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Thanksgiving Investing: Avoid The Turkey Trap In Magnificent 7 Stocks

Posted By: ndeeney
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Many shall be restored that now are fallen, and many shall fall that now are in honor. – Horace

Stocks have provided another rich bounty so far this year, so it is particularly easy to be thankful on that front. These robust returns also make it a crucial time to consider the “turkey problem” as it relates to investing. Nassim Taleb introduced the world to the “Black Swan” and used this tale to illustrate the concept. Imagine the life of a turkey, where a kind farmer feeds and tends to it every day, until, on the day before Thanksgiving, the situation suddenly takes an irrevocable turn for the worse. The turkey has only observed a positive trend during its lifetime up until that fateful Wednesday. The turkey is at its fattest and happiest at the moment when it turns out to be the time of maximum risk. Investors must be particularly wary when the trends look obvious and making money seems effortless. As Taleb states, “The same hand that feeds you can be the one that wrings your neck.”

This “turkey problem” illustrates the automatic human tendency to expect trends to continue, as we all have a built-in tendency to see patterns even when they do not exist. According to Jason Zweig in Your Money & Your Brain, this propensity to look for patterns is part of our evolutionary survival mechanism, since our primitive brains were tuned to the immutable physical laws of nature, such as the fact that when lightning strikes, thunder follows. In addition, humans also suffer from “recency bias.” In other words, we weigh recent experiences more heavily when predicting future outcomes. These biases are why people expect stocks to continue to rise if they have increased recently. Indeed, there is convincing evidence of the success of momentum and trend-following strategies in stock and other asset returns, but this is not an unfailing natural law. Instead, this tendency for stocks to keep performing well does not always hold, and the signal eventually erodes and reverses. Price momentum and trend following need to be implemented systematically across a portfolio of assets, with strict sell discipline, to be successful, and those considering these strategies need to be aware of the pitfalls. While our primitive reactions to stimuli kept our ancestors alive, this behavior in financial markets can lead to poor outcomes. Often, when our brain tells us to flee a falling stock or chase the latest fad, our long-term wealth would be better served by doing the opposite or by just sitting still.

One place some might point to a possible “turkey problem” is in the Magnificent 7 stocks. The total return from Magnificent 7, consisting of Microsoft (MSFT), Meta Platforms (META), Amazon.com (AMZN), Apple (AAPL), NVIDIA (NVDA), Alphabet (GOOGL), and Tesla (TSLA), has outperformed the S&P 500 by a massive margin since the end of 2018. To put the returns into perspective, since the start of 2019, the Magnificent 7 have an annualized return of 42.5%, while the S&P 500 gained 16.9% and the S&P 500 excluding the Magnificent 7 clocks in at 13.0%. On an absolute basis, all three are above the long-term average return on stocks.

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For some, the dominance of mega-cap technology stocks since 2019 might bring to mind the technology bubble associated with the rise of the internet and the resultant collapse. Unlike today, during the tech bubble period, internet-related companies dominated returns despite, in many cases, having no profits. Today, US companies have seen superior and improving profit margins, which is the percentage of revenue that ends up as bottom-line profits. The US technology sector is a crucial factor in the S&P 500’s exceptional profitability. Conversely, technology profit margins were falling as the 2000 tech bubble was bursting.

Notably, even companies like Amazon.com (AMZN) were dragged lower when the tech bubble popped. Amazon fell to $0.30 per share, and it would take until 2009 to regain its 1999 high. The critical lesson is not to count on price trends or the concept of a bright future; instead, to focus on the quality of the business and its earnings outlook. Back to today, the Magnificent 7, in general, and some other mega-cap technology stocks are exceptional businesses with profitability and earnings growth rates never seen before for companies of their size. The improving fundamentals and the earnings boost from the artificial intelligence (AI) revolution explain the vast majority of the group’s outperformance since 2019. Rather than viewing the current situation as a bubble, the pivotal concerns should focus on the future profitability of technology leaders following their increased capital expenditures to build AI infrastructure. In addition, the valuations have become more challenging, and the price paid for even a fantastic business matters for future returns.

