Naturally Intelligent about AI

AI’s all the rage, obviously. But the thing about Thematic Investing that I don’t hear about is that it’s really hard to attribute big, rosy, thematic projections onto company revenues and cash flows. Because everyone’s just guessing, even if their charts are slick.

We do know that the AI genie is out of the bottle, and its self-evident at this point how quickly it can compound towards usefulness. We’re seeing that compounding Live with ChatGPT. And so, it’s tempting to jump on the bandwagon. But I urge you to separate hype from rationality...so you can sleep well at night...if that's a priority.

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At The Buylyst, AI was one of our first big bets in 2018. Our vehicle was semiconductor stocks that directly adapted their chips to both facilitate and gain from this irreversible tailwind. The bet paid off for us but there were times when we found it hard to separate hype from common sense. I was losing some sleep over this nagging feeling of "punting".

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I did realize even back then that I couldn’t sensibly attribute any “it’s all about AI bro!” projections to Nvidia or AMD or TSMC or any other agent of AI. So, I treated thematic tailwind as more of a risk mitigator – one that reduces the chances of being wrong about a company’s prospects and therefore losing money. It was about reducing “Thesis Risk”. I had talked about this in Thematic Investing Done Right.

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Today, in practical terms, here’s how I approach a thematic tailwind like AI. I am choosing to “play the theme” via company (or stock) bets, so here’s my playbook:

1. I start with my target return – mine is 80% cumulative in 5 years (12.5% CAGR).
2. I quantify “revenue growth I need to believe to – rationally – expect that stock to deliver my target return.” I call this The Buycast.
3. I compare The Buycast to the company’s recent revenue growth numbers.
4. If the Buycast is more than the company’s recent revenue growth numbers……

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……it leaves me with 2 burning questions among others:

1. Does the company have some amazing competitive advantage that it can use to increasingly separate itself from competition?
2. Will the thematic tailwind be enough to cause an acceleration from the company’s recent revenue growth performance to the Buycast level?

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The answers to these questions are subjective. But having a Buycast in mind gives those open-ended answers some form and structure. That’s why I love using them so much. Of course, there is room for subjective overwrites. But at least I have a decent starting point.

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Here’s a chart of how those AI Buycasts stack up against historical revenue growth numbers:

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You can already tell which companies need that “AI tailwind” more than others. This comparison (we also add in Wall Street expectations and our own “downcast”) informs our SANITY Score. The Downcast is our fulcrum to Risk – which informs our SAFETY Score. Ultimately, it all culminates to one succinct RATIONALITY Score for these stocks (and about 3,500 others) in The Buycaster.

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The main takeaway is this: be careful of blanket bets on the hot new thing – they’re usually not the “rising tide that lifts all boats”. If you have the tools to be more discerning, I highly encourage using them.

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Many Happy Returns,

Saurav