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Navigating the AI Bubble: A Pragmatic Investor's Guide

Strategic Insights

— 1 min read

As the AI bubble continues to inflate, investors are left wondering how to avoid feeling like an idiot when it bursts. While some may recommend putting cash on the sidelines as a short-term shelter, this optimist believes diversification is the key to long-term success. By spreading risk across multiple companies, countries, and currencies, investors can reduce their exposure to the volatility of the tech market.

Key Takeaways:

  • Nvidia, the graphics processing unit (GPU) manufacturer, is a prime example of the "new normal" of sky-high tech share valuations, with a market capitalization of over $4.4 trillion and a price-to-earnings ratio of 52.
  • Multibillion-dollar investments in each other's shares by big tech firms are raising concerns about inflated valuations, with Nvidia investing $100 billion in OpenAI, which in turn plans to buy Nvidia chips.
  • Share prices don't rise forever, and the Nasdaq index of tech shares has doubled in the past five years, leaving the London FTSE 100 benchmark lagging.
  • The collapse of two American private credit lenders has raised fears of a domino effect, with two regional banks reporting deficits amid allegations of fraud.
  • Cash deposits up to £85,000 per person with authorized banks and building societies are guaranteed by the Financial Services Compensation Scheme, but over the long term, inflation will erode the purchasing power of cash.
  • Diversification is key to long-term success, with Barclays Bank's study showing that shares beat cash in 77% of five-year periods since 1899, and in 91% of decade-long periods.

Statistics:

  • Nvidia's market capitalization: over $4.4 trillion (PS3.3 trillion)
  • Nvidia's price-to-earnings ratio: 52
  • Shares I bought in February 2016: $23.75, traded at $263 on Friday, representing about 8% of the total value of the forever fund
  • Nasdaq index of tech shares: doubled in the past five years
  • London FTSE 100 benchmark return: 61% in the past five years
  • Barclays Bank's study: shares beat cash in 77% of five-year periods since 1899, and in 91% of decade-long periods

Sources:

  • Ian Cowie, Sunday Telegraph
  • Nvidia
  • OpenAI
  • Barclays Bank
  • Financial Services Compensation Scheme
  • Financial Conduct Authority
  • Greggs
  • EssilorLuxottica
  • Barry Callebaut
  • Ian Cowie's personal portfolio and investments

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