Today (9 September) Jamie Dimon, the CEO of JP Morgan, joined a growing chorus of individuals to warn of the increased likelihood of a US stock market crash.
Investing during a bubble can be exciting, but can also breed complacency. For those wishing to go along with the ride, I think the most important strategy is not to try to time the absolute top. Doing so might mean you are left without a chair when the music stops.
Tech bubble
The key attribute about any bubble is an acknowledgment that it is one. The thing about bubbles is that they suck everyone in, creating a shared delusion.
This is what happened during the dotcom bubble of the late 1990s, when Cisco Systems and Vodafone shot to the moon on the promise of all the hardware needed for the build out of the internet.
The problem was that all that spend did not turn into profit, mostly because the internet did not evolve in the way that such companies expected.
Are we repeating the same mistake today? Maybe.
Earnings bubble
Nvidia (NASDAQ: NVDA) is the poster child of the AI revolution. Its revolutionary GPUs have provided it with a near monopoly. In the mad dash to build out their infrastructure, the AI hyperscalers of Microsoft, Alphabet and Meta have spent like drunken sailors.
Today, Nvidia is a cash cow. But even if fundamentals remain strong, if market expectations begin to outpace reality, there may be little value left in the company at its present valuation. Never forget, that even great companies can sometimes be bad investments.
Capital expenditure among the hyperscalers remains robust. Yet despite this, none are yet to see any real return on their investments. And so far, no solution to the thorny issue of AI hallucinations has emerged.
Another very important point to note is that large language models are extremely energy intensive. So much so, that such models are now beginning to compete with domestic electricity users, pushing up prices in many US states. This fact has not escaped the attention of politicians, and pressure for heightened regulation of the industry could very well ensue.
Bottom line
An investment case in Nvidia today is premised on whether capital expenditure on AI chips will continue to grow at break-neck speed. As long as investors continue to believe they will, then this bubble will continue to inflate. I, on the other hand, remain sceptical that it can. That is the sole reason why I am sitting on the sidelines for now, in the expectation of a better entry point in the future.
Of course I could be wrong and therefore missing out on the biggest investing opportunity since the internet, and maybe of all time.
But when I look back at virtually every other major innovation from railways to the car, colour TV, video recorder, photocopier or the internet the same pattern ensued. Either the trailblazers made for a terrible investment or investors had to wait longer than they expected to see any returns.
For me, patience today is key. Right now, I’m looking beyond AI and Magnificent 7 for investment opportunities. But if my hunch is right and this ‘bubble’ bursts, these tech titans could soon have a far more attractive entry point for my portfolio.
