The Magnificent Seven

There's an old expression about Wall Street prognosticators that goes: There's those that don't know and there's those that don't know that they don't know. I know I don't know after investing for close to forty years. You can make an educated guess as to where the market is going (and it's usually up about 75% of the time), but just stick with S&P  500 index funds and you'll double your money every seven years on average. During the current bull market, your investments went up close to 100% in S&P 500 index funds in just over four years. That's a great return.  Many investors are bearish on the market and have done poorly. As John Maynard Keynes so aptly put it, "The market can stay irrational longer than you can stay solvent." 

Back in 2013 the acronym FAANG entered the lexicon of equity investors. Originated by trader Bob Lang and popularized by CNBC's Jim Cramer, it epitomized the large cap growth stocks for more than a decade. FAANG stands for Facebook, Amazon, Apple, Netflix and Google. You'll note that the majority of these stocks are still leading the market except for Netflix. Although a great company, Netflix is no longer a growth stock. Times change. For the last few years, FAANG stocks have morphed into The Magnificent Seven, or Mag 7 as they're  called. The Mag 7 consists of Apple, Alphabet, Meta, Nvidia, Microsoft, Amazon and Tesla. Many of the stocks remain the same but their names have changed.  

Most of these corporate behemoths are going to be here for the foreseeable future, but not all are going to make it. Just look at Netflix. It was supposed to grow to the sky, but the stock price has been cut in half the last couple of years. They are no longer a Wall Street darling. An option for Netflix is to buy NFL and college football broadcasting rights to goose their subscriber base, but that's going to cost money.

Currently, the Mag 7 stocks are in an enviable position. We're in an AI race with China and breaking up these conglomerates would put us behind the eight ball with the PRC. The question remains, which one or which ones are going to fall by the wayside? Many investors thought Meta would remain severely depressed, but they recently released a personal AI agent called Muse which brought the company back into the competition. With over two billion Facebook users, Meta is a formidable opponent. In addition, Meta has Mark Zuckerberg as its CEO and entrepreneurial CEOs are usually a plus. 

Although Nvidia and Apple have outperformed the S&P 500 on a year-to-date basis, the remaining members of the Mag 7 have been laggards. Tesla has negative returns for the year. Elon Musk has stated that he may merge Tesla and SpaceX next year, creating an organization that you would read about in a dystopian science fiction novel, but that is months away. Plus, it will have to get approval from the SEC (Security and Exchange Commission). 

I'm not smart enough to pick the winners and don't invest directly in the Mag 7 stocks, but I still own them in my pedestrian S&P 500 index funds. They command a huge percentage of market cap weighted S&P funds and ETFs. Approximately 35% which is a huge concentration risk. I'm willing to take that chance because historically, only a handful of stocks are big gainers in the index. That said, if you examine the top American stocks going back 50 years, the top ten equities in the index tend to change from decade to decade. Investors seem to believe that the Mag 7 gravy train is going to go on forever. It's not. It never does.

It's been about twenty years since the digital oligopoly began its ascent. What began with modest means is now a cadre of CEOs worth trillions of dollars. The law of large numbers doesn't apply. At least not yet. Which company will become the next Kodak, Xerox, GE, Blockbuster Video or Borders Books? I don't know, that's above my pay grade, but some of them are going to fall. I hope I'm wrong, but history doesn't repeat itself, but often rhymes.