Is AI an Investment Bubble

Speaker 1 – 00:00
Artificial intelligence has generated some of the biggest returns that we’ve seen in stock market history. A lot of
people have missed out. A lot of people have made millions.
Speaker 2 – 00:07
We have people saying, well, I want to get into AI Is this a good time for me to be doing it?
Speaker 3 – 00:11
If you just look at historic data, the drawback potential is serious, the downside is crazy. And we just want to make
sure that you have an investment strategy that’s supporting your life and goals. Because the worst thing that could
happen is you’re concentrated in one stock, you see an 80% pullback.
Speaker 1 – 00:27
Oh, this is a great investment. Okay, that depends on when you got in, when you got out, which most people can’t
get. Right. True wealth is something that’s going to support you forever. Not a bet that happened in one year and
then you get wiped out the next year.
Speaker 3 – 00:36
And the way to not be subject to all of that is to diversify.
Speaker 1 – 00:41
Properly by it, really determine the success of your financial plan. Artificial intelligence has generated some of the
biggest returns we’ve seen in stock market history. A lot of people have missed out, A lot of people have made
millions. Now the question is AI a bubble or is this just the beginning? All right, so AI, it’s exciting, it’s
uncomfortable. Guys, I think we’re going to go, you know, really nerdy into some of the numbers out here to answer
the question. Is AI a bubble or is it just the beginning? Are we somewhere in between? First, we want to preface
this. A financial plan is so important if you’re a tech, you know, executive or someone that’s had tech stock, and
your balance sheet is now five to $10 million and you’re in your 40s or 50s, 30s. We see this quite common now.
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Speaker 1 – 01:24
We’ve seen it all. We’ve seen, you know, stocks on margin and know one stock can move pretty quickly. You could
see a 50% drop like that. So the question is, how important is securing your life by design for the rest of your life? If
you’re someone that has not invested, if you’re a doctor and you’ve not invested in AI directly yet, you may be
invested. You don’t even realize it. The question is it too late or is this something that should be part of your long
term investment plan? So first of all, everything is individualized toward you. A financial plan should support your
life by design. No matter what, you know, missing out or, you know, fomo, it’s something that’s real, but ultimately
want to predicate that with your values and what’s most important to your family and your financial plan.
Speaker 1 – 02:03
Now with that being said, let’s get into AI. Are we in the beginning or are we in a bubble? What do you guys think?
Speaker 3 – 02:08
I think if we look at like what is a bubble? When has there been a bubble? Early 2000s.com, 2008 mortgages and
housing and fundamentally just high level. What it is basically when there is everything is way overvalued and there
are not financials to back it up. So meaning let’s look at the dot com bubble. There was a bunch of companies that
literally had no profits, there’s no cash flow. These valuations of these companies were all being projected on
future cash flows, future earnings. I think that things are a little bit different today. Some of that may be true and
there are some characteristics that apply today. But the big difference is the companies that are leading AI right
now, aside from OpenAI really. So we’re talking the Googles, the Apples, the Amazons, Oracle’s in there.
Speaker 3 – 02:57
These companies are blue chip large cap companies in the U.S. so what that means there’s not a lot of debt on
their balance sheet. They have a ton of cash, they’re very profitable. And so that’s way different than what we saw
20 years ago. We had these small companies that didn’t have those characteristics. So you can make the
argument for and against. I would say our general thesis is there’s some characteristics, but this is a little bit
different. What do you guys think?
Speaker 2 – 03:22
I would say the biggest thing, and this goes back to your point a little bit earlier when you say we have people
saying, well I want to get into a like is this a good time for me to be doing it? And then we’ll look at their portfolio
and they’re 70, 75% in large cap sector of their asset allocated portfolio and large cap primarily right now. The
magnificent seven. So your Teslas, your alphabets, your metas, that’s driving a large majority of the growth of that
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large cap sector. The earnings per share of just those seven companies between Tesla, Apple, Amazon, the Mag 7,
35% a year since 2016. So a lot of these big companies like WIP said, are implementing AI in their procedures in
how they operate.
Speaker 2 – 04:07
And so when you have someone saying, well I want to get into AI but their portfolio is 70, 75% large cap, well
indirectly you have a ton of AI exposure. You might not even realize it.
