The magic number 7

It took God six days to create the world – but then on the seventh day, he rested. That’s no coincidence. Seven is a holy number in most religions and frequently makes an appearance in fiction and mythologies. There used to be the seven world wonders, there are seven oceans, there are seven deadly sins, and not to mention seven dwarfs. There are seven days of the week, seven tones of music, seven colors of the rainbow, and so on. This number is prominent in our minds and work.

The number seven is also important on the US stock market. Everything revolves around the magnificent seven, seven companies that all originate in America. These are: Nvidia, Microsoft, Apple, Amazon, Alphabet, Tesla, and Meta. The stock prices of these seven companies rose by 111% in the last year compared to a 25% rise in the S&P 500 index. The S&P 500 index is composed of the 500 largest (by value) companies registered on the American stock market. One of these seven companies, Microsoft, is worth more than the combined market value of the British FTSE 100 (Footsie) index. FTSE 100 is composed of the 100 most valuable companies registered on the London Stock Exchange. The magnificent seven have been the main driving force for the S&P 500 index for some time. Notably, Microsoft’s stock value has risen by 1100% in the last decade, Apple has grown by 1000% at the same time Meta (which runs Facebook) has grown by 840%. And so we ask, what is so special about the number seven?

The number seven was on my mind when I was traveling by metro in Paris on the 7th of April this year. It was the birthday of my late father, Viðar Magnússon, and I was on my way to run a marathon which is six times seven kilometers. I had carefully planned where I should exit the metro to be as close to the start line as possible. It is preferable to not have to walk far to the start line before running more than 42 kilometers. There were plenty of people on the train, the runners were discernable by their race numbers stuck to the front of their race gear which also displayed their respective national flags. I had noticed a few French runners, and I believed following them would be a good method of determining where best to get off. Locals know how best to go about these things. They did not get off where I had planned to exit the metro. So, I waited and then approached them uneasily and asked where they had planned to get off. They said they were not sure and had planned to use the same method as me and follow the rest of the runners. This is quite a common method, that is, assuming other people know what is best and copying them. The same can be said of the stock market.

Deleted:Now let‘s return to the question of what makes seven so special. This question was possibly answered by a famous piece of work in psychology written by George A. Miller in 1956 (The Magical Number Seven). He showed that our short-term memory only has space for seven things and that an individual can only process seven things in a set of information. The processing capability of the brain is thus possibly one of the reasons for the popularity of the number seven. In this regard, we can recall that in the year 2000, there were another prominent seven companies that we called „the Super Seven“. These companies pulled in investors and grew quickly for a time, but then reached an apex. After that, their price fell.

We often say that history repeats itself. There is much sense in that theory, but perhaps it‘s more accurate to say that history rimes. It will be interesting to follow these seven high jumpers. It would be incredible, if not impossible, that they manage to keep the same course. They have simply grown so large. Much more likely is that these magnificent seven meet the same fate as their predecessors the super seven. Their market value must at some point exceed other standard financial metrics and investors will end up getting off on the wrong stop along with all the other shareholders.

Additionally, we can recall that there are more than 2000 companies registered on the New York Stock Exchange. It is thus important to spread your investments and not to put all your eggs in one basket. The best strategy, of course, is to invest in companies that have the potential to rise rather than those that have already reached high valuations. Furthermore, it is important to choose companies that are evaluated by real value estimations.