Nothing screams “Past Performance Does Not Guarantee Future Results” like Artificial Intelligence stocks. What has fueled incredible market success over the past two years has analysts debating what might happen going forward. Steve and Dave tackle the tangible and psychological factors of the A.I. trade in episode 124 of Plan For Life Now*
*ChatGPT played no role in the writing or publishing of this podcast blurb
Steve:
Welcome to Plan for Life now, episode 124. Here we are, Dave gathered the week before Thanksgiving and this year for investors. There’s been a lot to be thankful about.
Dave:
Oh, no doubt. It’s been a boy. The year’s almost over. That’s the amazing thing. I keep thinking we’re in the middle of the year, we’re near the end of the year. It’s been another good year. I just look at it even a little longer term. The last two years have been really good years.
Steve:
I think if we go back and look, it’s been 23, 24, 25 last three years now because 2022, that was the real wipeout year when the Federal Reserve was raising interest rates very aggressively. We had inflation running over 9% and a lot of fears about recessions and some people will mark that moment in the fall of 2022. They will mark that moment and they say it was the chat GPT moment. And if you don’t know what chat GPT is,
Dave:
Wake up.
Steve:
Yeah. If you don’t know what it is, pay a little bit more attention to what’s going on.
Dave:
I have so many friends because as you know, I am an older, well not that old, but I’m definitely a boomer and I don’t use chat gp. I’m like, you’re, why would you not use chat if you use the internet? Why would you not use chat GPT? I don’t understand it. It’s one thing to say I haven’t uploaded it and I’d like to find out what’s about but to be defiant about a tool like chat. GPT is, I don’t understand some of my fellow boomers.
Steve:
Well, if we’re going to be a little bit nuanced about it, I think some people say they don’t use it, but they’ll use the Google Gemini or whatever Google calls their thing.
Dave:
It’s basically the same
Steve:
Thing. It’s the same thing.
Dave:
That’s not quite as good, but it is the same thing.
Steve:
Yeah, I agree. It’s not quite as good, but yeah, it’s the same idea. But if you don’t know chat, GPT is kind of the biggest, most popular of these large language models out there that are artificial intelligence. And this is artificial intelligence where you can ask it questions, you can send it pictures of things it looks at, it gives you answers. Very, very cool. And that has driven the market for the past several years with a few exceptions where we had, earlier this year we had the tariff issues and blah, blah, blah, all that. But for the most part that has been driving the market for the past three years. And this is the first thing, Dave, that I had written down that I wanted to talk about and you came in and said something pretty similar is we’ve seen a little bit of weakness in the market over the last week or so. We’re recording this November the 18th, and we’ve seen the market pull back today doesn’t look so great. So it looks like maybe four or four and a half percent, which we all know in the grand scheme of things is nothing. But maybe by the time you’re listening to this, it’s gotten worse
Dave:
Unless our cracker jack and now we compliment them because they make these happen quicker. Compliance department makes this come out quickly and then we’ll be more or less on target with that.
Steve:
Oh my
Dave:
God, they’ve done a great job.
Steve:
Huge compliments for last time
Dave:
Or as our president would say, best compliance department ever in the history of compliance departments.
Steve:
Huge. Huge. Yeah, they were fantastic Last time. I think the podcast was approved within 10 minutes of us sending it, which seems kind of amazing. I don’t know how they had time to listen to a 30 minute podcast. But yeah, I mean there is this concern that we’ve all been very excited in the investment world about AI and what this means. And there’s a lot of this discussion around, well, all of these companies, they’re building out their cloud capabilities and they’re building all of these data centers. And I heard this analogy used, and I’m not going to steal it. I’m going to give attribution to the people at r Holtz Wealth Management. They were the ones, Josh Brown used this analogy. Dave, do you remember the movie The Usual Suspects?