Speaker 1 – 04:16
Is AI a bubble or is it the beginning? It’s the beginning and here’s why. So now I’M going to preface that with there’s
going to be lots of volatility. There’s going to be lots of companies I think that go under. There’s lots of companies
that benefit huge long term AI in general with how it’s going to impact our lives, companies lives, how companies,
you know, print profits, you know, save expenses, generate free cash flow. This is just the beginning. But there’s
going to be lots of bumps, there’s going to be crashes, there’s going to be volatility, just like you’d see in a normal
stock market. If you’re just invested in AI, that’s going to be even more magnified. But if we just look at what the
bubble, WIP, going back to what you said, the tech bubble.
Speaker 1 – 04:53
So from June 30 and 1996 to March 31 of 2004 year, basically a almost a four year period, earnings during that
period, which stock prices are derived from were 80%. The returns if you invested in those companies were 439%.
If we look at a ratio, that’s a 5 to 1 ratio of returns over earnings.
Speaker 2 – 05:16
Earnings did not support the returns you received.
Speaker 1 – 05:19
Now if we look at today, so from September 30th of 2021 through September 30th of 2025, so you know, four year
period we’re looking at earnings growth was 73%. Stock returns have only been 94%. Let’s just say a 1 to 1.2 ratio
versus a 5 to 1 ratio. Yeah, there’s been lots of easy money, but earnings has really supported that easy money
because these companies are literally printing cash and the projects are not taking on debt, they’re using free cash
flow at least the magnificent seven. A lot of times are. Now are there dangers? Is there a huge concentration like
The S&P 500, you know, 35 to 40% depending on the day. The Mag 7 make up over a third of the S&P 500. Does
that mean seven companies make up over a third of The S&P 500?
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Speaker 1 – 06:09
Two thirds are made up with the other 400 plus companies. So do we think it’s a bubble? No. Are there lots of
caution, lots of optimism? Depending on how you look at it, absolutely, yes. Let’s dig into some further details.
Speaker 2 – 06:19
No, Matt, that’s a great point because you were mentioning that build out of a lot of these AI developments are
being from cash flow and not debt. Global AI infrastructure investment through 2030 may reach between 5 and 7
trillion and it’s being funded responsibly. They’re not taking on debt. These are just through operating cash flow,
diversified capital markets, strategic partnerships, et cetera. So not leverage. So it’s not speculative as it has been
in the dot com bubble and the graphs that we just referenced. So the build out of a lot of these infrastructure and
investments is from a lot more stable sources than with, than we’ve seen in some of the previous bubbles in the
US economy.
Speaker 1 – 06:56
Yeah, if you look at like commercial real estate, think about how many people are working from home still post
Covid and like the vacancy rate, I don’t know like in Pittsburgh. I just know it’s over 50% if you’re downtown. Like as
far as like what companies are in person, if you look at these data centers, the vacancy across the board is 1.6%.
There’s not a demand shortage, there’s a supply shortage. You know, the GPU supplies basically get sold out
instantaneously and a lot of the scalers have to turn away workload because of that. Now with that being said, it’s
not all butterflies and rainbows here. Right. So WIP, you have the example of the mortgages that were being used
in some cases. So depending on your company, not all companies have free cash flow, not all companies have
good credit. Give us that example.
Speaker 3 – 07:35
I think the overarching point is the technology can be right, which we think it is. The technology’s been
revolutionary. Prices don’t always have to be right. We’re not saying prices aren’t correct now. And the companies
that we think are going to be the winners are not always the winners. If you keep those in mind and really take a
diversified approach to this, that’s how we would say you win instead of trying to hand pick which company is
going to win. And so to the example that you said, a lot of these companies, and we’ll specifically look at OpenAI,
Anthropic and XAI. So these are not part of the MAG7. These are three of the leaders. They’re all three private
companies.
Speaker 1 – 08:13
And this is supporting the MAG7. Right. But they’re not somewhat.
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Speaker 3 – 08:16
Yes. Yeah, all three are privately held companies. All three, they’re not as profitable, have the cash flows as a bigger
company. So one of the big things behind all of this is the infrastructure built out and these push to build these
data centers. These data centers are billions of dollars, trillions of dollars are flowing into these to build this to
support the infrastructure. Those three companies, specifically because they don’t have the cash flows on their
balance sheet, they don’t qualify for normal Business loans as a profitable company would. So there has been
instances where they’re underwriting mortgage type loans just to get the funding into these data centers. And so
we’re not here to speculate if that’s good or bad or how that’s going to impact their company.
