Image Source: Pixabay

Speaking of market extremes…

The numbers on market concentration right now are nothing short of eye-watering.

The “Magnificent 7” stocks now command a record 38% of the S&P 500’s market capitalization (h/t @KobeissiLetter). This means almost 40 cents of every index dollar is chasing just seven names.

Nvidia (NVDA) alone recently ballooned to more than 8% of the entire index. Meanwhile, the median S&P 500 stock is down 16% from its highs.

It’s egregious, but it’s also not unique. In the late 1960s-1970s, General Motors was the Nvidia of its time…

Back then, GM commanded a similar, massive slice of the S&P 500 pie. Fast forward to today and GM is #167 in the S&P 500.

So the lesson isn’t that Nvidia will fail. Rather, it’s that concentration itself is brittle. It masks underlying weakness, especially when the majority of the S&P 500 is simultaneously losing steam.

The fact that “Big Tech is all that matters” right now is precisely why it won’t be all that matters forever.

Rather than fighting to find opportunities in an increasingly crowded space, we think the smarter idea is to look where few investors are: the beaten-down companies (often outside the S&P 500) that are cheap, completely ignored, and — unlike Nvidia — offer asymmetric payoff potential.

DOUBLING DOWN ON DIPPERS?

While on the topic of straying away from concentrated bets…

An Insider member recently asked whether it makes sense to deploy fresh capital into a position that is underperforming and trading lower than our entry price?

The short answer is an emphatic “No”.

The temptation to “buy lower” and average down might feel smart for a moment, but here’s the reality…

The market has a nasty habit of letting bad things get worse. The graveyard of “doubling down” strategies is full of investors who mistook a cash incinerator for a screaming bargain (and we certainly have our fair share of scars to attest to that, too).

We like to look at these decisions through the lens of opportunity cost and conviction…

When you put more cash into an underperformer, you are effectively saying, “This is the absolute best possible home for my next dollar.”

But is it?

You have an entire book of high-quality ideas to choose from. Why commit more precious capital to the one single position that is actively fighting you?

This is the exact reason we obsess over position sizing…

By allocating a modest chunk of capital to any individual stock, a big drop doesn’t sink your ship. It just becomes a manageable, contained mistake. Your capital is far better used in new, fresh ideas or scaling up existing winners that are already ripping higher.

Remember, the goal isn’t to be “right” on every single pick. The goal is to make money across the entire portfolio.

THE LOAN YOU PAY TO MAKE

Sometimes you just can’t help but marvel at the collective madness in the markets.

Over in Switzerland, our fondue-eating, Rolex-wearing friends are — once again — paying their government for the “privilege” of being saddled with more debt.

And here we foolishly thought we’d shelved this insanity in 2020 (along with other flavors of crazy from that era) when $18 trillion of negative yielding debt was swirling around the global financial system.

As someone remarked on the interwebs…

Imagine explaining to aliens that humans once paid to lend money.

MERCH SHIPPING DEADLINES

It’s that time of year again… If you love our merch, the Christmas deadline for US orders is December 11 (see here for other countries). HO HO HO!

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