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Why the Nasdaq Isn’t a Particularly Good Investment

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Ruth Saldanha: Many investors look at the major U.S. indices, the S&P 500, the Dow Jones Industrial Average and the NASDAQ, and think that if they invest in one of those three, they’re good to go. But we think that one of those is not like the others. According to us, the NASDAQ is not a particularly good investment. Morningstar’s Ryan Jackson is here to tell us why. Ryan, thank you so much for being here today.

Ryan Jackson: Thanks for having me, Ruth. Excited to be here.

The Nasdaq 100 Looks Out for the NASDAQ, Not the Investor

Saldanha: So what are your thoughts on the Nasdaq-100 Index?

Jackson: So the Nasdaq-100 is a very interesting index. This is the benchmark for Invesco QQQ Trust. We have a Morningstar analyst rating of neutral on that fund, which means we don’t think this fund will meaningfully outperform its category index, in this case the Russell 1000 Growth on a risk adjusted basis over the long term. So when you think about the Nasdaq-100 Index construction, really all it’s doing is taking the 100 largest non-financial stocks that are traded primarily on the NASDAQ exchange and weighting them by their market capitalization. On the surface it seems like a very harmless approach, but there are some really big problems that spring from this tactic.

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First and foremost, it really does not make much sense to select, include or exclude stocks based on where they trade. You know, it’s very common to see fund’s select stocks or narrow their selection universe based on some set of investment criteria, but these are almost always backed by something that resembles some sort of economic rationale. That is really not the case here, where stock trades has no bearing on its investment merit. And we see this as almost more of an effort by NASDAQ, the index provider, to promote the business of NASDAQ, the exchange provider. I kind of equate this to ordering food at a restaurant that exclusively shops for ingredients at the grocery store right next door. You know, it might be more efficient, it might be better for their business, but at the end of the day the finished product might be missing something that you kind of have to venture outside the lines for.

Another big drawback to the Nasdaq-100 Index and Invesco QQQ Trust is that we have some pretty meaningful sector concentration here. Tech is obviously the best known technology stocks represented about half of the portfolio at the end of September. But you’ve also got some fairly sizable tilts towards consumer discretionary stocks and communication services stocks, each of which represented about 16% of the portfolio at the end of September. On the other hand, QQQ does not hold any real estate, energy, financials or basic materials stocks. So while these tilts are pretty common for growth funds. This fund takes it a little bit too far and could leave some investors with some undesirable outcomes like we’ve seen so far this year when it’s lost about one-third of its value and finished in the bottom half of the large growth category.

You’re Missing Some Big Stocks if You Buy Only the Nasdaq – Even in Tech

Saldanha: I’d like to follow up on a couple of things you said. First up, what are some of the notable exclusions to the index?

Jackson: Yeah. So, I touched on a little bit, but there are really two main reasons that we would see large stocks that meet the size criteria excluded from the Nasdaq-100.

Number one, it’s automatically excluding any financial stocks. The financial sector isn’t the largest part of the U.S. market, but it definitely includes some heavy hitters. Berkshire Hathaway (BRK.B) comes to mind. That was the 6th largest stock in the U.S. at the end of September. And then some of those bulge bracket banks here, you know, Bank of America (BAC), JPMorgan (JPM), you will not find in this portfolio either.

The other reason that we would see stocks excluded from the index is because they do not trade primarily on the NASDAQ exchange, you usually find them on the New York Stock Exchange. You know, this leads to some notable exclusions. You’ve got your big health care firms, some of which don’t make the cut, Johnson & Johnson (JNJ), United Health Group (UAHC), couple of big energy players like ExxonMobil (XOM) or Chevron (CVX), names that this fund certainly would have really liked to have so far this year.

And then there are even some surprises that you don’t find in this portfolio. You know some tech stocks like Salesforce (CRM), Oracle (ORCL), IBM (IBM). You’d think these would be good candidates to fit in the tech heavy NASDAQ, but because they primarily trade on the New York Stock Exchange, they are not eligible for inclusion here. So this kind of just reinforces that the Nasdaq-100, while we think of it as a tech index, doesn’t necessarily fit that peer mold.

