£-cost averaging is a high return investment strategy that has been around for a long time. The idea is to stagger your purchases so that you end up with a low average entry price. This positive effect can be amplified by investing the same amount each month, so that you buy more shares when prices are lower.
Back in the day savers were encouraged to do this with things like unit trusts, investing regularly to buy units in a fund. It works much better with ETFs where returns are more reliable and dealing costs and fees are much lower.
Below I am going to discuss bolder strategies using £-cost averaging where we are looking for dramatic investment returns.
Table of Contents
The first stock I am going to talk about is Nvidia, hopefully you are not all fed up with me going on about Nvidia but it exemplifies the kind of stock perfect for £-cost averaging. We need to make one central assumption, which is that Nvidia shares are going to be much higher a few years from now.
When shares are rising dramatically and have exciting stories like Nvidia they are invariably highly valued and this makes for share price volatility. Investors are as nervous as a herd of wildebeest being tracked by a pride of lions and will panic and run in all directions at the drop of a hat before regrouping and heading on to the greener pastures that lie ahead.
These periodic panics are ideal for £-cost averaging strategies as purchases made into panics will help drop your average purchase price sharply.
Short-Term v Long-Term
There is another phenomenon which helps investors taking a long view. Many operators in the stock market are pursuing short-term leveraged trading strategies. There is a whole category of operators known as day traders whose aim is to go in and out of a stock within a day at a profit.
These people have zero interest in the long-term trend and will sell out of the most fabulous shares because it suits their short term perspectives.
I look at Nvidia and think to myself why would anyone want to sell these shares just now. The chart looks explosive, the latest Q2 guidance was incredible and there are multiple exciting stories driving the shares from AI to the power of the latest H100 chip to the switch from hardware to a full stack approach which involves more high margin software in the package.
But there are tons of people ready to sell because the shares have just leapt by a third in a matter of days and there are huge profits to be taking by the short-term traders. What they see is a share which is heavily overbought and likely to see short-term weakness. What I see is a share which is overbought because the longer-term outlook is so exciting which brings us back to £-cost averaging.
Invest £100, or Whatever, in Nvidia Every Month
It is that simple and, I believe, virtually guaranteed to work well, because Nvidia has such exciting prospects and is such an amazing business. It’s obvious that Nvidia is one of the greatest businesses on the planet but that does not make it too late to buy the shares. Investors have an incredible ability not to see what is under their noses or look for that wonderful undervalued gem that nobody has heard of and buy them.
Not me, I am perfectly happy to go with the obvious because time and again we look back from some future point and think, that was so obvious, who didn’t I do it.
Invest in Nvidia every month and, if I right about the stock, at some point you will move into profit and start to build a significant holding and that is really fun. It is amazing to have a share which is doing really well and be holding a lot of them; that is obvious too, I know, duh.
If you are feeling very bold you can amp this strategy up by doing the whole thing in a leveraged account; that is your call, of course, but it is what I would do and then the returns can be ridiculous and in a spread betting account, tax free.
The Power of Nvidia’s H100 Chip
I am useless with technology but I am trying to get my head around Nvidia’s H100 chip because (a) it plays a critical role in the AI revolution and (b) it involves a full stack solution including software and generating recurring income, which is highly prized by investors.
I have no idea if this is a fair comparison but back in the 1990s Microsoft launched a version of Windows that worked really well and achieved widespread adoption. IBM made the hardware, Intel made the chips and Microsoft made the software. The ones who ended up laughing all the way to the bank were Microsoft and Intel, which together were known as Wintel.
The H100 chip is a full stack solution based on Nvidia’s GPUs, which may have something in common with Windows in its impact on the Nvidia share price. If that proves true £-cost averaging this share could be fabulously profitable.
Here is a bit of an insight into the power of this chip.
During the GTC 2022 keynote, NVIDIA announced its newest addition to the accelerator cards family. Called NVIDIA H100 accelerator, it is the company’s most powerful creation ever. Utilizing 80 billion of TSMC’s 4N 4 nm transistors, H100 can output some insane performance, according to NVIDIA. Featuring a new fourth-generation Tensor Core design, it can deliver a six-fold performance increase compared to A100 Tensor Cores and a two-fold MMA (Matrix Multiply Accumulate) improvement. Additionally, new DPX instructions accelerate Dynamic Programming algorithms up to seven times over the previous A100 accelerator. Thanks to the new Hopper architecture, the Streaming Module structure has been optimized for better transfer of large data blocks.TechPowerUp.22 March 2022
John Plender on the AI Revolution
I have been a bit naughty and shared an article below that I found in the FT, which prefers you to share articles rather than copy and paste them. I hope they will forgive me this once. Not only is it a very interesting article but the author, John Plender, is an old friend of my elder brother, who (the latter) will be 82 in August. I guess John Plender is even older than me but still going strong and he was always very clever.
The media hype over artificial intelligence since Microsoft announced its investment in ChatGPT in January inevitably calls to mind the excesses of the dotcom bubble. The sense of déjà vu was reinforced last week as the market capitalisation of Nvidia, whose chips power AI applications at ChatGPT among others, briefly topped $1tn.
