By the end of the week, roughly US$400-billion had been wiped out from Nvidia’s market value, which is larger than all but about 20 public companies on the planet.Jeff Chiu/The Associated Press
It’s never been easier to lose money on a stock.
These days, it’s fashionable for everyday investors to make bets on individual companies.
Online brokerages have made trading just as easy – and often with lower fees – as ordering takeout food. In popular investing forums on social-media platforms such as Reddit, the conversation revolves around stock picks.
But risk happens fast in single stocks. Just look at Nvidia Corp. NVDA-Q.
The computer chip giant had a very bad week. It started on Tuesday with the single worst day in stock market history, when measured by loss in market capitalization.
By the end of the week, roughly US$400-billion had been wiped out from Nvidia’s market value, which is larger than all but about 20 public companies on the planet. The loss is equivalent in size to the four biggest Canadian banks combined.
This isn’t a huge deal for Nvidia itself. The company is knocking it out of the park by any financial measure. And its stock has still more than doubled in price so far this year, even after the week’s 14-per-cent slide.
It’s a different story for shareholders. Nvidia is one of those stocks that was certain to lure in legions of retail investors. It has a great story, as the single greatest corporate beneficiary to date of the transformative force that is artificial intelligence. And the recent share price gains have been astronomical – more than 700 per cent in the 18 months up to the June peak.
By all accounts, retail investors have been increasingly eager to toss their money into the Nvidia vortex.
Trading platforms have regularly ranked the company as among the most popular among users. CIBC Investor’s Edge said it was the No. 1 most purchased stock on its platform in July.
And stock forums such as WallStreetBets have been full of regular investors bragging about how much money they’ve made on Nvidia.
Very few post about their bad stock picks. So, it’s easy for investing novices to get the impression from social media that picking winners is easy, said Lisa Kramer, a finance professor at the University of Toronto who specializes in behavioural economics.
“It’s common for investors, especially for relatively new investors, to feel overconfident about their ability to pick stocks and then to end up holding poorly diversified portfolios concentrated in single stocks,” she said.
The industry is in no rush to disabuse them of that belief. Trading apps have gamified the investing experience. Regular investors have ready access to riskier approaches, such as leverage and options contracts, designed to juice their bets on individual stock holdings.
The latest trend in the exchange-traded fund space is toward single-stock ETFs. In August, Harvest ETFs launched a suite of these funds in Canada, some of which employ leverage to amplify the daily moves of just one name, such as Nvidia.
A generation of younger investors emerged from the trading boom of the COVID-19 pandemic with stock picks on the brain. But like others who assemble their own portfolios, many of them aren’t spreading their risk across enough investments.
“It’s the nature of how people go about buying individual stocks,” said Dan Hallett, head of research at HighView Financial Group. “They’re not buying 30 names. They’re buying five or 10.”
There are other, indirect reasons that some investors may end up with outsized positions. Failing to rebalance, for example. Others may receive stock in the company they work for as part of their compensation.
But there is always risk in concentration. Companies – even good ones – can falter for all kinds of reasons. In this respect, BlackBerry Ltd. looms large in the psyche of the Canadian investor.
Between 2009 and 2016, the software company’s share of the global smartphone market fell to zero from 20 per cent. Its market capitalization dropped by 95 per cent from its peak.
Just as Nortel investors learned a decade prior, market dominance can vanish quickly. And when it happens, those investors with big positions can often find it difficult to step out of the way of the train wreck.
“You fall into a bit of a behavioural trap,” Mr. Hallett said. “When a stock is down 50 per cent, people are reluctant to sell at that kind of a loss.”