The Magnificent 7 & Hedge Funds complaining
What better time to release this than AH when Google & Microsoft are getting hit on their earnings release.
I’ve been reading a lot of Q4 fund letters as of late. Let me sum it up to you via a picture.
My God! I’ve read the phrase Magnificent 7 an innumerable amount of times. For those who don’t have the time, let me sum up the underlying tone and subtext of these letters.
Dear LPs
The Mag 7 predominantly accounted for the bulk of the S&P 500 (our benchmark) returns in the year 2023. Therefore, by extension, the reason that we underperformed the benchmark wasn’t due to the lack of quality in the stocks we hold nor our ability to select stocks but came as the result of us not owning the Mag 7. May I also remind you that this cohort of Mag 7 is trading richly and at crazy valuations. Therefore, it goes to reason that our underperformance was the consequence of us being fiduciary custodians of your capital. Fear not though, we’re expecting a sector rotation any moment now and that should cause capital to flood into our names.
PS
Please don’t redeem your capital.
Sincerely, Hedge Fund Manager
I’m going to be honest with you, I don’t give a fu*k about the Mag 7. I care about them as much as I care about the OMX Copenhagen Index. FYI, the OMX Copenhagen Index is outperforming the S&P 500 on a 1,3,5,10 and 20 year timeline. Why isn’t anyone talking about that? Oh, I know, it’s because their ethnocentrism won’t allow them to.
Every time I hear about NVDA being up, the only thing I think about is how Paulo Macro was seemingly right. I kid you not, that is the only thought I have and then I move on.
I think more about the Kuwait stock market crash in which people were writing postdated checks more often than I think about the Mag 7.
I pay no mind to the Mag 7. Matter of fact, the other day I was reading something and it noted how NVDA was up 11% in Q4. I had no idea. I thought, “huh, it still hasn’t fallen. I guess Paulo Macro was right.”
I’m seemingly apathetic and agnostic to the Mag 7. The Mag 7 doesn’t bother me, those who are bothered by the Mag 7 bother me.
What I am interested in is why are so many others interested in it? Typical meta-level shenanigans that I’m always up to.
What’s with all this whining, bemoaning, complaining and bellyaching? This sort of begrudging fixation and preoccupation on the verge of obsessive pathology makes me think of them akin to what’s known as Trump Derangement Syndrome. The parallels seem obvious to me.
It’s some sort of weird toxic vitriolic jealousy at play.
So many fund managers feel compelled to talk about the Mag 7.
Looking at it from the fund managers point of view makes it more understandable as to why they’re so obsessed. It is the necessary rhetorical smokescreen they need in an ostensible and specious red herring format to afford them plausible deniability in their ineptness as a fund manager. Simply put, it’s a distraction done via a scapegoating mechanism.
To be more generous and accurate they also know that if they underperform the S&P for any meaningful period of time that they’re going to get redeemed and not get their bonuses let alone lose their job. And since the Mag 7 plays a crucial role in their benchmark they fixate on it with uni-dimensional fervor. The Mag 7 has become this existential malevolent predator, the boogeyman if you will. So of course they’re obsessed with the Mag 7, if I were them I would be too.
As I noted in Stupid Sh*t people say: Nvidia edition (which could be thought of as an adjoiner to my In Defense of the Magnificent 7), there are ample other stocks to choose from. This false implicit binary between Mag 7 and the other 493 stock is BS and narrative. They’ll show you that the RSP was pretty much flat on the year. So what? A collection of 500 equal weighted stocks were flat but that doesn’t mean that there weren’t out performers in that set of stocks.
What’s interesting is some people still blame the Mag7 even though their performance was below that of the equal weighted index. But remember, the fixation isn’t on those 7 stocks per se but their overall weighting. But if you don’t have a keen eye you might miss that distinction. So now what’s their excuse? Just by me asking that question, the game is revealed because that’s exactly what they’re looking for…an excuse. It’s that the Mag 7 is so heavy in the headlines they use that as cover. Clever, don’t you think. What you realize is that the reason for underperformance is an evergreen story that adopts a creeping thesis and requires an ever moving goal post. And people will latch on to whatever story affords them the most plausible deniability. Like I said, clever eh?
In that above mentioned article I showed you charts like these:
I also showed charts like this:
NVDA was the 70th best performing stock as of the time I wrote that article. And people act as though the stocks stop existing once you count past 500. As though there aren’t stocks beyond the S&P 500.
Tell me you’re a failed closet indexer without telling me you’re a failed closet indexer.
I don’t buy into their copouts. They didn’t need to be up 100’s of percentage points, just roughly 26% in order to match the S&P. The problem is that they’re not allowed much concentration, they’re not allowed much stock volatility and they’re not allowed any reasonable period of underperformance. That’s a tough game.