In a related topic, the S&P 500’s returns this year have been driven primarily by a relatively small number of large companies. The total return of the S&P 500 in 2025 is far outstripping the return of the median, or middle-performing, stock. Notably, this situation was also observed in 2023 and 2024, and mega-cap technology outperformed, so it is not a signal of imminent collapse. While the extreme return concentration can resolve itself through sharp declines in the leaders, additional stocks could begin to perform better, improving the breadth of the stock market.

Some more speculative edges of the stock market have seen impressive returns in 2025. For example, the IPOX SPAC index, which measures returns from Special Purpose Acquisition Vehicles (SPACs), soared by over 100% from its April lows to its October highs, while the S&P 500 rose by a still-impressive 34%. However, the flip side of these types of companies tends to be rough when the animal spirits recede; the SPACs have fallen by 20.9% since their October peak, while the S&P 500 index is only down 1.7%.

Despite outperforming stocks for most of 2025, the decline in risk appetite has caught up with Bitcoin. Bitcoin has fallen to near its year-to-date lows and is posting a year-to-date decline. Despite being considered a diversifier or electronic gold by some proponents, Bitcoin’s price movement has been similar to that of stocks this year. However, the recent sell-off has been more severe. No matter your view on cryptocurrencies, the volatility of Bitcoin shouldn’t be a surprise, as assets without cash flows tend to be more susceptible to large price swings. Like collectibles, like art, cryptocurrencies are only worth what someone will pay for them. While that is also true for businesses, like publicly traded stocks, company cash flows can provide some basis for the pricing or support the owner while waiting for sanity to return to markets.

Turning to the investment greats can also help in battling the influence of the unconscious mind and being mindful of risk. Warren Buffett points to The Intelligent Investor by Benjamin Graham, noting chapters eight and twenty as particularly worthy of focus. Chapter eight tells us to analyze stocks as businesses, not just pieces of paper. Also, investors shouldn’t react to short-term fluctuations; instead, they should take advantage of the market rather than expecting it to guide their decisions. Buffett says, “If you own your stocks as an investment – just like you’d own an apartment, house, or a farm – look at them as a business.”

Chapter 20 provides the basis for value investing, as investors should buy below the “indicated or appraised value.” Value is the present value of the cash that the company’s owners will receive. If one buys enough below this estimated value, there should be a reasonable return even if the analysis isn’t perfect. Buffett says, “You can’t precisely know what a stock is worth, so leave yourself a margin of safety. Only go into things where you could be wrong to some extent and come out OK.”

The trend of economic growth, as measured by real (after-inflation) GDP, has been on an upward trajectory since the COVID lockdown lows. Increases in GDP tend to boost corporate earnings. Benjamin Graham, mentor to Warren Buffett, suggested looking at a company’s earnings over a five- to ten-year period to smooth out economic cycles and value a stock based on “normalized earnings.” With the S&P 500 trading at 22 times next 12 months’ earnings estimates, there remains little fear of an economic or earnings downturn discounted in the market today. The avoidance of recession remains the base case based on our indicators, so the markets may be correct, but one should not be blind to the downside risks.

While capitalism has produced massive wealth and many of the greatest businesses ever known, it is a brutal system that produces these results through robust competition and the destruction of weaker firms. Even Warren Buffett’s Berkshire Hathaway (BRK/A, BRK/B) was built on the remnants of its failing textile business and a department store. Berkshire Hathaway benefited from the greatest capital allocators of our time, Warren Buffett and Charlie Munger, who, in Charlie’s words, “would run money out of a failing business and bought other businesses.” Businesses that don’t adapt to the times and competition are apt to suffer the fate of the Thanksgiving turkey.

Warren Buffett recently released his Thanksgiving letter, which is worth a read if time permits over the holiday. He provides some needed comfort and perspective after all this discussion of risk when he writes: “Our stock price will move capriciously, occasionally falling 50% or so as has happened three times in 60 years under present management. Don’t despair; America will come back and so will Berkshire shares.”