Dave:
I do actually. I saw them. Okay,
Steve:
So in the Usual Suspects, if you don’t know the movie, the big bad guy is Kaiser Soce. Kaiser Soce is like this myth, this kind of out there. Nobody actually knows who he is if he exists or if he’s just the boogieman or what. And Josh Brown used this analogy and said that OpenAI is the company that created chat, GPT. They are like the Kaiser Soce of this market. And what he meant by that was saying they created this product that everybody agrees is phenomenal. It’s incredible. Everybody’s trying to copy it and be like that, but they’re not a publicly traded company, so you don’t actually know what they’re spending, what they’re making. I mean they’re spending tons of money and they’re not making a lot, but you don’t know what the financials look like. And there is this concern that these companies maybe are spending way, way too much money building out this AI compute and this cloud and all that, and the money they’re going to make from it is way, way, way in the future,
Dave:
Right? This is the theory. That’s a good one. But this is the general, I’m trying to think of the guy’s name, Michael Burry big short gap. It’s not the same but similar. It’s that we don’t really know how much money is being spent on all this and what the payoff’s going to be. And just like you said, if the payoff’s too far down the line, then there might be some serious pain on the short term here.
Steve:
That’s a good one. I hadn’t even thought about that, but let’s bring that up. So Michael Burry, who was famously played by Christian Bale in the big short movie, he was in the Big Short, if you don’t know it, that was the Michael Lewis book that was turned into a movie all about the mortgage crisis and the whole meltdown of the housing market in oh eight. And Michael Bur famously predicted this and he was right, but he was very early. I mean, this was like oh 5 0 6. He was saying, okay, this is going to meltdown and nothing melted down for a couple more years. So people listen when he talks because he was so right before. Now I think we’ve talked before about how you can’t always assume that just because these very smart people have gotten it right before that, they’re going to get it right again. And in fact, Michael Burry has been pretty public about a lot of the things that he’s been wrong about since then. But with that caveat, he’s talking about how companies now are investing all this money in chips and GPUs, but they only have a useful life of five or six years. So they dumping all this money in, they’re going to have to dump more money in, and is the payoff actually going to be there?
Dave:
So okay, this leads to the backdrop of what I actually brought up to you before the podcast, which is financial advisors. All of us out there, we are in this precarious position of, if you were to say, well, based on my fear, I’m getting out of the Nvidia business and everything tied to that open ai, you know what I mean? The ai, big Biggie business,
Dave:
You
Dave:
Are potentially costing your clients a ton of profit as we sit here, right here. If you stay in the Nvidia open ai, everything tied to it business, the magnificent seven 10, whatever this huge capital is, I can lose track of all that stuff. But the bottom line is you got to stay in it, but you got to be careful of it. So what do we as a working with people’s retirement plans specifically, how do we approach it?
Steve:
Yeah, I mean I think this is a fundamental approach that any good portfolio manager advisor should utilize. Not saying they all do, but is to have this broad diversification where you’ve got exposure to things like Nvidia and Google and Tesla and all these exciting cool companies. But then you’ve also got exposure to more of the dividend paying companies and the mid cap and small cap and international stocks, which finally decided to work this year for the first time in a long time. Because I do feel like investors have been lulled into this false sense over the last decade, this false sense that all I need is the s and p 500. And if you look at that s and p 500, about 36% of it is made up of those mag seven names. So you’ve got huge concentration there, and a lot of people think that’s all I need.
I am well diversified if I have that. And that no doubt, there’s no denying it. That has worked very well over the last decade, but you can pretty easily go back and look at other decades when that’s not been the case at all. So a good advisor is going to say, okay, yeah, we’ve got exposure. We want to get some of that growth, but we can’t count on that happening again and again and again. And in fact, if I had to think ahead, I’d say, okay, well is it physically possible for Nvidia to grow at the rates that it’s been growing in the past? Well, I mean the company would just be so big, it would swallow everything. So I don’t think it can grow at those same rates going forward.
