“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. “
– Mark Twain
It is Monday January 01/27/2025 at 7:30AM. Nvidia, currently the largest company in Nasdaq and the S&P 500, is set to be down nearly 15% at the open taking many of the major indexes down with them.
On Friday and over the weekend, Austin and I opined on the news of a Chinese entity called “Deep Seek”, the supposed breakthrough AI model that appears to have dramatically surpassed the capabilities of other AI models and may dramatically reduce the required processing capabilities needed to operate the large language models within the Artificial Intelligence emerging technologies. While we thought it might have some impact, given Nvidia’s apparent lofty valuation and prospects, I do not think either of us imagined it would threaten to remove nearly ½ of a trillion dollars off the market valuation of the stock and perhaps multiple trillions of dollars across the major US indexes.
This is behavior in motion and is absolutely fascinating to the “student of the market” in me. I often opine that the market is both efficient and inefficient at the same time. At any given moment there are countless individuals and trading systems making buy decisions as well as sell decisions. Many of these buys and sell decisions are well researched and knowledge based, while many others are unsophisticated gut reactions based on fear and greed or some crystal ball indicator that perhaps worked during a rhyming economic backdrop; one time in a row does not indicate a trend. The “market” is nothing but a heartless, soulless and immediate indicator of these sentiments. This morning, for the moment at least, it has found a reason to sell.
Over the long run, this combination of human intelligence and animal spirits creates an efficient marketplace. It is the combination of these two things that value of assets is decided. When it comes to investing, we all like to think that we have the qualities of Mr. Spock, the Start Trek Vulcan known for always being scientific and rational, but most of us are much more like Homer Simpson, compulsive and reactionary, most affected by what lies directly in front of us with a perception of an immediate threat.
It will be interesting to see how this washes out. As I am writing this, I am witnessing the above play out. A company that many opine deserves to be priced for perfection, may not be perfect after all. Rhyming with the turn of the century dot.com bubble when it was believed that Cisco Systems would change the world and was priced accordingly. Well…Cisco did change the world, and a quarter century later the shares are still trading 30% lower than that period. I certainly am not making a call on an individual stock; I am simply illustrating how the behavioral animal spirits of the markets can change quickly, and market leadership always proves to be ephemeral over the long run.
- Dave
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