If you’ve been following the news you’ll know that just 10 stocks make up more than one-third of the S&P 500 – an index that tracks America’s largest 500 companies! And just 10 are pulling most the weighs. And of those 10 stocks, Nvidia’s been the one to catch everyone’s attention! Before reporting its earnings for Q4 of last year markets (and investors) were at the edge of their seat.

Nvidia misses earnings = market crashes. Nvidia beats earnings = market goes up. Nvidia’s been the single stock fuelling this AI-led market rally. Everyone’s going nuts. No one can get enough of it. Nvidia’s revenues pretty much tripled from last year and its stock went bonkers, hitting the $2 trillion mark. (For some context: the S&P is up 15% over the last 6 months). 

The stock market has been rallying (aka the US) thanks to AI-mania ever since ChatGPT was born. Let’s be real, we’re all using it! Whether you’re a software dev looking to debug your code (my cousin said it saved her 16hrs!) or if you simply need some inspo for a date (stargazing, picnic, cooking class, dance class) and all else in between.

It’s becoming our handy-dandy everything and our go-to for all sorts of questions. That’s the immediate effect we’re seeing. The rest is much more longer term. This is potentially a multi-decade trend, the likes of which none of us have ever seen in our lifetimes. Psst: here’s 3 unconventional ways to find the best investment opportunities in places most aren’t looking!

AI, AI here we go again! My My!

Pretty soon we’ll have our takeouts delivered to us by drones with tiny robots cleaning for us and forget about putting on the pounds because you’ve got magic weight-loss drugs to thank for that!

Then there’ll be driverless cars on a mass scale not to mention AI making our work easier from writing emails for us (I suppose ChatGPT is already taking care of that!), drafting proposals, writing summaries and so on. But the majority of this AI-shift is unknowable right now.

All we can see are the immediate and near-term effects but the impact of AI in 10yrs, 20yrs will be mind-blowing. Tech starts off as being a slow-moving force then compounds and gathers so much speed that you blink and find the world as you know it has totally been altered. 

But no one knows who will will be the AI winner – so investors are busy backing Nvidia in a “picks and shovels” play aka buying the businesses who will enable the new tech rather than trying to figure out which one will be the winner.

Though investors are getting slightly anxious over valuations. And with Bezos, Zuckerberg and others others selling their stock (at record-high I might add!) you might be feeling a little bit spooked that we’ve hit bubble territory. And I don’t blame you. Speaking of, an AI-based startup I invested into recently went bust and why that’s a hint of what’s to come in the VC space.

Everyone wants to be selling at the top. Especially if you’re offloading billions. But insider-selling doesn’t always mean the top is near. Since no one (not even the owners) knows when the top is. Still, it’s kinda unnerving. 

The real question is whether investors are getting ahead of themselves.

For market bubbles to happen you need these 2 powerful ingredients: a) over-excitement about a new technology and b) easy money – measured by low interest rates and/or QE (aka money-printing). 

So let’s look at the first one. Over-excitement. 

Bubbles come along when investors get ahead of themselves. They get over-excited. They buy into the powerful story of new innovation and they multiply a stock’s price today by an insane multiple.

Why? Because that story is just so powerful. And its price so dangerously tricky to figure out. Hence bubbles. Cuckoo prices. (Only to come down when holes are poked in those stories and we realise we were mad all along).

It’s true for the internet as it was the first motor car. And if AI turns about to be anything like those innovations then you run the real risk of a bubble brewing (if it hasn’t already begun). 

The 2nd ingredient: cheap money. 

Cheap money encourages all sorts of crazy investor behaviour. From backing unprofitable enterprises to thinking endless growth will continue till infinity. (yes, I know – Nvidia’s profits are growing just as much as its stock price!). But we’ve got something weird: we’ve had cheap money for a while until rates suddenly went vertical. And as rates went vertical, so did stocks. A pretty unusual, if not rare, situation.

But rumour has it the Fed will cut rates (that forecast has been pushed off till June ‘24!) and if & when then happens you can expect this market to take-off like a rocket. No surprise then that a Fed cut could very well make this early bubble into something of a totally different kind. So investors are still overweight US tech. And will be for a lot longer. But if all that is making your head dizzy – simply ignore the macro rollercoaster of the 2020s and you’ll be richer than you think (inflation-adjusted of course!)

Okay, so we’ve looked at these 2 ingredients and so far we’ve got 1 of those but the cheap money is yet to determine how things unfold. But this isn’t ‘99. And we’re certainly not partying nearly as much as we were doing for companies not nearly as good back then!

The level of partying can be spotted by the amount of leverage (aka margin debt) that’s in the system. Unlike other bubbles, we’re just not seeing that hyped-up leverage. Not yet anyway. Margin debt has in fact been falling (and a % of the size of the market). Investor behaviour is not at that crazy irrationality that marks the peak of a bubble. But should rate cuts happen sooner than they think and are more frequent well, that will send this crowd running! 

The concentration is making me nervous

But this super-tight market is something that’s worrying me. As I said earlier, more than 30% of the S&P 500 = 10 stocks. That is nuts. And these aren’t any old biz. They’re worth more than entire countries. The only other time in history were US stocks were this top-heavy was in 1929 right before the Great Depression. Soz to be so depressing.

It’s kinda impossible to draw conclusions and tell you when things will start to reverse (hint: nothing lasts forever) but insane levels of concentration usually comes about before a big correction. 

But these guys are nothing like the kinds of companies that went public in ‘99. That’s a crucial piece of the jigsaw. Those that IPO’d in the late 90s had little to no revenues and were basically disasters waiting to blow up. Looking at Nvidia’s revenues alone are enough to make your eyes water.

But looking at the businesses that were the internet winners like Google and Meta – Google was still a private company and Meta didn’t even exist. So no wonder investors went all-in on Cisco (at one point it was the #1 biz in the world) because it was the best way to access the mobile phone tech. But we all know how that ended.

So now investors seem to piling into Nvidia in the hope that it’ll be the winner from all this. Only time will tell. 

So what to make of all this? 

Do not try to time a single thing. As Keynes famously said “markets can remain irrational longer than investors can remain solvent”. And most investors make the mistake of piling into stocks at the very end.

Right before the music shuts off. They’ve seen the insane growth and they’ve got insane FOMO so they pile in in the hope of joining the crowd. Only to find themselves holding the bag. 

There is no doubt in my mind that AI is going to a multi-decade shift in how we do everything. Elon said he reckons AI will mean one day we’ll no longer need to work. And sooner, it’ll shrink our working week to 3.5 days.

Now don’t tell me none of that will have any consequence! Of course it will. Just not in the way you might think. Companies who will be pioneers in the AI space aren’t even created yet. The best is yet to come. 

And in the meantime, while the froth starts brewing, be the rational one in the crowd. Or better yet, get outa the crowd. Think for yourself and make sure to take a global approach with your investments.

Don’t just invest in the US. You might wanna look at the UK, small caps and China and figure out for yourself whether they deserve their low price tags (or not). Point is, don’t follow the crowd. Investing is so much more than that. 

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.