By Chad Butnari
One of the hottest topics being debated in the world right now is the evolution of technology, and more specifically, Artificial Intelligence. It really started picking up steam in the second half of 2023 and has carried momentum into 2024 thus far. While I believe that AI is here to stay and will be impacting our lives for many years to come, I can’t help but think that some analysts, market commentators, and portfolio managers may be getting ahead of themselves.
Many of you will remember the “dot-com” bubble of the late 90’s and early 2000’s. The internet was exploding in this period with many companies that were completely unprofitable and had very little value and yet were attracting capital from investors looking to get in on the next big thing. While some companies made it through and turned into the tech giants we know today, many more did not. They simply went out of business and their stock prices went to zero.
If you were unlucky enough to invest in one of these companies, or even invest in a fund that was highly concentrated in these companies, you either lost a lot of money or at the very least, had a difficult investing experience for several years (does the name Blackberry ring a bell?) Even great companies that we know today, like Amazon, dropped significantly in value before getting back to their market highs. For example, if you had bought Amazon at the peak of the tech bubble, you would have bought it for $100/share. It proceeded to drop to $7/share, before it ultimately surpassed its previous market high. That’s a 93% drop in value. How many of you would have been able to hold onto it long enough to ultimately realize the long-term gains? You can see how this becomes a very challenging proposition for investors even if you happen to choose one of the great companies.
Now, I don’t know if it’s fair to compare the highly profitable tech giants of today to the unprofitable shell companies of the late 90’s. In fact, I will explicitly say that I don’t think it is. The tech companies leading the way today are highly profitable and much more intentional with their business strategies. They are larger and provide more essential services than ever. But I can’t help but notice some similar patterns, particularly in the US. The excitement and euphoria feel similar. The prognosis that the “Magnificent 7” can do no wrong is palpable. And, in the US, we now have the biggest valuation difference between Large Growth stocks and Large Value stocks that there has ever been in history. The gap today is larger now than it was before the dot-com bubble burst.
I don’t point this out to worry investors. I believe these are great companies and they will continue to be in the future. We hold these companies in our portfolios and will continue to do so (although in a less concentrated fashion than the index or purely growth-oriented funds). With that said, I would caution investors about over-exposure to this particular area of the market. It’s easy to get carried away when things have been going so well. When I start to hear people say things like, “Why should I own anything else?” and, “It’s different this time,” that’s usually when my internal radar starts to make noise.
To be clear, I think there is a tremendous amount of opportunity in markets today. We will pursue that opportunity by continuing to advocate for broadly diversified strategies and taking a responsible approach to investing. As a result, there will always be managers and funds with higher returns, but we are not solely looking at returns. We’re not swinging for the home run, as, to do so, you have to be willing to strike out. And, we’re never going to put our clients in that position. We are prudently managing your money with the sole purpose of allowing you to do those things that are important to you.
We’ve seen many fads come and go over the years. Some work out long-term, but many do not. One of the roles that we take most seriously for our clients is managing risk. While we can never guarantee what markets will do in the future, I continue to believe there is a significant difference between responsible investing and speculating. Stock markets can be used to do both, but only one approach has the proven track record to reliably grow your wealth over the long run.
If you have any questions about this article, our investment strategies, or how we implement them in your portfolio, please don’t hesitate to reach out. We are happy to help.
The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. This material is provided for general information and the opinions expressed and information provided herein are subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on the information presented, please seek professional financial advice based on your personal circumstances. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.
