Welcome to this week’s newsletter! I’m thrilled to dive into a hot topic that has taken the market by storm in 2023 – AI and AI-focused companies. As technology continues to advance, investing in this trend has become increasingly appealing. So, let’s explore this exciting field and see how we can position ourselves to capitalize on AI stocks and achieve substantial returns.
First and foremost, I want to express my gratitude to all the readers who have reached out with suggestions to improve the newsletter. Your support and feedback are invaluable, and I’m committed to delivering the best investment value to you.
Throughout my investing journey, I’ve realized that nothing is more captivating than a prevailing market theme. It spreads like wildfire, driven by new technologies or groundbreaking discoveries. Investors eagerly join the trend, flooding the market with an unstoppable force. It becomes the talk of financial news outlets, Twitter, and popular YouTube channels, leaving many investors anxious not to miss out on the excitement.
However, succumbing to the allure of a market trend can be a risky endeavor. We often find ourselves caught up in the fear of missing out, waiting for the perfect moment to jump in as prices continue to climb higher. But unfortunately, nobody can predict the future or the outcome of the latest market trend, including AI and AI stocks. I myself enjoy using AI, and I am amazed and its usefulness and capabilities every time I use it. The first time I tried AI I spent at least 1 hour asking and searching random things like a kid in a candy store, amazed at just how accurate and “smart” the AI seemed to be. But let’s take a walk down memory lane and use history as our guide on how we can better prepare ourselves as investors and also remained disciplined and fundamental in our approach.
Let’s take a step back and look at history as our guide. During the most recent bull market since 2008, I’ve witnessed the rise and fall of various market cycles and themes. From the explosion of social media, cryptocurrencies, NFTs, meme stocks, and electric vehicles to the surge in options trading, the market runs on cycles influenced by economic, geopolitical, and technological factors.
We must acknowledge that the market is a reflection of human emotions. As humans, we tend to be emotional beings, and our collective emotions impact the market. These cycles, whether positive or negative, often influence investor psychology and sentiment. For example, the hype surrounding the switch to electric vehicles drove up prices to unimaginable levels, only to face a subsequent bear market. Throughout the fluctuation of electric vehicle stock prices, has anything changed regarding the growth and transition from gas-powered cars to electric? Humans tend to be unpredictable and irrational therefore the market or stock prices will go in the short term are always unpredictable.
As investors, we aim to develop a strategy and remain disciplined, even in the face of irrational prices. Remember Warren Buffett’s timeless advice: “The first rule of investment is don’t lose money. And the second rule is don’t forget the first rule.”
Protecting our capital is crucial for staying in the game. While losses are inevitable, we must minimize them to give ourselves the opportunity to realize gains. So, how can we navigate the world of AI stocks and capitalize on the latest market theme?
As mentioned earlier, nobody knows exactly what will happen with AI stocks, and that’s okay. The best investors understand that: they know, that they don’t know. This philosophy allows them to remain firm and disciplined in their approach. Instead of trying to predict the future, let’s take a journey through history to gain insights into the market.
While I wasn’t an investor during the birth of the internet, I vividly remember its impact. The internet and smartphones have revolutionized our lives, transforming how we shop, communicate, and work. During the dot-com bubble of the late 1990s and early 2000s, many internet companies skyrocketed in value, only to crash later, leaving investors with substantial losses.
Let’s take a look at an example. One of my favorite demonstrations for this is Amazon. In the late 1990s, Amazon’s operating revenue experienced colossal growth. From 1996 to 2002, Amazon’s revenue grew from 15 million to 3.93 billion, over a 1000% growth in revenue.
During the same period that Amazon’s revenue was exploding, adjusted for stock splits, Amazon’s price soared above 5 dollars to lows of .29 cents. That is more than a 94% drop in price. So a $10,000 investment would have dropped to $600.
Of course, as we know in hindsight, Amazon’s stock price eventually rebounded but not without many years of investor patience. Furthermore, there was no way to predict what would happen with Amazon as it was one of the companies that eventually succeeded while many other online retailers failed. One might think, well of course the market has cycles an investor should just hold on to a stock! This can be deceiving, as we must account for the time value of money and lost opportunity cost. The more time an investor holds on to a losing position waiting for a rebound, is lost opportunity cost. The reality of a business’s growth and the explosion of new technology always is not reflected in the stock price in the short term or even the long term. It was true that the Internet was enormous, it was true that online retail shopping exploded, and indeed, the Internet changed our lives forever. But how many investors simply lost and underperformed the market by chasing a market theme
We can’t predict the future or guarantee which AI stocks will succeed, just as we couldn’t have foreseen the fate of internet companies in the past. Countless stocks have soared, providing significant returns, but it’s virtually impossible to catch every single one. Trying to chase every market trend is not a viable strategy.
I don’t mean to imply that history will repeat itself, but it’s essential to remain conscious of the lure of trend following and speculation. Our focus should be on developing a process, maintaining consistency, and exercising discipline in our investment approach. I would like to think that such a great new technology will undoubtedly play a role in our lives over the next generation. But what AI stocks will do, how they will perform, and which will be the best performers no one can predict.
Consistency and discipline are key. As investors, we must accept that there will be both successful and unsuccessful investments. Strive for a consistent process that prioritizes capital preservation and avoids speculative ventures. Your investment process may evolve as you acquire more knowledge and skills, but having a defined and consistent approach is crucial for long-term growth and profitability.
The fate of AI stocks remains uncertain. Rather than attempting to predict the future, let’s focus on developing a resilient investment process that aligns with our goals. We can navigate the ever-changing market landscape and secure our financial future by staying disciplined and consistent. By remaining focused on our goals and financial future, we may cloud out much of the noise in the market.