The wise second-in-command to Warren Buffett at Berkshire Hathaway, Charlie Munger — who died this week aged 99 — was a pioneer in blending investment and psychology. He warned about a “Lollapalooza effect”: the tendency for emotions and cognitive biases to reinforce each other and drive herd mentality. As stockpickers mull their strategies for 2024, many are wondering how much of this year’s buying frenzy over the so-called Magnificent Seven stocks — Apple, Alphabet, Microsoft, Amazon, Meta, Tesla, and Nvidia — is indeed mass hysteria, or actually grounded in reality.
Soaring interest rates were expected to subdue equity markets in 2023, but America’s S&P 500 has posted a 20 per cent total return so far. The rise, however, has been overwhelmingly driven by the seven tech giants. They account for 29 per cent of the stock index by market capitalisation — the highest for the seven largest listed corporations since at least 1980 — and have collectively returned a staggering 72 per cent. Hedge funds seeking to raise their long exposure to frontier technology, particularly generative artificial intelligence, have played a key role in pushing up their valuations. Exclude the Magnificent Seven and an “S&P 493” would have returned only 8 per cent, according to Goldman Sachs’s latest calculations.