Folks, let’s be honest. We’ve been riding an incredible wave in the stock market. The S&P 500 and Dow Jones Industrial Average just hit record highs this week, and our portfolios are looking fatter than ever. But a wise investor knows that no bull market lasts forever. And some folks are starting to wonder – is the AI boom about to go bust?
We can't ignore the whispers of doubt. Right now, the AI industry is the hottest ticket in town. Nvidia, the undisputed king of AI chips, is trading at nosebleed valuations. But even the mighty Nvidia took a hit recently, alongside other tech giants and AI chip plays. Some investors are getting cold feet, wondering if the returns on AI investments are enough to justify the sky-high prices.
The naysayers are out in force. Elliott Management, a massive hedge fund with billions on the line, is sounding the alarm bells. They’re calling AI a “bubble” that’s destined to burst. In their latest letter to investors, they argue that AI applications are too expensive, unreliable, energy-hungry, and downright untrustworthy.
Now, I’m not one to panic. I believe in the long-term potential of AI to revolutionize our world. But even I have to admit, there’s a whiff of over-exuberance in the air. The question is – are we headed for a dot-com style crash? And what can you, the smart investor, do to PROTECT your profits?
Is the AI Boom Built on Hype?
First, let’s address Elliott Management’s concerns. They do raise some valid points. Current AI models do have limitations, and there’s no guarantee that every AI company will succeed. But claiming that AI is only good for summarizing reports and helping with computer coding is shortsighted, to put it mildly.
AI Isn’t Just a Buzzword – It’s a Reality
As we've discussed in this newsletter all week, companies across almost every industry are adopting AI at a breakneck pace. Lumachain, Chipotle's new AI partner, is using artificial intelligence to improve safety, quality, and reduce waste in food production. And it's just one example.
Even legacy companies like IBM are transforming into AI powerhouses. As we reported on Monday, Big Blue is generating over $2 Billion in orders from its Watsonx enterprise AI platform, while investors are still piling into the likes of Nvidia.
Don’t forget what AMD CEO Lisa Su, the head of the SECOND largest AI chip company, said just this week:
“It’s clear the rate of investment is continuing to grow everywhere, driven by more powerful models, new use cases, and actually just wider adoption of AI use cases.”
If the AI revolution was just hype, would savvy CEOs be making these kinds of statements, and investments? Think about it…
The AI Bull Market is Young – The Dot-Com Crash Took YEARS
Remember the dot-com bubble? That frenzy lasted for YEARS before it finally burst in 2000. The current AI bull market is only about two years old, and many believe that it's just getting started. Oracle’s Chairman Larry Ellison, for example, believes the AI race will “go on forever,” driven by the need to build “better and better neural networks.”
As we detailed Wednesday, a Global AI exchange-traded fund, which invests in companies involved in developing and using AI, has delivered a compound annual return of 15.7% since it was established in 2018, which is much better than the 13.1% average annual return from the S&P 500. This is hardly the performance of a “bubble.”
What to Do NOW: The AI Crash Survival Guide
That said, the market is a fickle beast. It’s always wise to prepare for a potential pullback. So what can you do to protect your hard-earned AI profits?
- Don't Chase Hype: Avoid overpaying for AI stocks based solely on hype. Look for companies with solid fundamentals, real revenue growth, and reasonable valuations.
- Diversify Your Portfolio: Don't put all your eggs in the AI basket. Spread your investments across various sectors and asset classes to reduce your risk.
- Look for Income: Focus on AI stocks that pay dividends, such as IBM and the Global X Artificial Intelligence & Technology ETF.
- Have a Plan: Consider setting stop-loss orders to automatically sell your AI holdings if they fall below a certain price.
The AI revolution is happening folks, whether Elliott Management wants to believe it or not. But even the most ground-breaking technologies can experience market corrections. By following these steps, you can navigate the AI boom with confidence and sleep well at night, knowing that your portfolio is built to withstand any storm.
What's Next?
Tomorrow, we'll take a look at how you can leverage the immense power of Big Tech to grow your wealth in the AI market. Make sure to come back for a deep dive into the ‘Magnificent Seven'.
