Concept is the story behind a stock. It can be a simple as the elevator pitch that explains why a given stock is potentially interesting. For example: Nvidia (NVDA) is the king of AI chips and AI is the future of just about everything. One might add that the company is growing at 50%+ per year but only trading at 35x this year’s expected eps. Usually, though, it’s a business line by business line analysis of possibilities over the coming, say, five years.

Valuation is the argument that a stock is cheap. Valuation can sometimes, paradoxically, be the concept, too–especially so for the deepest value investors. But it’s handy to separate the two. Cheap often means trading at a discount to a key balance sheet metric, like shareholders equity (book value) or net working capital or net cash (the letter two being Depression-era benchmarks that Graham and Dodd used; Japan is the only place you might see this nowadays, and that’s most likely an indicator that the company is family-controlled and not able to be acquired).

In an up market, Concept dominates. In a serious down market, Valuation is all people worry about. Think the second half of 2020 for the first, 2007-08 for the second.

My sense, from reading market commentaries, that pundits overall think we’re in a concept-driven market. I think that’s true only in the very narrow sense that the air continues to come out of pandemic darlings that, even now, have been driven more by hope than underpinned by earnings. I regard this as more or less looking in the rear-view mirror.

In addition, if we look at ARKK, arguably the ultimate in concept investing, it’s down by -9.7% ytd, as I’m writing this, vs. +4.1% for the S&P 500 and +1.6% for the NASDAQ. On a one-year view, ARKK is well ahead of NASDAQ but trails the S&P. The point here is that after their big runup in 4Q23, the market had already begun to move away from the riskiest stocks almost two months ago. (For what it’s worth, my sense is that what’s happening now is the final pandemic-stock housecleaning. Again, using ARKK as a barometer, that ETF is off by about 2/3 since its top three years ago. This compares with +50% for the S&P since then and about +10% for the NASDAQ (which peaked in late 2021. From the latter high, NASDAQ is basically flat. Who knows what will happen, but it’s hard to imagine further punishment from more or less the same group of stocks.)

NVDA, again

It will be interesting to see what happens when NVDA reports after the close today. It’s off its ytd high by about 8% in the past few days, after almost tripling out of the gate in 2024. If I’m correct that Wall Street has substituted fast-reacting bots for human, spreadsheet-creating industry experts trying to predict–and act in advance of–earnings, then there should be strong action in either direction, depending on the earnings news. My hunch is that this will be more true if the earnings are disappointing than if they’re surprisingly good. That’s mostly because it’s (untrained) human nature to not want to admit a mistake–so that takes everyone who’s sold in the last week out of the game, I think. But I have no real idea. It will be interesting to watch.

Myself, I’ve held NVDA, thanks to my son Brendan, for years. I have no intention to sell. And I have enough that I haven’t even set a target at which I’d be a buyer. That last sentence would be very bearish if there were lots of holders like me–because it suggests buyers on bad news might be thin on the ground.