In the aftermath of a market that’s been fervently painting a future of relentless growth for NVIDIA, the pressing question now is: what happens if reality falls short of these lofty expectations? Part 2 of our exploration into expectation investing focuses on the other side of the coin—the risks and the strategies investors must consider when forecasts don’t align with outcomes.

Imagine the collective anticipation as a highly charged spring; if the anticipated future growth of NVIDIA fails to materialise, that spring could uncoil swiftly, leading to a sharp correction in the company’s stock price. Such a scenario is not just a hypothetical cautionary tale; it’s a recurring theme in markets driven by human emotions and economic cycles.

Take for example Meta.

On 27^th July 2022, Facebook aka Meta Platforms reported weaker than expected revenue and earnings for the second quarter. The stock tumbled 26% erasing some $251.3 billion of market capitalisation…This was the biggest one-day wipeout in the market value ever of a US company.

Isn’t this like the NVIDIA story but on the downside? Do you see the connection?

Just a couple of weeks back (February 2024), every media outlet covered the stupendous one-day market cap rise of NVIDIA. The shares jumped 16%, adding about $277 billion in market capitalisation, bringing its total market value near $2 trillion.

As I write this post today, the Meta stock is at $498. The point I was making though is that reactions can be insane in either direction…Before I proceed, let me be very clear that this is not a forecast on the NVIDIA stock. I am simply incapable of any forecasting.

The key for investors, especially those enchanted by NVIDIA’s current success, is to understand the inherent uncertainty of market expectations and to prepare accordingly.

This preparation involves diversification, not putting all your eggs in one high-flying tech stock basket, no matter how promising it may seem. It includes due diligence, continually assessing NVIDIA’s market position, technological advancements, and competition. And most importantly, it calls for discipline—the discipline to stick to your investment philosophy and investment policy, to take profits when your goals are met, and to cut losses when the market narrative changes.

NVIDIA’s journey is a case study in how market sentiment can often pivot on what investors believe a company can achieve down the road. The stock’s current valuation is a collective endorsement of NVIDIA’s potential to lead and transform its industry.

For investors, this means that the act of buying or selling stocks is more than a transaction; it’s participation in a grander narrative. It requires an investor to look beyond the current events and to invest in a story yet to unfold. But with this foresight comes risk, as the future is never written in stone. And it is in times such as these are we prone to some very costly mistakes…

The key to navigating this landscape is to arm yourself with strategies to mitigate risk. The only free lunch in finance – diversification – stands as a cardinal rule in this regard. This means spreading investments across various sectors, asset classes, and even geographies can safeguard against the volatility associated with any single investment. By not putting all eggs in one basket, so to speak, an investor’s portfolio can weather storms that might capsize more concentrated holdings. The point to understand here is about sizing of your positions.

Sizing your positions in the market is a delicate balance between ambition and caution. It’s essential to allocate enough capital to each investment so that if it prospers, it significantly contributes to the overall performance of your portfolio. Yet, it’s equally important to ensure that no single investment can derail your financial strategy should it not pan out. This is the art of risk management—investing sufficiently to feel the uplift of a success without leaving your portfolio vulnerable to a single point of failure.

A well-sized position maximizes the potential for growth while safeguarding against the potential for loss. It demands a clear-eyed assessment of how much you’re willing to risk for the possibility of reward. A position that is too large can expose you to undue risk, whereas one that is too small might not make a noticeable difference in your overall portfolio even if it does well. The key is to find that sweet spot where your investment has room to grow and affect your portfolio positively without putting your financial goals at risk if the tide turns.

Additionally, you need the counsel & wisdom of a world class real financial professional (who has a sound understanding of human behaviour, investing, market dynamics and can thoroughly diagnose you before prescribing any products), who will come between you and your costly blind spots/mistakes. Such professionals can provide valuable insights, drawing from a deep well of wisdom and experience to guide investment decisions. They can help you understand your risk tolerance (your capacity to take risks and your behaviour towards risk) as you align your portfolio with your long-term financial goals and offer counsel on when to stay the course and when to adjust sails. This person acts as a steward of your wealth, often tempering the emotional responses that can lead to hasty decisions in times of market stress.

Investing, at its core, is a complex interplay of foresight, analysis, and emotion. Expectations set the stage, but the market’s applause can be fickle, often turning into a hush when the performance doesn’t meet the script.

This is where the strategy of diversification and strategic position sizing transcends from theory to indispensable practice. As an investor you need to recognise that no single narrative, no matter how convincing or pervasive, should lead to a concentration of risk that threatens the entirety of your portfolio. NVIDIA’s story, with its triumphs and uncertainties, exemplifies the need for a disciplined approach that is receptive to change and resilient in the face of market volatility.

For those captivated by NVIDIA’s success and potential, the path forward isn’t to shy away from opportunity, but to engage with it thoughtfully. It’s about recognising the difference between a company’s intrinsic value and the exuberance of a market moment. It’s about understanding that true investing wisdom lies not in predicting the future but in preparing for its many possibilities.

The narrative of NVIDIA, much like the ongoing saga of technological innovation, will continue to evolve. And as investors, our challenge is to learn from each twist and turn, to build portfolios that can withstand the tests of time and uncertainty, and to seek guidance from seasoned financial professionals who can help us focus on what’s truly important for our financial lives.

In essence, the narratives we see around NVIDIA and its meteoric rise in valuation aren’t just about the company; they’re about the very essence of what it means to invest. When you invest with expectations, you’re placing a bet on a future you believe will come to pass. And while the outcome of such bets is uncertain, the process of making them is what drives the market forward. It’s a reminder that at the heart of every financial decision is a vision of tomorrow—one that’s continually reshaped by the innovation of today.