Bubble or a New Era?
Key Takeaways
It seemed like just yesterday when Blockchain Technology and NFTs flooded our newsfeeds in 2021. Now a new buzzword emerges: Artificial Intelligence (AI).
Should we be diving in to invest in this? After all, they could be the next big thing like Google or Apple — but it is not the first time that the human race has developed something new and exciting.
History has taught us time and again that when you are caught in the exuberance of the boom stages of these innovations, there can be very painful busts.
By using a systematic indexed manner, you have the ability to invest in revolutionary new technologies without getting sucked into unnecessary asset bubbles.
In a speculative market, what counts is imagination and not analysts.
We are not so far removed from the mania that swept the world over when NFTs and other decentralised / blockchain technology entered mainstream media. Back in 2021, people were frothing at their mouths over the new technology which would supposedly change the world and how we interacted online. In the euphoria, pictures of rocks and monkeys were being sold at astonishing prices, some in the millions. However, at the moment it seems that the shiny future has dimmed as the prices of these digital pictures are currently worth -90% less or even lower.
However, it would appear that investors have quite a short memory as a new buzzword is now sweeping up stock markets and pushing up prices of companies related to a new theme: Artificial Intelligence (AI).
The latest beneficiary of this surge was a company called Nvidia. It started as a company making Graphics Processing Units (GPUs) for gaming but because computer games required massive computing power, the GPUs have been used for many other purposes over the years, even for mining cryptocurrency.
Its hard to imagine that Nvidia was a big loser last year in 2022 (chart below) ending the year -52%.
Tapping on the exuberance on AI (generative AI was mentioned 43 times during Nvidia’s recent earnings call), the share price has skyrocketed this year (chart below). This recent surge in popularity has also lifted the share price of any company related to this new technology.
Are we on the cusp of a technological evolution?
If that is the case, then maybe we should be diving in to invest in these new companies as their future profits would be exceedingly large — in the same way that Google or Apple has risen to prominence.
But not so fast — it is not the first time that the human race has developed something new, transformative, and exciting and it would definitely not be the last. History has shown us that we should always take such things with a measured approach. The past has been littered with the wreckage of companies which have gone bust after the initial craze died down.
Here are a few examples:
1700s — South Sea Company. The company was granted a monopoly on slave trade and exclusive rights on the gold and silver trade with South American colonies. It also created an innovative debt to stock swap where British government debt was exchanged for shares with a guaranteed dividend rate. There was an incredible boom in the shares, which rose more than 8x but eventually collapsed and the company closed down in the mid-1800s.
1800s — Railroad Mania. The invention of the steam locomotive in conjunction with the use of metal rails led to an explosion of building and financing activities related to railways. The train was seen as a new disruptive technology which could move increasing numbers of people and cargo and access areas previously untouched by civilisation. Shares in railway companies surged in the exuberance, and were then promoted as a foolproof venture. Eventually it all imploded (see below). Whilst railways were still used for many more years after the collapse, this is a cautionary tale of getting swept up and paying too much for a business.
1920’s — “Roaring Twenties”. This period followed World War I from 1914 to 1918 and the Spanish Influenza Pandemic which killed an estimated 5% of the world’s population. However, it was during this period that a lot of revolutionary inventions were created. We saw the advent of the vacuum cleaner, electric washing machine, hairdryer, frozen food, electric shaver, ECG, radar and the refrigerator. After so many years of depression and death, there was a sudden consumer and stock market boom. Many believed the record profits generated by companies would continue and levered up on new and exotic financial products. At the end of the decade, a significant stock market collapse occurred and triggered longest and deepest downturn in the history of the United States (see chart below).
2000 — Dotcom Bubble. The advent of the internet allowed many startups to market and raise funds from investors using the novelty of the dot-com concept. As a result, the excitement frothed over and investors were happy to buy and pay anything for technology related companies with no thought about future cash-flows. Investors who got caught up during the boom took more than 10 years to recover their losses.
And now, here we are again, on the cusp of another technology inspired boom — similar to what has happened many times in the past. Perhaps AI will indeed be transformative and changing the world in many positive ways. But what we’ve learnt from history is that when you are caught in the exuberance of the boom stages of these innovations, there can be very painful busts.
So how do we still invest to capture such returns while trying to avoid over-concentration risk or risk missing out altogether (similar to what the growth and tech-heavy ARKK fund did)?
Our core VaR and Everest portfolios operate in a systematic indexed manner in which upcoming companies are assessed on a set of rigid valuation metrics before inclusion. This means that companies are not just blindly included on a whim, but those which fit the evidence based criteria of stock market returns will be. In this manner, you can be sure that your investments accurately represent the latest and most updated investment allocation, with the ability to invest in revolutionary new technologies without getting sucked into unnecessary asset bubbles. If you want to find out more, come and have a chat with us.
