Alas, I’ve reached the age where my teeth are starting to wear out. How is it that I wasn’t told decades ago that it’s a bad idea to open plastic packaging with your teeth?
Last week I had two more dental crowns installed paired with the first one implanted earlier this year. My dentist assured me the rest of my choppers look okay - for now - assuming regular flossing and that I stop using them as a bag opener; I can’t promise either.
The process wasn’t painful and ended on a positive note when the dentist said my new crowns were manufactured by Dentsply Sirona. For those who don’t live in York, Pennsylvania, Dentsply is the world’s premier manufacturer of dental and consumables (eg. false teeth, dentures and crowns) and has deep roots in York.
The innovative new company chose York as its manufacturing home in 1907, from where it invented a host of dental products and championed the mass production of ceramic teeth in all its various forms.
In a way, Dentsply was a high-tech company, not dissimilar to the innovative tech companies dominating the US economy today.
As I sat in the dental chair musing about the rich history of Dentsply and yet another extraordinary business success story emanating from York, it conjured thoughts about technology, innovation, market bubbles and best investment practices in a stock market bubble.
No, it wasn’t the numbing meds that got me thinking this way. I’ve been grappling with the investment impact of the generative artificial intelligence (“AI”) phenomenon since it burst on the scene in late 2022. It has spawned a new tech sector bull market that has become so frothy that is now poised to rival the mother of all market bubbles: dot.com.
The AI driven stock market spectacle is not my first tech bubble rodeo. As a young investment professional in the late 1990s, I had a front row seat during the internet stock bubble/crash.
The dot.com era was a miserable time to be a professional money manager. It was a struggle to even match the stock market performance during that manic bull market because just a handful of tech stocks drove the entire stock market higher. Sound familiar? The aftermath of the 2000 crash meant repairing devastated investment portfolios, which took many years.
The dot.com financial carnage was surreal: Driven by the emerging internet and then Y2K spending, the NASDAQ tech index rose 800% from the mid-1990s until early 2000. Then the bubble burst with the NASDAQ Index collapsing 78% by October 2002. It took over fifteen years for the index to rebound to its March 2000 pinnacle. The (slightly) more diversified S&P500 Index dropped a stunning 57% peak-to-trough during the same period.
I was confident that I’d not see another tech stock market bubble again in my career – yet here we are. To be sure, I’m getting too old to navigate through another tech market crash and so are our Baby Boomer clients.
No question, AI is a fascinating technology that holds serious potential for meaningful future economic and societal benefits. The problem is that for investors AI-fostered economic benefits are not well-defined, feel over-hyped and won’t materialize until well into the future, if at all.
I’d like to come back in the next life as a futurist. Last fall I sat through a presentation by a professional “futurist” who divined a magical AI-driven future for humanity where machines will create a life of leisure. What a gig! I bet he made $50,000 that day predicting distant future events for which he’ll never be held accountable.
The stock market euphoria about AI in its current form is irrational, but the stock market often behaves irrationally, especially during technology boom times. Aside from the internet, the advent of railroads, automobiles and the radio all propagated bull stock market events that eventually ended badly.
Back in the 1990s boom, the darling computer chip company was Cisco Systems; today it’s NVIDIA. Both companies experienced a meteoric rise in their stock price. Cisco remains a viable technology company today, but nothing grows to the sky. During the dot.com crash, Cisco’s share price swooned a stunning 83% and the stock has been a relative underperformer ever since.
And NVIDIA’s share price keeps climbing.
I attended an investment conference earlier this year and posted a question to a high profile TV investment pundit (whose name you’d recognize): “How is NVIDIA’s current stock price surge different than CISCO’s epic run in the dot.com era? I got a word salad response.
If the AI irrationality continues, I’m (unseriously) thinking about changing our firm’s name to add “.AI” then flip it for multiple times more than its current value. It could be a swell chance to profit from the greater fool theory.
Outlandishly rosy predictions about AI are adding helium to the tech sector balloon by the week - but is not rooted in realism. Not sure about you, but I’ve been underwhelmed using the ChatGPT AI technology. It’s like a faster Wikipedia with less detail and is riddled with factual mistakes.
I liked what one commentator said about the current state of AI: It’s the world’s largest plagiarism technology. The current truth is that the prospects of AI serving as a game-changing driver of business productivity are short on details, yet tech stocks keep running higher. I’m pretty sure I know how this all will end.
So, it’s reality check time heading into the second half of 2024. If you own a large cap stock index fund, 34% the S&P500 index is now comprised of mega tech stocks, nearly as high as in March 2000. My counsel is to steer clear of tech-dominated equity index funds in these bubbly market conditions. An index fund cannot take profits in tech winners and is set up for trouble as soon as the AI bubble springs a leak.
Indeed, there are treacherous investment times ahead for momentum-growth tech investors – and I stand by that prediction.
Until next time, be well…Tim