Oct 23 • 3 min read
Is the AI Bubble About to Pop?
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Every week seems to bring a new headline about the tens of billions of dollars pouring into artificial intelligence (AI). With so much money chasing the next big breakthrough, it’s no wonder talk of an “AI bubble” is everywhere. Legendary investor Paul Tudor Jones recently joined the conversation, saying today’s market “feels a lot like 1999” and warning that a “blow-off top” could be coming. So, is AI in a bubble? No one—not even Mr. Jones—can say for sure. Rather than trying to predict the future, I think this is a good moment review three timeless lessons about bubbles and investing. But first, did you catch this week's podcast episode? Bubble Talk: 3 Lessons From the Past1.) Bubbles Aren’t Entirely Bad Yes, bubbles can be destructive for investors who get swept up in the frenzy. But the wave of cheap capital that often drives them also fuels innovation that changes the world for decades to come. Take the dot-com boom, for example. During the late 1990s, telecom companies laid more than 80 million miles of fiber-optic cable, far more than was needed at the time. After the crash, about 90% of it sat unused. Yet today, those same cables form the backbone of the internet we all rely on. As tech investor Fred Wilson once said: “Nothing important has ever been built without irrational exuberance.” If that’s true, we may look back decades from now and be thankful for the massive AI investments happening today, just as we appreciate the overbuilding that powered the internet age. 2.) A “Bubble” Can Last a Lot Longer Than You Think Labeling something a bubble doesn’t mean it’s about to pop. Even Paul Tudor Jones admitted there could still be room to run, if it bursts at all. Investors have been calling tech stocks “overvalued” for years. Some started using the word bubble as early as 2018. Yet here we are, seven years later, still watching many of those same companies deliver remarkable returns. Timing the top of a market cycle is incredibly difficult, even for the experts. Case in point: Former Fed Chair Alan Greenspan warned of “irrational exuberance” in 1996. But the market didn’t peak until 2000, after more than tripling in value. Anyone who sold based on that warning missed one of the strongest bull runs in history. That’s why market timing is a dangerous game. You have to be right twice: when to get out and when to get back in. For most investors, it’s far more effective (and far less stressful) to stick with a diversified, long-term portfolio. As we like to say: "If you never sell, you never have to regret having sold." 3.) Diversification Softens the Blow Even if a bubble bursts, a well-diversified portfolio can help cushion the impact. When the tech bubble popped in 2000, the Nasdaq plunged nearly 80% over the next three years. But other sectors held up much better. Diversified investors didn’t escape unscathed, but they avoided the devastating losses that tech-only investors suffered. Nick Murray put it best: “Diversification means never owning enough of any one thing to make a killing, but also never enough to get killed either.” Diversification doesn’t eliminate short-term pain, but it helps ensure you’re not overexposed when the music stops. Bottom LineWhether AI is in a bubble or not, no one can say for certain. What we do know is that bubbles—past, present, and future—are part of the natural rhythm of markets. And history shows that diversification and patience remain the most reliable path to long-term success. That’s why we’ll keep focusing on what we can control: building balanced portfolios, staying disciplined, and letting time do the heavy lifting. 📚 What I've Been Reading
Thank you for reading! Please reply to this email with comments, questions, and/or feedback. Stay wealthy, Taylor Schulte, CFP® |