The Same Old Story, With Better Graphics

Financial writer Phil Rosen recently asked for thoughts on his show "Full Signal" about whether AI is heading toward bubble territory. The short answer? Probably yes. The slightly longer answer? That's not necessarily a bad thing.

Here's the thing about game-changing technology: the excitement always leads to overshooting. It's practically a law of financial physics. People see the potential, money floods in, and inevitably too much capital chases too few good ideas.

And make no mistake, AI's potential is enormous. Companies across every industry have figured out ways to use it for speed and cost savings. That's the whole point of productivity-enhancing technology: it saves you time, money, or both. People happily pay for that. Basic economics tells us that where there's demand, supply will rush in to meet it.

And boy, is the supply rushing in. We're seeing eye-popping capital expenditures, mountains of venture capital flowing into startups, and retail investors reallocating savings into publicly traded AI companies. Some of these bets will pay off spectacularly. Many will flop just as dramatically.

This Has All Happened Before

None of this behavior is new. It's the same script, different century.

Warren Buffett made this point beautifully at Berkshire Hathaway's 2021 annual meeting when discussing the automobile boom of the early 1900s. "It transformed the country," he noted. "There were at least 2,000 companies that entered the auto business because it clearly had this incredible future. And of course, you remember that in 2009, there were three left."

Think about that. Two thousand companies. The opportunity was real, the technology was transformational, and still, 99.85% of those companies disappeared.

Or consider railroads, an even more extreme example. We worry today about tech concentration in the market, but it pales compared to rail transport a century ago. UBS analysts noted that "markets at the beginning of the 20th century were dominated by railroads, which accounted for 63% of US stock market value and almost 50% in the UK."

Hundreds of railroad companies were financed by investors eager to profit from building out America's logistics infrastructure. The industry's rise also brought financial crises and spectacular failures.

Yet here's what matters: both railroads and automobiles ultimately delivered on their promises. They saved time and money. They transformed society. We wouldn't have what we have today without the overinvestment and financial blowups along the way. The waste was, in some sense, necessary.

What This Means For Your Portfolio

It's tempting to get complacent when you're sitting on solid returns from the AI boom. Don't. New technology typically brings volatility to markets and the economy. That's part of the package.

But here's the problem with trying to be clever about it: market crashes aren't guaranteed, and even when they happen, timing them is basically impossible.

Remember Alan Greenspan's famous "irrational exuberance" speech? He gave it four years before the dot-com bubble actually peaked. And here's the kicker: the S&P 500 at the post-bubble low was actually higher than where it stood when Greenspan issued his warning. So even if you'd listened to the Fed Chair's concerns, you would have missed years of gains.

If we do get an AI-related correction, there's no way to predict its depth or duration beforehand. Maybe it already happened. Maybe we'll see multiple bumps on the way up. Maybe the correction will be mild, or maybe it'll be brutal.

For most investors, the answer isn't trying to outsmart the market. It's staying invested through the ups and downs, even when those downs take years to recover from.

If you can't put in the time to understand what you own, or if you can't stomach the volatility that comes with transformative technology, the stock market might not be the right place for your money. But if you can handle the ride, history suggests that revolutionary technology eventually delivers for patient investors, even with all the wreckage along the way.