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Managing investments has three principal parts: deciding which\u00a0to own,\u00a0which to ditch and \u2014 crucially \u2014 implementing those decisions.<\/p>\n
Over the years I have heard too many tales of woe from investors who had decided what to do but\u00a0had not got around to\u00a0doing it until it was too late.\u00a0<\/p>\n
Many global equity investors will be sitting on decent gains from the rise of the so-called Magnificent Seven stocks. In dollar terms the MSCI All World Index is up over 15 per cent annually\u00a0over three years. A former colleague used to say that when investors get rich they often think they have become more intelligent.\u00a0<\/p>\n
If they are intelligent, they will be looking nervously at those gains and asking if now is one of those moments to act. For me the best herald of danger is valuation.<\/p>\n
Those megacap Mag 7 companies that have driven so much of this growth now make up more than 20 per cent of global equity indices. It\u2019s worth examining which are flashing red on valuations.\u00a0<\/p>\n
The ratio of price to earnings is a crude measure that shows how many years\u2019 earnings it would take to pay for one share. By this measure, it would take nearly two centuries to pay for your Tesla shares.<\/p>\n
Earnings \u2014 or profits \u2014 can be understated if a company is investing heavily for growth,\u00a0building AI data centres, for example. Looking at the ratio of a company\u2019s share price to its sales gives you a sense of how much these revenues must grow to generate the earnings the share price merits when that capex is done. Few shares trade at more than five times sales for long. Nvidia shares would either have to fall a lot or their sales grow at this speed for many years to come to sustain this valuation.\u00a0<\/p>\n
Revenues are growing strongly in most,\u00a0but this growth appears to be slowing. AI might improve profitability for a company such as Microsoft \u2014 but only if its customers value it sufficiently to merit paying more.<\/p>\n
That is a gamble.\u00a0I am not surprised by recent research showing that 95 per cent of organisations get zero return<\/a>\u00a0from their investments in generative AI.\u00a0On the other hand, the application of AI to diagnostics and factory automation looks like it is raising productivity.<\/p>\n \u200bI would not own Nvidia, Tesla or Alphabet now. If I held Apple, I probably would hang on to it as it is not an AI stock and it\u2019s the AI hype I\u2019m trying to avoid.<\/p>\n Beyond these megacap stocks, not everything related to AI is expensive. Taiwan Semiconductor<\/a> still looks reasonable value, and we bought cyber security specialist Fortinet on its recent stumble. \u00a0<\/p>\n