The Nasdaq 100 Isn’t the Best Tech Index

Saldanha: I want to talk a little bit more about that? Because investors often use the Nasdaq-100 Index as a shorthand for a tech basket. You went into it a little bit, but could you expand and tell us why this is not such a good idea?

Jackson: Yeah, it’s hard to say exactly how NASDAQ emerged as the go to tech option for investors. I think we’d have to go back and trace through a couple of decades of trading and investing history to find that out. But for me, it seems to me like an issue of liquidity more so than anything else.

Invesco QQQ Trust is an enormous ETF entered this year with over $200 billion in AUM and that’s something that’s very easy for investors and traders to easily get in and out of and that’s certainly an asset in the investing world. How it exactly got to that size? Well, it’s had, you know, over 2 decades to get there. This is a fund that launched in 1999. You know, that was very early on in the ETF days. Actually wasn’t the first tech ETF to hit the market or the first tech fund by any stretch, but it was very, very cheap, comparatively speaking back then. It was cheaper than a lot of tech options and by the time the rest of the herd kind of caught up to them on a cost basis.

They had built up quite a big following and quite a big investor base. So I think that legacy of both being NASDAQ the kind of tech brand and that early on just establishing themselves as number one it’s been a hard legacy brand for them to shake.

Where Should You Invest?

Saldanha: So finally what are some alternatives for investors who do want exposure to American tech.

Jackson: Yeah, for technology alone, Invesco QQQ Trust is not a perfect tech fund. You know, we’ve touched on this a little bit. So if you want to look elsewhere, I think the best pureplay tech fund on an ETF basis to go to it would be Technology Select Sector SPDR ETF that trades under the ticker XLK. You know this is a very cheap tech option. All it does is take all of the technology firms in the S&P 500 and weight them by market capitalization. And by taking such a sensible simple approach, it’s able to charge a very low fee. So this is a very low cost, investor friendly option.

Elsewhere it’s worth noting that the large growth market as a whole is very, very tech heavy as it is right now. So investors hoping for a little bit of tech exposure without necessarily going all in can look to something like Vanguard Growth ETF, ticker VUG, or iShares Russell 1000 Growth ETF, ticker IWF. Even these are, you know, more broadly diversified growth strategies, they’re still going to have, you know, between 40% and 50% of that portfolio stashed in tech. So investors would certainly still be getting their technology fix.

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Amazon Adds $2.75 Billion To Anthropic Investment, Sora Goes To Hollywood – Forbes

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Amazon invests $2.75 billion in Anthropic. This brings Amazon’s investment to $4 billion, as it follows its previous investment of $1.25 billion, which gave the company the option to invest the additional funds. This comes as Anthropic’s new Claude-3 chatbot outperforms ChatGPT- 4 in recent tests. Amazon has unique insight into Anthropic’s performance as it is one of the suite of AI models offered by AWS, which include most of Claude’s competitors.

Sora Goes To Hollywood. Everyone is reacting to a Bloomberg report that OpenAI will soon be meeting with studios and other Hollywood stakeholders to demonstrate the capabilities of the text-to-video generator and explore partnerships. OpenAI says unnamed “A list” directors are already using it.

Based in Toronto, shy kids are a multimedia production company who utilized Sora for the above short film about a man “who is literally filled with hot air.” His head, as you can see, is a yellow balloon. “We now have the ability to expand on stories we once thought impossible,” shares the trio made up of Walter Woodman, Sidney Leeder and Patrick Cederberg. Walter, who directed Air Head, said as great as Sora is at generating things that appear real, what excites us is its ability to make things that are totally surreal.

