Some hedge funds are selling Nvidia and other tech stocks, but now is not the time to panic.
Institutional investors, or the “big money” investors, are worth keeping an eye on because they account for the majority of trading volume on Wall Street and their actions can affect stock prices in the short term.
For evidence, look no further than the past few weeks, when many big tech stocks have begun to fall. Recent data shows that hedge funds and other institutional investors sold off tech stocks at their fastest pace in years in June, including AI chip maker Nvidia (NVDA -4.07%), whose shares are now down more than 16% from their June peak.
Why are these ultra-wealthy traders selling, and should ordinary investors follow their lead?
Why is a billionaire selling Nvidia?
Stanley Druckenmiller, the billionaire who runs the $3.7 billion investment firm Duquesne Family Office, was a bit ahead of the trend. He sold 70% of his Nvidia stake in the first quarter. Now, other companies appear to be following suit. But Nvidia and other tech stocks have soared over the past 18 months and are still up substantially. So why sell?
In the competitive hedge fund industry, short-term results are naturally emphasized. Hedge funds that bought big tech or AI stocks in the first six months of 2023 are likely sitting on huge unrealized gains. For example, Druckenmiller estimated that the average acquisition cost of Nvidia shares was less than $20, so he sold them at a huge profit.
Apparently, his peers have started to do the same. This doesn’t mean that Nvidia is no longer a leading AI company or a good long-term investment — it just means that hedge funds are prioritizing short-term profits.
Your Edge Over Millionaire Investors
It may feel like billionaires have an unfair advantage in the stock market. Hedge fund managers can use cutting-edge technology, hire top analysts, and have access to industry insiders. Yet most hedge funds have underperformed the S&P 500 over long periods of time. Why does this happen?
The easiest way to succeed in the stock market is to buy shares in great companies and then hold them for years without doing anything else, which is why The Motley Fool emphasizes long-term investment strategies.
Hedge funds don’t follow that pattern. They have to compete with each other to justify their high fees and to keep clients from moving to other funds and pulling their money. After all, hedge funds are commonplace — there are more than 3,800 in the U.S. alone — but fewer than half survive for five years.
As an individual investor, you’re accountable to no one but yourself. In the Internet age, anyone can research and learn about great companies. Once you find a winning stock, you can hold it for as long as you believe in the business, without feeling the pressure to make monthly, quarterly, or annual profits.
How should investors treat Nvidia stock?
No one knows what NVIDIA’s stock price will do in the future, but the company’s business is growing exponentially thanks to its dominant position in the niche market of AI chips. Companies need to keep investing in AI, but for NVIDIA to sustain the growth it has achieved over the past 18 months, it needs to continue innovating and defending its market share from competitors building rival chips.
There’s nothing wrong with selling your stocks to lock in your profits when your investment goes up, and you can easily sell some of your profitable stocks and keep some of them invested for the future.
Those looking to buy Nvidia during the recent sell-off should consider using dollar-cost averaging, a strategy in which you invest a set amount at regular intervals to gradually expand your position until you have the amount you intend to invest in the stock. This not only helps protect you from bad timing if the stock continues to fall, but also allows you to jump in quickly if the stock starts to recover quickly.
In other words, investors should do what they think is right and not make decisions based on the actions of some hedge fund managers, who will often be proven wrong over time anyway.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool owns shares in and recommends Goldman Sachs Group and NVIDIA. The Motley Fool has a disclosure policy.
