In the end, single stock risk comes for everyone.

Doesn’t matter how great the stock is, if you’re sitting in a concentrated position and your position has grown immensely, the drawdown risk has only grown larger.

This week, the world’s greatest technology stock was crushed by an unexpected innovation in China and it hasn’t recovered at all yet. Nvidia finished one of its worst weeks ever on the lows.

Here’s the one-month view - a 21% drawdown from the early January high and the largest daily market cap loss recorded for a single stock of all time.

Nvidia’s employee-shareholders have lived through many large declines only to see their stock value climb to ever-higher heights in the aftermath of these episodes. Usually the recoveries have happened very quickly. I’ve been a shareholder since 2015 so I can tell you this from experience: Even the best stocks don’t offer the smoothest of rides.

In 2022, Nvidia was in a 70% drawdown from an all-time high. Most stocks down 70% never come back. This one 5x’ed after that drawdown as the tech bear market of ‘22 gave way to the AI bull market of ‘23 and ‘24.

As you can see above, that drawdown from the end of ‘21 into the fall of ‘22 barely registers, despite the percentage loss incurred on paper by my fellow NVDA shareholders. I had people on TV telling me to apologize for it or arguing that Intel was a better investment because of its valuation. True story. I have the receipts.

If you were an employee at Nvidia during this bear market for the sector and the stock, you had one advantage that outside shareholders did not: A rock and roll ESPP plan with a “look back” provision enabling you to put $25,000 per year into the stock at the lowest trailing price. And then, like a cherry on top, they gave you a 15% discount to that price to boot. They made you an offer you couldn’t refuse. Many Nvidia employees took them up on that offer and have the massive gains in wealth to show for it as a result.

And they all lived happily ever after.

Just kidding. Now they have more wealth than ever, concentrated in the world’s largest company by market cap and the weight of this responsibility can be crushing if they don’t have a plan to tax-efficiently convert some of this wealth into offsetting portfolio weights. Nvidia may go on to be the greatest stock of all time over the next decade, but one can never know for sure. The annals of stock market history are littered with counter-examples where employee wealth has declined as their employer’s stock price has braved the slings and arrows of outrageous fortune.

Talk to an Intel employee about how that potentially goes wrong. There was a time when Intel’s chips were every bit as dominant and indispensable for the personal computing and Internet 1.0 era as Nvidia’s chips seem to be now. And then, gradually and imperceptibly at first, something changed.

Intel workers who’ve made employee stock purchase plans the centerpiece of their retirement assets have a 61% decline over the last 25 years to show for it.

This is an extreme example and in no way representative of what I think could happen at Nvidia. But it’s an example nonetheless and one that should be a sobering reminder of how vast the realm of possibilities is when it comes to the rising and falling fortunes of even the best companies in the world. Especially companies living and dying based on keeping ahead of the innovation curve.

Which is why the advice we give to Nvidia employees is centered on the concept of Regret Minimization. My colleague Joey Fishman has been with the firm for almost a decade now and has been in the thick of these conversations with technology company employees ever since. Joey cannot predict the future share price of Amazon, Microsoft and Nvidia, but he can simulate a whole range of potential scenarios and help the employees of these companies understand the tax, estate and emotional consequences of their decisions. By the way, I’ve asked Joey to make some room in his calendar for people with extremely large concentrated employer stock positions who don’t even know where to begin - we got your back, let us know what’s going on here.

This week I launched my new channel on YouTube called Ownership by Ritholtz Wealth. I’ll be using this channel to bring you the insights we’re sharing with clients who are the owners of assets: Business founders, public company employees compensated in stock, venture-backed startup employees who appear somewhere on a cap table they do not fully understand, real estate families in need of estate planning advice, etc. We eat, sleep and breathe this stuff internally. On the Ownership channel, we’re going to turn this aspect of what we do inside-out and show you how wealthy people remain wealthy well into the future. This isn’t stock market or economic commentary like what we do on The Compound. This is the real-life stuff that’s even more important. Get ready to learn.

And because I am already anticipating the requests, here are the charts Joey and I used during the making of this episode, thanks to Sean and Chart Kid Matt for the data and graphics here, just outstanding work from the boys on this one:

Dan Ives defends the AI theme

Dan Ives covers AI and the related technology stocks for Wedbush and he was extremely early to the importance of it all while most of Wall Street hadn’t yet ever heard the term “Large Language Models.” He’s a long-time bull on stocks like Tesla, Nvidia and Palantir who was way ahead of the crowd in recognizing the opportunities in these names for the AI era.

We always have so much fun when he comes by to do the show. The timing on his appearance this week was insanely good. Who else would you want to hear from at a moment like this?

Listen on Apple or Spotify at the link below or watch it on YouTube below that.

YouTube:

That’s it from me this week. Talk soon, guys. - J to the B