Speaker 3 – 08:58
But what I would caution is there’s a rush to dump a lot of money into this technology. And if we look back at past
revolutions of tech, as far back as railroads, radios, the Internet, all of this stuff, a lot of these cycles are the same
in the sense of people rush to dump their money in. It’s euphoric, it’s emotionally driven, and then the cycles are
very similar. So we’re not saying there’s going to be a big crash. There probably will be some corrections along the
way. And the way to not be subject to all of that is to diversify properly by investing with the tech, not trying to hand
pick which companies.
Speaker 1 – 09:37
Are we on an AI bubble with certain companies, Absolutely certain companies will crash the overall. Are we on a
bubble AI? I would answer no. Diversification is an important structure to have in any portfolio, I would say,
especially in AI, I mean, their main players are basically exchanging money. You know, video, Tesla, Amazon, all
these companies are basically exchanging money. So there could be some issues, you know, if that stops. But you
know, diversification is still going to be an extremely important aspect of AI. And you know, the rest of the S&P 500
as these other companies do, start to adopt AI and figure out how it can save, you know, their profits, revenue
minus expenses.
Speaker 3 – 10:17
And I think it’s important to understand, like if you’re heavily concentrated in one of these companies, if you just
look at historic data like the drawback potential is serious. Like if you look at Nvidia the last 20 years, obviously
they’re killing it right now. They’ve gone up into the right, but they’ve dropped over 50% twice. There was like a 60%
pullback and an 80% pullback. So you will get a lot of this upside, but the downside is crazy and we just want to
make sure that you have an investment strategy that’s supporting your life and goals. Because the worst thing that
could happen is you’re concentrated in one stock, you see an 80% pullback. And will that last with Nvidia? Probably
not. They’ll probably rebound. They’re a big company.
Speaker 3 – 11:00
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But in that short time period, your life’s going to be really stressful because it’s just depending on the Nvidia share
price.
Speaker 2 – 11:05
Do you have the time horizon to wait out one of those drops. And then emotionally speaking, are you disciplined
enough to stay in during one of those downturns? A lot of people, it’s a lot easier said than done. So that’s why we
always stress keeping a concentrated position between 10 and 15% of your overall balance sheet, your overall net
worth, so that we’re not so tied to those swings when they do occur.
Speaker 3 – 11:29
Cisco was booming in late 90s, early 2000s. They got crushed with the dot com level 25 years later. Now they’re
adopting AI. They are now back at the price they were 25. So it literally took them 25 years to get their business
back to where it was. So that’s like a real, that can happen with any one of these companies.
Speaker 1 – 11:50
No question. Yeah. So historical perspective, we had the railroads in the 1840s, big transformation. Radio and
autos in the 1920s, big adoption, huge drawdowns, ultimately with the rate depression. Then we had the Nifty 50 in
the 1970s. So lots of iconic businesses, but extreme valuations. We know the ending story there. And then Internet
1990s to 2000. So world changing tech, 5 to 1 ratio of returns versus earnings. A lot of people got greedy. Loss of
shirt, 78% NASDAQ decline in those three year periods.
Speaker 3 – 12:20
Basically every one of these same thing happened. The technology’s revolutionary. A lot of companies, people get
greedy. A lot of companies lost. And I, I mean none of us were alive a hundred years ago. But from my research it
looked like in the 20s, RCA Radio Corporation of America is like the equivalent of like a big bleed chip AI stock, it
rose 200% in the 20s and then it crashed and doesn’t exist. So there’s so many examples of like trying to pick that
one company along the course of history. The Nifty 50 is another good one. There’s 50 blue chip stocks that
people thought no brainer, that was like Cook, IBM, McDonald’s, like put your money in there and don’t ever sell
them. And that obviously didn’t work out.
Speaker 2 – 13:03
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I go back to just the COVID pandemic. We had a one month drop. We saw the market drop 30% in about a month’s
time. By year’s end we had already made up the difference. A three year drop. Like do you have the stomach to deal
with a three year drop consecutive years? Do you have the lifestyle that you’re able to sustain with your income
without having to take any distributions? I think it’s so much easier said than done. So I mean, do you really have
the stomach for that three year stretch where that market could go down? It’s easier said than done. Oftentimes
people say they can, but in the moment it’s hard.
Speaker 1 – 13:38
If you’re in the tech bubble like before and that’s all you were in, which a lot of people were just in tech stocks, they
were so hot, you know, we talked about that 5 to 1 ratio. They’re so hot. Let’s say you’ve got $10 million. So to put it
into kind of today’s perspective, like a lot of these tech executives have you see a 78% decline like it happened in
2000 through 2001. Your 10 million is now worth 2.2 million because that 78% decline. But if it goes back up 78%,
it’s only 78% of 2.2 million. So, you know, we’re still missing over way over half our money. It would take a 450%
return. After that you’d be back up to 9.9 million. You wouldn’t even be back up to the 10.