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Neuralink Shows Paralyzed Patient Playing Chess on a PC. Elon Musk’s brain-computer interface company shared a video of its first human patient, Noland Arbaugh, playing chess and Civilization VI using their brain implant. Arbaugh, who is paralyzed below the shoulders, described the experience as “just stare somewhere on the screen” to move the cursor. While some experts see this as a promising step, others emphasize that it’s still early days and the technology has limitations. Arbaugh acknowledged that there’s still work to be done, but the implant has already changed his life.

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Illuvium Labs Raises an additional $12 million for NFT Gaming Universe. Following an extensive three-and-a-half-year development journey and $60 million in funding, Illuvium Labs is on the cusp of unveiling its interoperable gaming universe. It will feature three interconnected titles designed to utilize the same NFTs seamlessly across all games, promising a first-of-its-kind experience. The influx of $12 million in Series A funding from esteemed firms like King River Capital, Arrington and Animoca will be allocated to developing new gaming titles within the Illuvium ecosystem.

Databricks’ DBRX claims the crown as best open-source LLM. It’s a list that includes Meta’s Llama 2 and Mistral’s Mixtral. Leading companies like OpenAI, Google, and Anthropic sell, or rent, their proprietary private models to enterprises and subscribers. DBRX was produced for just $10 million, orders of magnitude less than its competitors. On Monday, Wired reported that the company showed data proving its AI model’s reading comprehension, answers to general knowledge questions, and coding is superior to other open-source models that can be downloaded from Hugging Face and modified by users.

Shiba-Inu Metaverse leader steps down amid dispute over IP. Marcie Jastrow, the well-regarded Hollywood executive who led Technicolor’s XR efforts, has left the company. This led the company’s legions, known as the Shib Army, to speculate about malfeasance, which is easy to do, because Jastrow is the only person involved who is not anonymous, including Ship’s charismatic leader Shytoshi Kusama.

This live football experience was built by Immersiv.io to showcase how AR can transform the live sports broadcast and fan experience using the Apple Vision Pro. Immersiv.io worked with the Bundesliga (the German Football League) on the production. In a post on X, the company said. “This is a 3D reproduction of the live game integrating TRACAB Gen 6 live skeletal data of all players and the ball, complemented with real-time insights, offering the ultimate live tactical perspective of the game.”

SXSW 2024: XR That Makes You Go Wow. The XR competition was won by an AI experience, The Golden Key. This is the second year in a row that an XR experience did not take the immersive festival’s grand prize.

The second annual AI Film Festival is coming to Los Angeles on May 1, and New York May 9. Seats are limited, request to attend at http://aiff.com

This column, once called “This Week in XR,” is also a podcast hosted by author Charlie Fink, and Ted Schilowitz, former studio executive and co-founder of Red Camera, and Rony Abovitz, founder of Magic Leap. This week our guest is Liz Hyman, CEO of the XR Association. We can be found on Spotify, iTunes, and YouTube.

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Where Will Virtual Reality Take Us? (Jaron Lanier/New Yorker)

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FP Answers: What is a 'behavioural edge' in investing and how does it affect returns? – Financial Post

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Temperament is the unsung hero of investing success

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By Julie Cazzin with Felix Narhi

Q: What is a “behavioural edge” in investing? How does it potentially enhance returns? How can an investor develop it? — Giovanni

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FP Answers: Giovanni, the term behavioural edge is just another way of saying “temperament,” which refers to the habitual way a person behaves in each situation. For example, one person may be easygoing and relaxed while another is more likely to be impatient and assertive.

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Temperament is the unsung hero of investing success. Gaining insight about our innate emotional temperament and learning how to work with it gives investors an edge.

The common misconception is that you need a high level of intelligence to be a successful investor. No doubt, that can be helpful, but based on many years in the industry, I’ve seen it is not always the most important differentiator.

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Once someone has at least an average level of intelligence, it is temperament that often provides the investing edge in leading to better returns over the long term. “Investing is not a business where the guy with the 160 IQ beats the guy with the 130 IQ,” famed investor Warren Buffett has pointed out.

