#134: Don’t Ignore the Yield in Total Return

Posts might be a bit shorter for the next few days as I am attending the Finance Magnates conference in Sydney.

S2N Spotlight

I want to share a basic idea that I think few think about, and that includes me. Most people when quoting the performance of the S&P 500 Index or other major indexes, normally quote the price only index.

In the chart below I plot the same index, i.e. the S&P 500 over 50 years twice. The difference being the yield is reinvested and compounded into a total return index. Oh boy what a difference it makes. Looking at the annual return 11.12% vs 8.78% doesn’t seem like such a big deal. Compound that over 50 years and it pounds the price only index by more than 2,600%.

This is a weapon but like all weapons it needs to be used responsively. I will elaborate in future letters.

S2N Observations

I am actually very embarrassed about the next chart. I shared it yesterday and screwed it up. I thought whether I should even mention it, maybe just move on. However, it is not my style. I knew from the minute I clicked send I had screwed up. I wrote the letter in a noisy booth on the floor of a conference I was attending surrounded by a bunch of people talking loudly. Still no excuse. Yesterday’s chart I called the Y-axis “Cumulative Return” where it was actually “Price” and the 2 symbols shared the axis with totally different price ranges, what was I thinking or drinking. The below chart is correct. By the way it is interesting that SMCI is the 3rd largest customer of Nvidia.

The news we have all been waiting for came out and the numbers for Nvidia were actually pretty spectacular, but some true believers were disappointed with the forecasts. I believe the stock has done a lot in the last month and needs to breath a bit. A small selloff was coming if the news was good or bad in my not so humble opinion.

I try and only share my own charts. In the interests of time I was able to quickly plot this but my data source only has up to 31 January 2024 and doesn’t go back very far. I have wasted more than 15 minutes looking through my various subscriptions for the actual net income in the earnings. I couldn’t find it, all I saw was revenue and other “noise” related metrics. I went onto Nvidia’s website and looked under their press releases and investor kits and still couldn’t find net income. I know it is huge but it shows where the interest is – it is all above the line. They did $30 billion of revenue in the latest quarter.

In closing what caught my eye in the news is that OpenAi is looking at doing a very large capital raise at an impressive valuation of above $100 billion. Frankly, ChatGPT beats all its competitors in my experience. The AI industry is still struggling to capture earnings versus the massive outlays that are required to train and improve these generative A.I. models. The latest version of ChatGPT cost $100 million to develop.

I am a long term believer. I think what A.I. will do to productivity and advancements to the world are mind boggling. I think however, the market has probably gotten a bit ahead of itself. There will no doubt be many casualties and I am not sure there is enough space for all the players trying to compete.

I am starting to believe that the cleverest bot is going to win and take all, well at least a massive piece of the market. Just like Google blew all search engines out the water, my money is on ChatGPT owning this space. Maybe a $100 billion is cheap. Did I just say that. Until next time……..