So is it a case of here we go again? In fact, no. There is much about this AI buzz in the markets that is healthy. The plunge in Big Tech stocks last year was substantially to do with central banks raising interest rates. Applying a higher discount rate to distant future cash flows in the tech sector shrank the present value of those cash flows.
This year’s bounce, far from being driven by central banks, reflects something real. The simulation of human intelligence in machines has dramatic potential to change the way the economy works. Some people will profit greatly from the process. In the case of Nvidia they have already made a considerable killing this year.
It is easy, now the monetary tightening cycle has been under way for some time, to forget just how artificial market conditions have been and for how long. A new report from the McKinsey Global Institute points out that before the turn of the millennium, growth in global net worth largely tracked growth in gross domestic product. But then something unusual happened. Around the year 2000, with timing that varied by country, net worth, asset values and debt began growing significantly faster than GDP.
In contrast, productivity growth among G7 countries has been sluggish, falling from 1.8 per cent per year between 1980 and 2000 to 0.8 per cent from 2000 to 2018. AI has the potential to help take us beyond this world of asset price levitation and debt-dependent growth through its capacity to improve productivity.
Dario Perkins of TS Lombard suggests that two mechanisms will drive this improvement. First, AI can make current processes more efficient. It is already helping workers make better informed decisions, optimise their processes and remove mundane tasks. The resulting increase in the efficiency of the workforce should boost overall output. And then AI can help workers invent new things, make new discoveries and generate technological progress that can raise future productivity.
Meantime a number of studies have shown that Generative AI, which is capable of self-learning and performing several tasks, will boost the efficiency of workers and companies that use it. Note, too, that this could all happen much faster than anything in the dotcom bubble. The public facing version of ChatGPT reached 100m users in just two months. Data analytics firm GlobalData (which recently acquired TS Lombard) estimates the global AI market will be worth $383bn in 2030, a 21 per cent compound annual growth rate over 2022.
Much media commentary has harped on the scope for AI to cause unemployment to rocket — a fear that has been encouraged by AI enthusiasts talking about driving down labour costs. Yet Perkins points out that the ultimate impact of technology on labour markets is theoretically ambiguous. This is because technological advancements have two contradictory effects: a substitution or displacement effect, where labour-saving technologies can displace workers, and an income or compensation effect, where technology makes all goods and services cheaper, raising real incomes and generating new sources of demand in other sectors of the economy. Throughout history the compensation effect has consistently outweighed the displacement effect.
No one can be certain whether AI will buck that historical trend or indeed reach or exceed human levels of comprehension. In its current stage of development it can be untrustworthy and even spew out nonsense. Equally imponderable is whether AI’s deflationary impact will outweigh the current inflationary forces of supply shortages and tight labour markets and the future upward price pressure from shrinking workforces in the developed world and in China.
Nvidia chief executive Jensen Huang detected last week “the tipping point of a new computing era”. He could be right. It seems likely that Big Tech will continue to march to a different beat to more conventional companies in the S&P 500 index that are more sensitive to monetary policy. One lesson investors should recollect from the dotcom era is that much dross goes up alongside companies of real substance. At today’s valuations, we may not be far from the winnowing of the dross. [email protected][email protected] 5 June 2023
One of the things about John Plender is that he is always ready to pour a bucket of cold water on naive enthusiasm. The fact that he is not doing that on this occasion means that AI is probably going to be huge if even he is a believer.
Strategy is to Win and Win Big
When I find a share like Nvidia which is so exciting and ticks so many boxes for me as a potential world beater and multi bagger (shares that rises several-fold) I start thinking about how I can use this potential to make serious money.
In order to do this you have to take risks but I believe they are justified given the potential of this share.
Below is just one example of the huge role played by Nvidia technology in the automotive industry.
Listen to Nvidia again.
NVIDIA pioneered accelerated computing to tackle challenges no one else can solve. Our work in AI and the metaverse is transforming the world’s largest industries and profoundly impacting society.Web site
If this share does fantastically well nobody will be able to say they didn’t tell you because they did, almost on a daily basis. If you are a believer, like me, then the question is how to win big from investing in these shares.
The answer is simple – to win big you need to have a lot of them. You can do this by £-cost averaging and/ or by using leverage or by just buying a lot right now, which I would say is a pretty good strategy too.
I know a market value of $1 trillion seems a lot but for a business that is playing such a massive role in changing the world and which has just announced an explosion in growth, maybe it is still ground zero.
Below is the chart.
There is a thing called Ivory Tower charting where you look at a chart and have no knowledge of the underlying fundamentals.If I was looking at this chart with that perspective I would say that another bull market leg is most likely underway, all driven by that huge initial base pattern. The shares exploded higher in mid-2015 from 16 years of sideways trading.
They fell in 2018 when there was a dramatic setback in technology shares and then again in 2022 hit by excess inventories of things like gaming chips and an explosive rise in interest rates, which knocked the stuffing out of the whole tech share sector. The Nasdaq Technology Sector index came close to halving from peak to trough.
Since then the. shares have rocketed higher to a new peak. This may create some short-term vulnerability but bodes well for the medium to long term outlook.
Since 2000 on this 6m candlestick chart there have been four golden cross buy signals with the latest just occurring. The three previous ones have been followed by substantial share price rises.
Nvidia. NVDA. Buy @ $392