In his latest 2023 Annual Report, Prem Watsa discussed the tech-heavy NASDAQ significantly outperformed in 2023 and early 2024, raising concerns about a bubble.
He also raised concerns about overvaluation in technology and the “Magnificent Seven” (large tech companies) which comprise a record-high share of the S&P 500.
Similar concentration occurred in the past (e.g., Nifty Fifty), and some of those companies never recovered from subsequent crashes.
He believes maintaining high growth rates for the “Magnificent Seven” might be difficult due to their large size.
Here’s an excerpt from the letter:
In 2023, the NASDAQ was up 43% and then another 8% in early 2024.
The Magnificent Seven now account for 28% and technology, 30%, of the S&P 500 – even higher than the 26% at the dot com peak.
This sectorial weighting has never been higher – for any sector in the S&P 500 ever. So excluding the Magnificent Seven from the S&P 500, the remaining 493 stocks went up only 13.5% since January 1st, 2023.
In 2000, Cisco sold at $77 per share, more than the whole Canadian stock market, and 23 years later it sells at $49 per share even though earnings have gone up nine times.
Of course, today the excitement in the market is AI and Nividia is the star at $2 trillion. As my good friend Kiril Sokoloff chairman and founder of XIIID research says, “Nividia’s market cap exceeds the combined market cap of the S&P500 energy sector (Exxon, Chevron etc) by $200 billion even though the net income for Nividia is $14 billion versus $147 billion for the energy sector”.
Perhaps trees grow to the sky after all – but call me a skeptic! This reminds me of the Nifty Fifty – 50 outstanding companies in the late 1960s and early 1970s – which included McDonald’s, Johnson & Johnson and Proctor & Gamble and also Polaroid, Avon and Eastman Kodak.
As I said in our 2020 annual report to you in March 2021, after the crash in 1973/1974, these companies never saw
their highs for more than 15 years – and some of them went bankrupt!
Ben Graham had some advice about the Nifty Fifty in September 1974: Stay away! He said “a conservative analyst…would have to do the near impossible – namely turn his back on them and let them alone”.
This is exactly what we have done – and it has been painful! The Magnificent Seven have outstanding track records as I said in our 2019 annual report, but for them to grow at 10% – 20% in the future on revenue bases of $200 billion to $500 billion – means $20 to $100 billion additional revenue each year – only 170 companies in the S&P 500 had
revenues of more than $20 billion in 2023.
In 2022/2023, credit has tightened significantly but we have yet to experience the after effects – particularly in
commercial real estate and private credit – i.e. non-bank credit! Another area we continue to be very cautious
about.
You can read the entire Annual Report here:
Fairfax Financial 2023 Annual Report
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