MARKET UPDATE - Stay The Course: Resist AI FOMO And Stick With Your Long-Term Plan
There’s nothing that will derail you from your preconceived investment strategy like seeing others get rich quick.
When other investors are enjoying rapid gains and seemingly effortless success by throwing money at the latest stock market trends, and when this happens for an extended period of time, it is only natural for the thoughtful, fundamentals-based investor to second-guess themselves.
“Am I doing something wrong?”
“Am I a terrible investor? Should I just give up stock-picking and buy the S&P 500 or Nasdaq ETF?”
“Is technology the only way to do well in the stock market today?”
Right now, the US economy (and much of the global economy) is in the grips of an AI gold rush.
It is hard to engage with any form of media, especially financial media, without hearing multiple references to AI. It is now everywhere in our culture. AI-generated content is all over the Internet.
And in the stock market, it is hard not to notice that AI-related stocks (CHAT) are absolutely trouncing everything else, especially income-oriented investments like dividend stocks (SCHD) and REITs (VNQ):
It’s easy to look at this chart and conclude that one would be ~67% richer today if they had sold everything else and went all-in on CHAT at the beginning of this year.
But this way of thinking is entirely based on hindsight. It also assumes that one buys into the hot trend at the right time and (somehow) knows exactly when to sell.
The human mind tends to heavily weigh the importance of recent events and underweight everything else in history. This is called “recency bias.”
Recency bias makes an investor think that AI stocks will continue going up because they have done very well this year, and everyone is excited and optimistic about them.
But if we were to assign equal weight to both recent events and the grand scheme of history, we’d have to acknowledge that revolutionary new technologies virtually always cause investors to overvalue and overinvest in them.
This has been the case for railroads (1870s), electricity (1920s), the Internet (late 1990s), crypto/Bitcoin (late 2010s), arguably green energy (early 2020s), and now artificial intelligence.
It may be impossible to say with certainty when the assets associated with the new technology become overvalued and overinvested in, and it is equally impossible to say how high the prices of the associated stocks will climb. But historically speaking, they usually (perhaps always) become overvalued eventually.
At some point, it becomes apparent that despite how revolutionary the new technology clearly is, it will take longer than initially expected to widely implement it. At that point, investors begin to realize that they’ve overinvested in the space and overbuilt.
They’ve built more miles of railroad tracks than can be profitably utilized. They’ve produced more electrical infrastructure than can be profitably installed. They’ve laid more fiber optic cable in the ground than Internet usage requires.
It certainly appears as though we are on track to repeat history with the massive buildout of data centers on which to run AI software.
Moreover, there are some signs that AI has become overinvested and overvalued similar to what has happened in prior bubbles.
In the 1920s, for example, utility stocks soared as electricity spread from 30% of US households at the beginning of the decade to 70% at its close. This euphoria for electricity facilitated a complex and interconnected pyramid scheme of holding companies and subsidiaries. More companies were created based on the same assets, driving more capital into the utility sector and inflating valuations of the actual assets.
In the late 1990s, there was a circular flow of spending within the Internet sub-sector, wherein hardware companies like Cisco (CSCO) provided seller-financing for telecom companies to buy Internet infrastructure equipment from them.
We see something similar happening today.
Like the utility sector in the 1920s, a complex and interconnected ownership structure is forming between the AI-related tech companies. And like the Internet sub-sector the late 1990s, there is a circular flow of spending within the space that currently accounts for the vast majority of AI-related revenue.
All of this interconnected ownership, circular capex, and rapid buildout of AI infrastructure is premised on the notion that demand for AI products is going to surge exponentially in the coming years.
But what if demand for AI grows a lot more slowly than expected, as it did in the late 1990s and early 2000s?
If that is the case, then the current AI infrastructure capex boom is going to result in a multi-year period of oversupply just as telecom capex did in the 2000s. Also, peak valuations of the companies involved in AI will prove far too optimistic and will eventually deflate.
This doesn’t mean that AI isn’t a revolutionary technology. It is.
But like so many other revolutionary new technologies that came before it, from rail transportation to electricity to the Internet, widespread implementation will likely take longer than the early adopters expect it to.
A decade ago, we remember hearing panicked hand-wringing from technologists about how self-driving vehicles would soon put millions of truck and taxi drivers out of work. But here we are, ten years later, with automated vehicles just beginning to enter commercial use and experts predicting that fully automated trucking is still 10-20 years away.
We think a similar degree of hastiness accompanies the thinking behind today’s AI infrastructure boom and AI-related company valuations.
We suspect it will take a long time to practically and profitably implement AI. Likewise, we suspect it will take a long time for demand from outside the AI-tech space to grow to the point where it fully utilizes the capacity currently being built.
Stay The Course
Fellow landlords, we encourage you to stay the course. If you have carefully and thoughtfully created an investment plan, stick with it.
Resist recency bias.
Say no to FOMO.
Trust in your long-term strategy.
We are not saying that you ought to have no exposure to the technology sector or to AI-related stocks. If, for example, your preconceived investment plan involves a 20% allocation to tech, then it would be reasonable to stick to that allocation. If you’ve owned some of the names involved in the AI frenzy for a long time and consider them core holdings, we don’t suggest selling.
We are simply writing to remind you of the wisdom and prudence of disciplined, unemotional investing.
Yes, quick riches have been gained in the AI space this year, but riches have also been lost by giving in to FOMO in past asset bubbles.
Enduring wealth is not built by chasing momentum or buying “what’s working” at any given time. Rather, it is built by adhering to a consistent, thoughtfully designed, long-term investment strategy that you can stick to through the inevitable ups and downs of the market.
Remember the old parable of the tortoise and the hare.
Investing is a marathon, not a sprint.
While it can be painful in the short-term, we believe investors who stay the course and stick with their long-term investment plans will do well in the long run.
Finally, please note that we have exceptionally posted this article without a paywall. If you found it valuable, consider joining High Yield Landlord for a 2-week free trial.
You will also gain immediate access to my entire REIT portfolio, real-time trade alerts, exclusive REIT CEO interviews, and much more. We are the largest and highest-rated REIT investment newsletter online, with over 2,000 paid members and more than 500 five-star reviews.
We spend thousands of hours and over $100,000 per year researching the market for the most profitable investment opportunities, and we share the results with you at a tiny fraction of the cost.
Get started today - the first 2 weeks are on us:
Analyst’s Disclosure: I/we have a beneficial long position in the shares of all companies held in the CORE PORTFOLIO, RETIREMENT PORTFOLIO, and INTERNATIONAL PORTFOLIO either through stock ownership, options, or other derivatives. We also own a position in FarmTogether. High Yield Landlord® (’HYL’) is managed by Leonberg Research, a subsidiary of Leonberg Capital. All rights are reserved. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. The newsletter is impersonal and subscribers/readers should not make any investment decision without conducting their own due diligence, and consulting their financial advisor about their specific situation. The information is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The opinions expressed are those of the publisher and are subject to change without notice. We are a team of five analysts, each contributing distinct perspectives. Nonetheless, Jussi Askola, the leader of the service, is responsible for making the final investment decisions and overseeing the portfolio. We do not always agree with each other, and an investment by Jussi should not be taken as an endorsement by other authors. Past performance is no guarantee of future results. Our portfolio performance data is provided by Interactive Brokers and believed to be accurate but its accuracy has not been audited and cannot be guaranteed. Our portfolio may not be perfectly comparable to the relevant index. It is more concentrated and may at times use margin and/or invest in companies that are not typically included in REIT indexes. Finally, High Yield Landlord is not a licensed securities dealer, broker, US investment adviser, or investment bank. We simply share research on the REIT sector.
