They’re calling it a bubble. They’re saying valuations in AI growth stocks are getting insane. They might have a point, too.
The S&P 500’s average price-to-earnings ratio has climbed to levels rarely seen in recorded history. Its Shiller P/E ratio (like a 10-year average) has climbed to levels rarely seen in recorded history. Its average price-to-sales ratio has climbed to… Well, you get the idea.
On many metrics, the most comparable period in the stock market was the dot.com boom. An perfect memory isn’t required to recall that little episode didn’t end up being a great time for growth stocks.
But this time is different, isn’t it? Fears of stretched valuations and crazy share prices are overblown, aren’t they? That’s because artificial intelligence is well on its way to supercharging profits and transforming the economy, isn’t it?
Isn’t it…?
Alarming news
An MIT study released in recent days revealed an alarming bit of news. Of initiatives across companies to use AI to increase productivity or efficiency, 95% of them failed to make a return on investment. In other words, only one in 20 firms is using AI profitably.
Those are crazy numbers, and it seems like the alarm bells are percolating to mainstream news outlets too. Here are a couple of headlines that caught my eye, all from the last four or five days as I write this:
The Guardian: “Is the AI bubble about to burst – and send the stock market into freefall?”
The Telegraph: “The warning signs the AI bubble is about to burst”
Forbes: “Is The AI Bubble Bursting? Lessons From The Dot-Com Era”
Personally, these worrying details have caused me to reallocate a portion of my portfolio into a 4%-returning Cash ISA. Not too much of my holdings in percentage terms, mind. If AI does end up bringing home the bacon, then I’m still well placed to benefit.
But a risk-free 4% sounds attractive for the next year or two. And if the AI bubble does pop? Then I’ll have a chunk of dry powder to snap up stocks on the cheap.
A different approach
I’m not the only investor keeping a tranche of their portfolio in cash either. Warren Buffett’s Berkshire Hathaway (NASDAQ: BRKA) has built up a $354bn cash position while whittling equities down to $272bn. The world’s most famous investor has taken a look at the markets and chosen to have more in cash than in stocks!
Berkshire has long been famous for its above-market returns, going back to the 1960s. Will this unprecedented building up of cash be yet another prescient move? Will Buffett and I come out laughing? No one can say for sure. And for potential investors of the $1trn market-cap conglomerate, the recent announcement that Buffett will leave his post by the end of the year is another risk to bear in mind.
But for anyone looking to swerve the AI mania and take a value investing approach, all while outsourcing the nuts and bolts of portfolio selection, Berkshire Hathaway stock is one to consider.