Speaker 1 – 14:17
So drop of 78 even if you go up 450%, 2010, they call it the lost decade. So you were, you know, you’re kind of out
of luck for those 10 years. You’re waiting, you’re waiting. So the point is, yes, you want to participate in these big
swings, but just as much as you want to get these big returns, you gotta protect, you know, the negatives that can
take. You get 10, 10, 10,. 10, 10 over 10 years. That’s great. You drop 50%. You just gave it all back.
Speaker 3 – 14:41
I found this interesting. The Cisco numbers, it went up 3,800% in its peak and then it dropped 90% of that and then
it took them 25 years to get back up to that.
Speaker 1 – 14:52
Back to even. Yeah, yeah. So, oh, this is a great investment. Okay, that depends on when you got in, when you got
out. Yeah. Which most people can’t get. Right. So someone that invested in the bottom and wrote it back up could
be great. Someone that was in it for 20 years and then took a huge loss. It could have been the worst investment
of their life. So a stock’s not a good investment plan. You have to have diversification, asset allocation. You have to
have a plan. True wealth is something that’s going to support you forever. Not a bet that happened in one year, then
you get wiped out the next year.
Speaker 2 – 15:21
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I mean, this is strictly financial. We’re not even talking about the behavioral side of this too. If you look at The S&P
500 return over a 20 year period from, you know, 2000 to 2019 would have had about right around an 8% return.
The average investor at that same timeframe only averaged like 4%. So even if you got it right twice, did you have
the discipline to not touch it over that 20 year period when you shouldn’t have? When the market’s down, did you
stop? So financially you can make the right decision, but behaviorally, are you following the discipline plan that you
set in place?
Speaker 1 – 15:51
A lot of people don’t to further that. If you’re an accumulator, most people don’t have the discipline. But if you’re in
the distribution mode, there is no, you know, waiting it out. There’s, there’s emotional, but then there’s the actual.
The actual is if you’re distributing money and this is happening, you’re just going to run out of money. So you got to
diversify, you got to asset, allocate, you know, anything. Before we go to kind of our review of our core investment
philosophy, do you guys have anything else to add? I know we’ve talked a lot about numbers, a lot about statistics.
We’re not in a bubble, but we are very caution and optimistic long term. Yeah, it’s here to stay. How you invested it,
how much you invest in it and really determine the success of your financial plan.
Speaker 3 – 16:26
Yeah, I’d say there’s like kind of two ends of the spectrum of people that try to get this right is you have like the
emotional side of like, hey, this is revolutionary. These companies are really great, yada yada. And there’s no like
fundamental backing of it. And then there’s the other side of people that try to like analyze the business
fundamentals and look at sharpe ratios and price to earnings ratios and like the smartest people in the world that
try to figure the technical side of this out still don’t get it right. So neither one of those will generally be a good
approach. The truth’s generally somewhere in the middle. And so it’s really just work with a design, a plan that no
matter what happens, is going to be there to support your life.
Speaker 1 – 17:06
Yeah, I like the quote. Nothing is ever as good or as bad as it seems. So is AI as good as it seems? Probably not. Is
it as bad as it seems? Probably not. Yeah, but it’s gonna, obviously it’s life changing, but if it’s gonna change your
life and your investment plan, you gotta stay disciplined, not get too greedy, but also not have fear around it either.
So that brings us to our investment philosophy. So we’ve got to participate in long term innovation. We’ve got to be
able to survive inevitable drawdowns. If you’re an accumulation and distribution mode that those are two separate
things. One, you have more flexibility than the other and we got to keep your life goals on track. So we want to
make sure does your balance sheet support your life by design.
Speaker 1 – 17:43
And so you know, we’re going to stay globally diversified. We’re going to make sure you have safe assets to survive
a total stock market downTurn. Not just AI, but in general, if you just look at, you know, indexes right now, generally
speaking, whether you like it or not, you’re going to be would say overweight AI and that’s something we’ve leaned
into, you know, obviously being in the semiconductor ETF for several years now and having a focus on
technologies has paid off and we’re diversified around it. So if there are downturns and you know, we’ve got the
financial plan, the portfolio that can weather the storm and truly an all weather portfolio. Any questions, please
reach out. Yeah, we’re excited to continue to track this and make sure our clients participate on the upside and
protect on the downside.