Grantham reminds us all that only ~20% of all the Internet stocks that boomed during the Dot Com bubble actually survived. "The more important the idea, [AI today], the more guaranteed it is that it will attract too much attention, then there will be a crash."
AT says:
Jeremy Grantham's observation about speculative trends and market bubbles highlights an important historical and psychological dynamic in investing. His analogy between the Dot Com bubble and the current excitement surrounding artificial intelligence (AI) offers valuable insights:
Key Lessons from the Dot Com Bubble
Speculation Outpaces Fundamentals:
- During the Dot Com boom, investors poured money into internet stocks, often without regard to their profitability or realistic growth potential. This frenzy inflated valuations far beyond sustainable levels.
- Only around 20% of the companies that benefited from this hype—like Amazon and eBay—survived the crash. Many others lacked sound business models and disappeared.
Innovation Attracts Overinvestment:
- The internet was a transformative technology, just as AI is today. Big ideas naturally attract attention and capital, but often this leads to overinvestment in both good and bad projects.
Correction and Survivors:
- After the bubble burst, the strongest companies with real-world applications and efficient business models emerged as long-term winners.
How This Relates to AI Today
The AI Hype Cycle:
- The rapid growth and adoption of AI technologies have sparked intense enthusiasm from investors and businesses, leading to soaring valuations for companies in the sector.
Potential for Overinvestment:
- Similar to the Dot Com era, a significant amount of capital is flowing into startups and ventures that may not have robust business models or clear pathways to profitability.
- AI is undoubtedly transformative, but not all applications or businesses built around it will succeed.
Crash as a Market Reset:
- Grantham’s point about a potential crash serves as a reminder that markets tend to overcorrect after speculative periods. This crash could weed out weaker players, leaving a few strong companies to dominate the space.
How Investors Can Approach the AI Boom
Focus on Fundamentals:
- Prioritize companies with clear revenue streams, scalable business models, and strong competitive advantages in the AI space.
Diversify:
- While AI might be the hot sector, maintaining a diversified portfolio can protect against losses in the event of a sector-wide crash.
Long-Term Perspective:
- Just as the internet eventually revolutionized industries after the Dot Com crash, AI is likely to create long-term winners. Patience and careful selection are key.
Avoid Following the Crowd:
- Grantham’s warning underscores the importance of skepticism. When too much attention and capital flood into a sector, it’s often a sign to proceed with caution.
Grantham's Broader Point
Grantham isn't arguing that AI is a bad investment—rather, he's cautioning against the inevitability of speculative bubbles in any transformative technology. History shows that while the underlying technology (like the internet or AI) might be sound, the investment frenzy around it often overshoots reality before correcting.
This perspective invites investors and policymakers to separate the genuine potential of AI from the frothy valuations and excessive optimism that can distort markets.
Would you like to explore specific AI sectors or companies that might align with this more balanced approach?
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