This is a summary of my full article on Medium. For the complete deep dive, check out the original post here. You can find the full Python code here if you’re interested in the technical details.
Inspired by the 1960 Western film The Magnificent Seven, the financial world has adopted this name for a standout group of tech pioneers reshaping global markets. In 2023, Bank of America analyst Michael Hartnett highlighted seven influential companies—Google, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla—impacting their fields through technological innovation.
By 2025, Broadcom replaced Tesla on the roster, showcasing market shifts. Analysts have noted this change, emphasising the group’s adaptability, though Tesla is still mentioned.
In this article, I will try to investigate
- The correlations between the stocks
- Backtest an equal-weight strategy
- Backtest EPS (Earnings per Share) weighted strategy
Correlations
Let’s explore the correlations between them
Tesla, known for its volatility and responsiveness to political news (hey Elon!), exhibits the lowest correlation among major players, which isn’t surprising.
I want to note that the above correlation gives us a very high level of understanding. If you wish to dive deeper into the subject, take a look at the article here
How to invest in the magnificent seven
The question is how to allocate your portfolio to the ‘magnificent seven’ (or eight). Choosing just one poses risks, as Nvidia and Broadcom saw returns over 200%, while Apple’s return was only 13%.
We’ll allocate equal capital to each stock and rebalance the portfolio on the 1st of every month, ensuring the same amount is invested in each stock, no matter the price changes.
Our strategy achieved a 100% return, outperforming nearly all stocks, though it lagged behind Nvidia, Broadcom, and Meta. Notably, it outperformed the SP500 by over double during the same period!
When you diversify your investments, you should notice reduced risk.
The strategy is less risky than the stocks it outperformed, showing lower volatility than Google, Amazon, and Tesla. It is also less than half as volatile compared to Nvidia and Broadcom, which reduces our concerns about daily performance. While SP500 is a safer option, its returns are less than half of our expectations.
- Its volatility is lower than that of the stocks which the strategy itself outperformed! Google, Amazon, and (apparently) Tesla were more volatile, even though they performed worse than our strategy.
- This strategy is also less than half as volatile when compared to Nvidia and Broadcom. This offers a significant reduction in concern, allowing us to feel more at ease as we monitor our daily performance.
- When it comes to SP500, it’s definitely a safer option compared to our strategy. However, the returns are less than half of what we anticipate.
EPS Weighted Strategy
Let’s explore a strategy linking weight to earnings per share (EPS). I’ll use the same monthly rebalancing approach, investing in stocks with the highest EPS.
For this strategy, I’ll follow the same approach as before. I plan to rebalance the portfolio on the first of each month and will invest proportionally in the stocks that show the highest EPS.
What an interesting surprise! The EPS strategy generated much lower returns at 74% compared to the simpler strategy, which achieved 100%. However, it still outperformed SP500.
Now let’s plot the risk:
As expected, the EPS strategy exhibited less volatility than the equal weight strategy, seemingly sacrificing some profit potential.
Maximum Drawdown
An important metric to consider is the maximum drawdown. Let’s calculate and plot this value.
Both strategies show impressive maximum drawdowns in the mid-20s range, with only SP500 (18%) and Microsoft (23%) outperforming them. This metric is reassuring for peace of mind! 😉
Less stocks?
Given the controversy surrounding the replacement of Tesla with Broadcom, it will be intriguing to observe how the strategies perform without both companies.
Both strategies performed worse than the initial ones, losing about 30% of their profits. Similarly, regarding volatility, they turned out to be less risky.
Conclusions
- A monthly rebalanced portfolio evenly distributed among eight stocks, such as Tesla and Broadcom, achieved about a 100% total return from mid-2023 to today. This outperformed most individual stocks, except for NVIDIA, Broadcom, and Meta, and more than doubled the S&P 500 (SPY) return.
- Our equal-weight strategy exhibited lower volatility than Google, Amazon, and Tesla, and was less than half as volatile as NVIDIA and Broadcom, although it remained riskier than the S&P 500.
- An EPS-weighted portfolio, rebalanced monthly, delivered a total return of 74%—lower than the equal-weight approach but still ahead of the S&P 500—with reduced volatility compared to the equal-weight strategy.
- Both portfolio strategies showed strong performance in maximum drawdowns, remaining within the mid-20% range. Only the S&P 500 and Microsoft displayed smaller drawdowns, which indicates effective downside protection.
- Removing Tesla and Broadcom from the portfolios resulted in an approximately 30% decline in returns and reduced volatility, highlighting their significant impact on overall performance.
When it comes to investing, it can feel a bit like the Wild West. Sometimes, it’s best to go along with the crowd. As they said in *The Magnificent Seven*: “Nobody gives me my guns and tells me to ride on. Nobody!” This reminds us that strength and returns often come from being part of the right team.