Dave:
Yeah, I feel like this is not the vast majority of our clients, but I feel like the biggest danger in all of these is not the, I’ll just call it the typical client who has whatever they have, 60, 40, 70, 30, 50, whatever they have, they have some bonds, they have ETFs and funds with us, and we’re making decisions and what we just said rings true, so we’re not going to leave it. But we have all this diversification even out of stocks. That’s one group. And this is not just our clients, but people, I think I always feel the more dangerous group is the one is, you know what? My uncle gave me a tip to get Nvidia three years ago or whatever. It was nothing. And now it’s this and now it’s this much of my money. I’m not leaving it. I’m thinking about diversifying. Yeah, unfortunately the psychology of you, we know the psychology of you so well, it’s weird if someone to say, Dave, what do you think investing becomes cultish? I would say just the situation I just gave when somehow you were early on in something and it now is going crazy and part of your brain says diversify. The other part is now in the I’m in this one thing cult, even though I know this one thing is now dominating my overall portfolio,
Steve:
I don’t have the study in front of me, but I remember reading this years ago when they took a look at the feelings that people have when they have a stock or an investment that performs like that. And it’s most similar to love that is and beyond love. An infatuation, an obsession. That’s the feeling. So why are you going to get rid of or trim your infatuation, your love? No, you’re going to hold onto that. But that’s dangerous. And I know you can always point to, oh, well if Elon Musk could have diversified away, he wouldn’t be the wealthiest, blah, blah, blah. Okay, we’re not trying to be billionaires here,
Dave:
Right? Well see, this is then where it all loses the reality. Most of these people we’re talking about are more or less regular wealthy people, not crazy wealthy people. So in other words, you could take some of that off the table and put it somewhere else and you’re going to be fine. And then we’re not saying sell all that holding, but if it all were to come crashing down now, you’re not fine. So I think that thought in the brain is the logical part if you’re working about, but like you said, it’s whatever the dopamine is of this particular situation that is the real kind of danger for some people. I’ve never been in one of these things where somebody gave me a tip and then it became huge. So I don’t have the personal experience of the, whatever, we’ll call it the stock version of the lottery hit.
Steve:
No, I’ve long said that. I don’t have the investing temperament to hold on to what they call a 10 bagger in the investment parlance, which is obviously when something goes up 10 x from what you bought it at, if I ever have a stock that goes up double what I bought, I’m selling, I just figure it’s going to go down.
Dave:
It’s just something in your brain. It’s like Michael Jordan loved gambling to the point where he gambled like, okay, I don’t get it. Why would you love something? What the end game is making money when you have all the money in the world?
Dave:
I
Dave:
Don’t get, I mean if Michael Jordan said, Hey, now I’m taking a pickleball and I want to be the best in the world that I would get, it’s a different thing. Okay, now you want to be the best at that. You were the best at basketball. But that correlation, but whatever it is, this is everybody’s brain is different. The psychology of money.
Steve:
Alright, so I had two other things written down to talk about, and I didn’t even connect them thinking, oh, this conversation really works, but they work very well. So the first thing I wanted to talk about was Goldman Sachs came out recently with their prediction for stocks over the next decade. And do you want to take a guess at what they predict? I hate to put you on the spot.
Dave:
No,
Steve:
I love, I say I hate to, but I love to do it
Dave:
Over the next decade. So we’re talking about what annual return over the next
Steve:
Decade, annual return for us stocks,
Dave:
US stocks over the next decade? I would say, I’m going to say they’re probably pretty bullish. I’ll go with 8% annualized over the next decade.
Steve:
Okay. Not too bad. They said six and a half percent. They were actually not quite as bullish.
Dave:
Right? That’s a little on the bearish side.
Steve:
Yeah, it’s a little on the bearish side. I mean, historically stocks have returned little over 10% annualized returns, but the past decade, what US stocks I think have been 12 or 13% over the last decade. So six and a half percent is definitely a step down from that. But their rationale is purely coming in based on valuation. So valuation is the price you’re paying per dollar of earnings. Now, right now, the US stock market is pretty expensive relative to the earnings. But a lot of that, this goes back to what we were talking about, A lot of that is driven by the AI trade. This idea that we’re going to have this what they call ag agentic ai, which is artificial intelligence that’s able to carry out, perform tasks and ultimately replace jobs. I mean, that’s going to be a big cost savings there replacing jobs, but create these efficiencies that will produce more profits, et cetera, et cetera. So I guess Goldman Sachs, their prediction is that that won’t be fully realized.
