Be On The Right Side Of The Percentage

"I can calculate the motions of the heavenly bodies, but not the madness of the people." -Isaac Newton-

Whenever you notice bubbly market conditions, one of the most meaningful ways to gauge where we are in the spectrum of the stock market bubble is when you start hearing the most dangerous phrase in the financial market:

"This time it's different".

Admittedly, I am probably one of the most bullish investors today in the stock market, simply because of the artificial intelligence trend. But that being said, I am on the lookout for market sentiments, may it be on CNBC, Yahoo Finance, YouTube, etc. The moment I start hearing this 4-word phrase, I will re-evaluate my opinion along with my portfolio size and positioning.

Thought Process: The Artificial Intelligence Secular Trend

Year-to-Date:?The tech sector, particularly any stocks that have to do with AI, may it be semiconductors, software, data centers, biotech, etc., are already in bubbly territory.

Let's pick one specific stock to build our case/thesis.

Stock: Super Micro Computer Inc. (SMCI)

As you can see in the chart, it has never had that parabolic price movement since its inception. The price movement is decent and, for the most part, trading sideways. Then chatGPT happened, which made a historical adoption of a million users in 5 days in November 2022 — the tipping point. (AI has been in the works since the late 1950s.)

AI has?reached the psyche of humanity, and everybody and their mother are rushing to get their Nvidia and SMCI stocks.

Let's see what my favorite cartoon character, Peter, thinks about his stocks, which are way above the stratosphere at the moment. (He must be elated.)

Peter's Argument:?This?cannot?be the same as the 2000s tech bubble. This is entirely a different phenomenon because,?unlike?the tech bubble, AI today is backed by significant technological advancements, including improvements in computing power, data availability, and algorithms. AI applications are now more tangible and have demonstrated their value in areas like healthcare, finance, autonomous vehicles, and natural language processing. It will change every facet of our everyday lives.

Hence,?this time it's different.

In my personal opinion, Peter is right about AI, which is the main reason my portfolio (both strategic and tactical) is currently skewed toward AI hardware and software companies.

Peter's thesis, on which I fully agree:

• The AI trend is centered around the rapid advancement and adoption of artificial intelligence technologies across various industries.
• During the dot-com bubble, many internet companies were in their infancy, and the technology infrastructure was not as developed as it is today. AI has reached its technological maturity and is ready for primetime.
• AI has a wider industry impact, reaching sectors beyond technology, such as healthcare, finance, manufacturing, and transportation.
• AI is seen as a transformative technology that can enhance productivity, efficiency, and decision-making across diverse domains.

But is Peter right on insisting?this time is different? Or is Peter in a state of suspension of belief given how his portfolio is outperforming Warren Buffet? (market psychology) This is where I?won't?agree with Peter and instead focus on history, as it may not repeat itself exactly, but it mostly rhymes.

Boom/Bust Case 1: Backward in time to the 1900s

• The Roaring 1920s:?A Period of Economic Prosperity and Cultural Change in the U.S. The economy grew rapidly, and new technologies such as the automobile and the radio became popular. The stock market boom created many millionaires. Also, the Fed’s easy credit and low interest rates fueled the bubble.
• The 1930s Great Depression:?The stock market crashed on October 29, 1929, a day known as Black Tuesday. The crash wiped out millions of investors and led to the Great Depression, which lasted a few years. The depression was caused by a number of factors, including the stock market crash, the overproduction of goods, and the collapse of the banking system, which led to high unemployment, poverty, and homelessness.

Boom/Bust Case 2: Post WWII Economic Expansion and Contraction

1950s–70s:?Post-war economic expansion. The baby boom generation entered the workforce. This was the longest economic expansion in history. This was also the era of investment in infrastructure, like highways, airports, and other public projects. These investments facilitated transportation, trade, and commerce, supporting the economy.

1973–1974:?Stock market crash caused by oil embargo that led to sharp oil price increases that caused recession in most countries. Also, the Vietnam War was costly and dragged the US economy down. And as usual, the heavy speculation always ended in a crash.

Boom/Bust Case 3: The DOT-COM Crash and the GFC

• The US economy grew rapidly during this period as the baby boomers entered their peak earning years and the?economy shifted?from manufacturing to services.
• The S&P 500 index grew by an average of 10% per year from the 1980s to the 2000s. Economic expansion,?low interest rates, emerging technologies, globalization,?and increased demand for stocks were some of the factors that contributed to this growth.

This is the tricky part of the bull market, even the smartest of us, Sir Isaac Newton, wasn’t spared from the hype of the "South Sea Bubble" circa 1720. Reportedly, Sir Isaac Newton lost 20,000 GBP. Later on, when asked about the direction of the market, he replied, "I can calculate the motions of the heavenly bodies, but not the madness of the people."

That said, no matter how bullish you are (like I am), first we have to learn from history, and second, no matter how good the music is, sadly, it's going to end. So, enjoy the music and make sure to get your seat before the music stops.

Translated into investing strategy, it could mean:

• It's okay to be optimistic and cautiously ride the trend as long as you have a plan.
• Buy and dollar-cost-average on the way up (DCA In).
• Take profit, as the saying goes; nobody gets poor taking profit.
• Sell and dollar-cost-average on the way down (DCA Out).

The question becomes: (a) Are you a buyer or a seller at this stage? (b) Do you have a non-zero position to be on the right side of the percentage?

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