AI is here to stay - share market fads versus trends
"Which dotcom are you invested in?" was the only conversation starter at the Managed Futures Association conference I attended in Chicago in 1998. The dotcom fad of buying any stock with even remote relevance to the internet lasted less than two more years, at which point the bubble well and truly burst.
According to Investopedia, investing fads "are popular stocks or other investments that enjoy substantial short-term gains . . . normally characterised by a temporary excessive enthusiasm for a certain investment or style, which is by definition unsustainable over the long term."
The debate of the moment is whether AI is a fad or a trend. If a fad, how soon will its bubble burst? If it's here to stay, by how much and at what rate will AI-related stocks rise? AI is starting to become legitimised through the introduction of specific legislation, with the European Parliament recently introducing a world-first AI Act. There are a few ways we can distinguish long-term stock market trends from fads that deliver short-term spikes:
1. Look at what is driving activity and conversation. A lot of investment activity and education, particularly among millennials, is happening online, as evidenced by the concept of 'meme stocks', which describes the shares of companies that have gained a popular or devoted following (sometimes pushing up value) on social media. On platforms such as Reddit, communities converge around ideas, companies, and whole movements in the share trading world.
All that noise, however, doesn't necessarily mean that crucial work is being done. Sound share trading should be based on fundamental analysis, which involves evaluating a company's financial health, including its revenue, earnings, debt levels, and competitive position. A stock market trend is typically supported by strong fundamentals, such as consistent revenue growth and increasing profitability. In contrast, fads often lack solid fundamentals and rely more on hype or short-term market sentiment – the kind of sentiment easily fed by social media.
Warren Buffett famously said, "When forced to choose, I will not trade even a night's sleep for the chance of extra profits." What he meant is that investors with a long-term strategy need to adopt the 'sleep at night' policy – which is different from the adrenaline junkie who is always hunting for the new, hot, riskier stock and may not be getting the breadth of information input that should inform any investment decision.
2. Online movements have real-world effects. One of the prime recent examples of mass mobilisation via social media, an event which sidelined Wall Street to drive up a share price, was the case of GameStop. In late January 2021 GameStop's share price spiked to $483 based on activity heavily driven by the WallStreetBets subreddit, which had noticed that hedge funds were selling GameStop stock short, with the plan to buy it back at a lower price. All the everyday people who bought shares were collectively fighting back against Wall Street, trying to make money out of the demise of a company. It worked, and the hedge funders lost a lot of money.
What is illustrative about this episode, and how it indicates that activist behaviour in response to perceived Wall Street misbehaviour might be more a trend than a fad, is how the everyday investors understood what they were doing. After the hedge funds short-sold the GameStop stock and the investors drove the share price up, it was the merchant banks who made the margin call to the hedge funds, saying, you've lost money, we need you to cover the loss. In other types of investing, you go to zero, you've lost your investment, that's it. But this short-selling worked a lot like a futures contract – the hedge funds had made a bet, got it wrong because they didn't see the activist investors coming, they were obliged to pay, and it really hurt them.
There have been other instances of share trading where people have stood up against the market, such as Crocs, which reached a $68 high in 2007 before falling to $1.21 in 2009, largely because of the faddishness of the product at the time. But in the years since it has gathered steam, reaching an all-time high of $174 in 2021 and now rising again from some earlier dips, to $125 as of early March. Many early Crocs investors and the market would have written Crocs shares off as a fad, but the brand has shown staying power and a readiness to innovate, which have been rewarded.
That might be how we should see GameStop, with the benefit of three years' hindsight. On one hand, the GameStop event was a moment in time – and the share price ended up settling at $15-$20 – but on the other, we can be sure that this experience will have changed the way Wall Street thinks about traditional tactics like short-selling, now we have seen how ordinary investors can mobilise to fight back.
3. The signs are there that AI is a trend, not a fad. Trends have longevity and sustainability, meaning they have a solid foundation and resilience through different market conditions. AI as we know it now has been decades in the making and is now, with heavy R&D investment, rapidly advancing at a commercial and government level, with the potential to revolutionise industries and services. It has already demonstrated its capabilities in areas such as machine learning, natural language processing, computer vision, and robotics.
This versatility and potential for continuous advancements make AI a long-term trend rather than a short-lived fad – with the caveat that its success and widespread adoption, and therefore its potential long-term value to investors, will depend on external factors including ethical considerations, regulatory frameworks, data privacy, and public acceptance. AI is here to stay, but how it will play out across different investment propositions over the coming years cannot be predicted, and there will undoubtedly be some great investment bets and some bad ones.
Even with all the protective and predictive measures you should take before investing in a publicly traded company – doing your market research and industry analysis, looking at investor sentiment and media coverage, and seeking expert opinion – there still is no foolproof way to predict the future performance of stocks or the market. It's always recommended to diversify your portfolio, conduct thorough research, and consult with a financial advisor before making any investment decisions.
