SOME exposure to the Magnificent Seven, putting too many eggs in that basket just doesn’t make sense.


If you like Podcasts, check out this on the Magnificent Seven from Allan Gray.

If you would like to read more about the perils of Thematic Investing, you may like to check out this by Joe Wiggins.