Don't underestimate your own edge

It is May 27th 2024. Nvidia’s stock is at $1064.69.

Roughly five years ago Google publicly announced their integration of BERT into Google search. Nvidia’s stock on that date was $51.14.

I remember thinking about whether investing in Nvidia could be a good idea. Deep learning models were clearly an impactful tool that were only going to get better and be applied to more tasks. The hype had already been building since 2012 with the release of AlexNet which smashed prior records in a computer vision competition and made people in the field aware of its potential. It was one of the most exciting tools that had recently been developed in science.

Nvidia had a monopoly on the hardware required to both train and use deep learning models. They were still led by their original founder Jensen Huang and clearly in a fantastic position. But I had read just enough about finance to know of the Efficient market hypothesis. Surely if I was aware that Nvidia was in a great position, all the professional investors did too. It must be priced in already!

Clearly not.

The takeaway for me is that if you do work in a field and are aware of a great product or service don’t underestimate the degree to which most people will be unaware of them. Even those who you might expect to know better.

Professional investors don’t buy stock based on how a company is doing now, but on what they expect growth to be like in the future. I think this is main reason Nvidia was underpriced by professionals. They may have known that they were in a good position, but it was only with the release of ChatGPT and the explosion in AI startups that it became clear that there was huge demand for what Nvidia offered and therefore huge growth on the horizon.

But I believe that for anybody in the industry it should have been obvious that the growth would happen. Deep learning gets such good results it was guaranteed that some use case would be found for it. Some people took decisive action based on deep learning’s effectiveness even earlier than 2019: OpenAI was founded in 2015.

Nvidia’s stock price at the time? $8.