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Just buy the NASDAQ?

The other day I was asked whether one should give up stock picking and just buy the NASDAQ.

The question is because the NASDAQ continues to move upwards and is the best-performing major index globally at +30.8 per cent this year. The NASDAQ 100, comprising the largest 100 stocks, is up 38 per cent. Clearly, just holding the NASDAQ this year would have been a very successful strategy so far.

But why stop at the NASDAQ? Why not just invest in the seven companies that have accounted for the rise in the index this year? The remaining companies are in aggregate, essentially flat. The Magnificent Seven are Apple at +42 per cent this year, Microsoft at +43 per cent, Alphabet at +40 per cent, Amazon at +49 per cent, Nvidia at +192 per cent, Tesla at +111 per cent and Meta Platforms at +134 per cent.

As the FT pointed out on Friday, Apple is worth more than the Russell 2000 of smaller US companies and, perhaps more alarmingly for a UK investor, more than the entire FTSE 100 in aggregate. Microsoft, with a valuation of $2.54 trillion (v Apple at $2.9 trillion), is close to being larger than the FTSE 100.

Charlie Bilello posted the valuations of these stocks last week.

Whichever way you look at it, they are very expensive. What valuation one pays for a stock will ultimately determine the return one makes. Back in 2000, Cisco was the then darling of the US stock market. It was valued at 10.7 times sales. Supporters justified the valuation by pointing to how Cisco’s products would be in great demand as the internet revolution was rolled out. The supporters were correct about the growth in Cisco’s business, just wrong about it being a good investment at that valuation. It took many years to recoup one’s losses if one bought in 1999/2000. See chart.

In 2000, Cisco’s revenue grew 55 per cent to $18.93bn. Phenomenal growth, but sadly the shares were ludicrously overvalued on a price/sales of 10.7x.

Cisco share price 1990 to 2023 (source:

Another nice stat:

Apple is now valued more highly than the world's fiftieth most highly valued mining companies. In fact, with the change left over, one could buy three years' supply of global copper production.

The top mining stocks are forecast to generate more free cash flow than Apple over the next year.

Material World by Ed Conway.

On Friday, I listened to Merryn Somerset Webb’s weekly podcast (The Inconvenient Truth About Reaching Net Zero), where her main guest was Ed Conway (SKY News economics editor). His book, Material World, is just out. I went straight out and bought a copy. It is superbly written – a real page-turner. It chronicles the use of raw materials such as silica, iron ore, copper, coal, and oil during the development of mankind so far. Importantly, it looks at the future demand for these materials as we transition to net zero. The simple message is that demand for these materials will accelerate rapidly. That is before other issues, such as the developing world catching up with the developed world's use of materials such as steel.

The conclusion of the introduction: "The six materials described in this book may not be scarce. They may not look or feel particularly sexy. They are not especially valuable in and of themselves. yet they are the primary building blocks of our world. they have fuelled the prosperity of empires. They have helped us build cities and tear them down. They have changed the climate and may, in time, help save it. these materials are the unsung heroes of the modern age, and it is time we heard their story."

Interesting stat: In the UK, there are 15 tonnes of steel in use per capita; buildings, cars, trains, rail tracks, fridges etc. etc. In China, it has grown from around one tonne a few decades ago to around seven or eight. In less developed countries, it is way less than that. Are developing countries likely to forgo the benefits that wealth and progress bring, such as fridges and washing machines?

Reading the book has reaffirmed my belief that we are in the foothills of the next commodity super cycle. Demand for many of these materials, which cannot be met from current production, will lead to price increases. Investment in new mines has been slower than in the past as ESG concerns weigh on investment plans and companies are being more disciplined. Cash flow for mining companies should grow substantially. Current valuations look very attractive because markets are focused on short-term concerns about global growth.

Conclusion: In the short term, anything can happen. NASDAQ stocks (especially the big seven) can get more expensive. Perhaps in the coming months, NASDAQ will climb back to the November 2021 peak of 16,000. I won’t, however, succumb to the fear of missing out and will continue to focus on stocks, which on current valuations, give me a good chance of making decent returns over the next few years. The table below shows the forecast yields of my current holdings.

The blank spaces:

SDI Group does not yet pay a dividend. BlackRock World Mining is on a prospective yield of around 6.0 per cent (for some reason ShareScope does not show forecast yields for investment trusts). Niox has just announced a maiden 2.5p dividend (yield of 4.2 per cent), and I expect IG Design will resume paying a dividend next year (perhaps news on that front with the results tomorrow).



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