Investing-in-bubbles Advice
With the Nasdaq 100 just finishing its best-ever first half of a year — up 40%! — and adding an astounding $5?trillion?of market capitalization, the biggest question in markets is no longer what interest rates or inflation will do — instead, it’s whether we’re about to experience another legendary investing bubble.
Masayoshi Son clearly thinks so: The Softbank CEO announced in June that "the time has come to shift to offense mode" in AI investing.?
He’s not the only one: Inflection, a one-year-old startup building “personal AI ,” must have broken some early-stage investing records with last week’s capital raise of $1.3 billion.
And investors in listed equities, with fewer options, have pushed Microsoft to 36x earnings and Nvidia to 37x?revenue. Yikes.
Perhaps most tellingly, Alphabet, which might be the biggest?loser?of the generative AI boom, is up 37% year-to-date, just because they, too, have a large language model.
It’s all starting to feel rather bubbly, which might, per George Soros, mean it’s time to rush in and buy.?
But how do we know we’d be buying the start of a bubble and not the end of a rally?
“Every bubble consists of a trend that can be observed in the real world and a misconception relating to that trend,” according to Soros.
With AI we have a trend, certainly.?
And it’s highly observable: Just as the dotcom boom was driven by the websites everyone was using, we’re all using AI chatbots now.
So, all we need for a textbook bubble is a misconception and it’s not hard to imagine what that might be: AI has so far created a lot of costs for corporations (most of Inflection’s $1.3 billion raise will go towards buying semiconductors) and not much revenue (ChatGPT is free and easily replicated).
But it’ll be a while before we find out whether AI is monetizable and even if you think that it won’t be, the misconception, according to Soros, is a reason to buy, not sell.
The other legendary hedge fund manager of the pre-internet era, Julian Roberston, agrees: Robertson saw the dotcom boom as “a Ponzi pyramid destined for collapse,” but conceded during the dotcom boom that “the only way to generate short-term performance in the current environment is to buy these stocks.”
Unfortunately for Robertson and his investors, he reached that conclusion a little late: That quote is from the letter he wrote announcing the closing of his fund after losing billions of dollars in 1998 and 1999.
Soros, however, didn’t fare any better: Huge losses in dotcom stocks prompted Soros to return most outside money to investors, take less risk, and focus on philanthropy.
The two greatest hedge fund managers of their generation were both sunk by the dotcom bubble.
And here's all you have to know about trading such bubbles:?One of those legendary funds was short and the other was long.
Remarkably, they threw in the towel at nearly the exact same time: Robertson covered his shorts and closed his fund in March of 2000 (at the very peak of the bubble!) and Soros’s Quantum Fund cut its?longsand returned investors’ money the very next month.
If you’d like a more recent example of how difficult it is to time these things, consider that Softbank has invested over $140 billion in AI startups and301
?has almost nothing to show for it ?simply because they started too early — and then stopped right when they should have been starting.
So here’s your Wednesday investment advice: Investing in bubbles is hard.
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Wen crypto bubble?
With bitcoin up 80% this year (double the Nasdaq 100!), it’s fair to ask whether crypto, too, could be entering a new bubble phase: Every conceivable disaster seems to be behind us, we may finally get some regulatory clarity, interest rates have likely peaked…
And if a bubble is forming in tech, it might also be that crypto will simply get to go along for the ride.
I suspect it won’t be that easy, though: The 2021 boom in crypto prices was an everything bubble and I think you only get one of those.
Tech stocks had their everything bubble in the dotcom boom and it’s the subsequent dotcom bust that the 2022 bear market in crypto is most often compared to — with the implication that it’s simply a matter of time before crypto recovers, just like tech did.?
But the post-crash recovery in tech was driven by the revenue generated by the wholly new industries that emerged from the infrastructure built during the dotcom bubble: social media, web hosting, streaming services, and SAAS, amongst others.
It was the earnings from these wildly profitable businesses that drove the recovery of tech stocks, not just the ebb and flow of investor sentiment.
So, for its next bubble to form, I suspect crypto will similarly need “a trend that can be observed in the real world.”
There’s so far little sign of it: Crypto remains a niche activity with not much activity observable from the real world.?
I don’t think Soros would be rushing in to buy just yet.
Written by Byron Gilliam
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