Although I understand from an abstract conceptual level why they’re so obsessed, it does not resonate with me one bit.
A word of Caution
People have been blaming the top 1% (Mag 7) for all their problems since time immemorial. It shouldn’t surprise you that it would bleed over into the investing world too. It’s a convenient scapegoat.
If you find yourself around a bunch of people who are commiserating with you, you better watch the hell out. I mean it. They’re not doing what you think they’re doing. They’re not lending a compassionate empathetic ear. Anything but.
What they are doing is excusing and rationalizing the faults and mistakes of others as a way to indirectly excuse or rationalize their own faults and mistakes.
It’s a parasitic relationship. You’re playing a role in their fantasy.
They’re downplaying and excusing your faults in order to minimize the significance and impact of their own faults. They’re trying to absolve themselves of guilt, shame and responsibility. And you’re the patsy at the table who’s playing along clueless of all of this.
They’re seeking validation and reassurance that their actions are not unique or as significant as they initially perceived. This is done to provide themselves with a sense of relief and justification for their own mistakes and normalize it.
You get it? If you’re not at fault and they did the same thing you did then they mustn’t be at fault either.
You very well might be an innocent bystander who is unaware that you’re playing a role in the projectors (fellow commiserators) delusion? You’re the tool necessary in them providing themselves with absolution and exoneration.
Even though this metaphor doesn’t track perfectly, “If you’re unwilling to not spill blood then the second best thing is to make everyone else's hands bloody.” These people aren’t the type to repent and fix their sinfulness. Instead they go around making everyone else a sinner too. And thus normalizing it. Accountability, introspection and personal growth are foreign ideas to these people.
The hazard lies in the temptation to want to befriend this person since you’re unaware of the true game being played and its unique dynamics. It’s especially difficult when you really are in a weakened state and emotionally vulnerable. It’s when you’re most susceptible that you’ll need to be the most aware of this.
You think you’re finding camaraderie and shared understanding. And that’s true until you go against the victim narrative.
This is a maladaptive coping mechanism that I’m explaining. They try to normalize and foster an environment of unaccountability and one of being victimized by external forces (Mag 7).
This phenomenon is known as projection. Projection is a psychological defense mechanism in which individuals attribute their own thoughts, feelings and behaviors onto others.
By excusing the mistakes of others, people unconsciously justify and rationalize their own mistakes. They’re seeking validation that their actions were not as egregious or unique by emphasizing that others have also made similar errors. This process allows them to distance themselves from their own feelings of guilt or responsibility.
Ego defense mechanisms know no bounds. Their unconscious will be more than happy to sabotage you.
They’re trying to convince you in order to convince themselves. They’re excusing your behavior in order to excuse their own behavior. It’s a real toxic mind fu*k when you come to realize this.
They’re insecure, fearful and need validation.
These people often blame shift to some external factor that’s responsible for their failure, never to account for their own ineptness, inadequacy and insufficiencies. But ultimately how you get better is by addressing those things. They’re not trying to get better, they’re trying to FEEL better.
And by making you a victim of this existential boogeyman and malevolent predator they normalize their conspiratorial beliefs. Them commiserating with you is an attempt to make you an unsuspecting role actor in their fantasy. They need people like you to validate their belief in this existential predator (Mag 7). And your role is to embolden their fantasy by reinforcing, internalizing and accepting it.
It’s a toxic, parasitical transactional relationship. And although you might feel relieved at first by having someone listen to your complaining, it’s exhausting and detrimental to your long term success.
They want reassurance and validation. What they don’t care about is seeing you succeed. Matter of fact, they need you to not succeed. Think about that for a minute. Seriously.
It’s this sort of environment that gets created is why I’m so repulsed by the obsession of people pointing, sputtering and manufacturing indignation towards the Mag 7. A vast majority of them are engaged in what I just outlined above.
I’m not being casted in the role of pacifier or comfort ambassador in their grand delusion. I’m not going to play the role of victim in their drama fantasy to validate their conspiracy with the end goal of excusing their failings. Nope, no way, not going to happen. Anytime anyone tells me that they failed (portfolio underperformance) because someone else succeeded (Mag 7) in an immediate red flag.
It’s one of a necessitous individual, who lacks optionality, a mental point of origin and is operating within a scarcity mindset. And those are not the traits of a loyal person. Matter of fact, those are traits of someone who’ll stab you in the back. Their loyalty resides in their neurotic anxiety and comforting their afflicted ego, first and foremost.
Cooperating with commiserating cohorts leads to culpability in your own catastrophe. It can be no other way. It sounds seductive but don’t be tempted by the ills of others.
Caveat emptor applies just as much to the relationships you invest in as it does the stocks you buy.
You’ve been forewarned. Do not let this fall upon deaf ears.