Having the right temperament can potentially enhance investment returns in several ways. An investor who is very reactive to external events is likely to fare poorly over the long term because, quite simply, the world is full of uncertainty and always will be. Markets are highly reactive, abetted by algorithmic trading and automatic rebalancing by exchange-traded funds. Individual investors should not be.

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Research shows that investors who trade frequently or try to time the market underperform. On the other hand, those investors who can remain calm and patient throughout market cycles do better because markets historically trend upwards. Hands down, being calm, cool and collected is the right temperament for an investor to have.

The concept of “homo economicus” — or economic man — describes a hypothetical person who consistently makes rational decisions. In real life, our decisions are coloured by our formative experiences, moods, external circumstances, what we ate for lunch and a host of other factors. These influences drive our behaviours, but they often operate below conscious awareness (even artificial-intelligence apps “hallucinate”).

Given that behaviour is some combination of cognitive and emotional inputs, an investor can create an edge by developing a disciplined investment process that overrides temperament, especially during highly volatile periods.

The term “active patience” means being clear about your investment principles and what you are looking for, and practicing active patience until the right opportunity arises.

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In contrast, regular patience is making an investment decision and sticking with it no matter what, even if it was the wrong decision. The latter approach is unlikely to bring financial success, which is the major goal of investing.

Active patience is what Buffett would call the “fat pitch,” which occurs when the market (occasionally) presents a very attractive opportunity. It is easy to spot a great opportunity and take full advantage of it when an investor has clear principles on what they are looking for.

Can we change our temperament? Recent studies show that personality traits and moods are subject to change, sometimes within the hour, so temperament may not be as fixed as we’ve been led to believe.

Becoming a better investor starts with self-knowledge — and lots of practice. The behavioural traits associated with good investment outcomes are patience, discipline, emotional control and risk awareness. It so happens, these qualities lead to good life outcomes, too. A calm temperament is the bedrock of making sound investment decisions.

Every investor must determine for themselves how to achieve greater equanimity and there is no shortage of books, videos and TikTok tutorials on that evergreen topic. I would also add the importance of staying humble.

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In investing, as in life, the learning never stops. Staying open to new information and having the courage to challenge our own and others’ beliefs and habitual behaviours are the keys to future success.

Felix Narhi is chief investment officer and portfolio manager at PenderFund Capital Management Ltd.

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

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Lenders Rally After India’s Central Bank Eases Investment Curbs – BNN Bloomberg

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(Bloomberg) — Indian banks and shadow lenders rose Thursday after the country’s central bank eased capital requirements for a unique type of investment, a move that may free up more funds for loans.

The gains came after the Reserve Bank of India issued Wednesday modified rules on lenders’ required provisions for exposure to alternative investment funds, or AIFs, that invest in the lenders’ borrowers. Under the new policy, a lender needs to set aside capital only for the amount the AIF invested in the debtor company, and not the entire investment of the lender in the AIF.

Shares of Piramal Enterprises Ltd., which reported among the biggest provisions for such investments, closed 1% higher after rising as much as 6% during the day. A gauge of financial services firms climbed 1%, the most since March 1.

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Lenders led the rally in the broader market, with the NSE Nifty 50 Index registering its best day since beginning of the month.

The RBI’s softening stance came after industry players raised concerns over clarity and uniformity after it announced in December restrictions on lenders’ exposure to AIFs that hold stakes in their borrowers. The latest move will likely help firms including Piramal, HDFC Bank Ltd. and IIFL Finance Ltd. reverse some of their relevant provisions made previously, according to analysts at Citigroup Inc. and Jefferies Financial Group Inc.

Read more: India’s Crackdown on Financial Risks Puts Industry on Watch

“Select private banks and NBFCs like Piramal had provided for their entire AIF exposure during 3Q and could see some write-backs in 4Q if they decide to reverse the excess provision,” Jefferies analyst Bhaskar Basu wrote in a note.

Regulators introduced a flurry of new rules last year to prevent a buildup of financial stress at a time when India’s economy remained resilient in the face of rising interest rates, slowing global growth and unabated geopolitical tensions.

©2024 Bloomberg L.P.

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