Dave:
But here’s the problem. Even with that, the psychology, if we are sitting here on a podcast talking about, oh, they predict six point a half percent growth, a listener would be thinking, well, I could handle six point a half. That’s actually pretty good. It almost sounds like a bond. No, this is going to be one rocky aide to get to that six and a half is sort of the way I look at that prediction is the volatility involved in that end game is probably going to be, or at least they’re predicting it’s going to be pretty intense.
Steve:
Absolutely. And that takes me right into the next thing that I had written down, and there’s a columnist for the Wall Street Journal, Jason Zweig, who if you ever read personal finance stuff, you’ve probably come across some of his things and very, very good. And he had an article recently and it said, should you just buy stocks until you die? And it was this basic idea that if you go and you take a look at a portfolio and you look at, well, what’s going to come out best being a hundred percent in stocks or being in this 60 40, 70 30, whatever it is, allocation, having more conservative elements in your portfolio, what’s going to do better over the long term? And I did not need to crunch the numbers. I did not need anybody to do it for me. Anybody who’s taken a casual interest in the market will know that the vast majority of the time stocks do better than bonds, cash real estate, et cetera.
I mean, that’s been the case, not all the time, but the vast majority of the time over history. So I was afraid when I first saw this article that it was just going to be something that pointed this out and said, you know what? If you buy stocks and you hold onto ’em for a long time, you’re going to make a lot of money. And I would spend a little bit of time getting angry and saying, guys, stupidest article, but I’ll give ’em credit. They went beyond that, Dave. They went into what I thought they needed to touch on, which is our old friend, the sequence of returns, sequence of return risk.
Dave:
Wow. Brings us back to the first seminar I ever did with you and you put together that part was on that.
Steve:
Absolutely. And what they looked at here, okay, so they looked at 30 year stretches. So 30 year periods of time, and actually this is a little surprising to me. Stocks underperform bonds in 25% of time periods of 30 year time periods. It’s actually more than I would’ve thought there.
Dave:
Me too.
Steve:
I guess I could be. They’re still making money. I was thinking they were losing money, but they’re still making money, but just a little less than bonds. And then it looked at one of these classic examples, and if you type in sequence of returns to Google, you can come up with a thousand different examples or type it into chat. GPT if that’s new to you, and you can look at this, but the one that they looked at is somebody that retired in 1999 versus somebody that retired in 2002. Well, what happened after 1999, you had this brutal bear market due to the tech bubble in 2000, 2001, 2002, somebody who happened to retire at the end of 2002, you went on a pretty nice run. Of course you had to deal with the financial crisis, but then from there everything was kind of backup. So it was just this example showing of you retired in 1999, you were taken withdrawals, you were out of money not too long, 12, 13 years later versus you retired three years later and you had $4 million. And is that any fault of the person who’s invested there? No, they just picked the wrong time to retire. So thankfully, the conclusion from the article, which would’ve been my conclusion, is you have those bonds in there, you have the conservative elements, whatever they are, bonds, annuities, fixed guaranteed payments, things like that to protect yourself emotionally and to protect yourself from just bad timing. You just got unlucky and retired at the wrong time
Dave:
Or leaving 80% of your portfolio in Nvidia.
Steve:
Oh God, Dave. Now compliance is not going to approve this at all. And we Oh,
Dave:
I was just joking. Yes,
Steve:
We do not invest in individual securities. We’re not recommending it, blah, blah, blah.
Dave:
I can’t believe. So this is why you don’t just ad-lib things, had this whole thing going ready to go, ready to be churned right out, to get it out to you and the public in 48 hours, 24 to 48. And I just blew it with that comment, which as we all know is a complete joke.
Steve:
Right. Alright, thanks for joining us. I hope everybody has a good Thanksgiving. I hope the next time we’re talking, all this concern about the AI stuff has gone away and we’re hitting new all time highs, but in all honesty, a correction is a healthy thing in a market. A market that goes straight up, that’s not a good thing. So you want to have these sell offs and these corrections that is a healthy
Dave:
Way. Absolutely. If things are, yeah, I mean, there’s the one thing you can never predict. Is it going to go down and down and down and now all of a sudden we’re in a 30% down bear market? Or is it a 10 or 15? Hey, you can’t predict that stuff. But in general, bottom line is it is going to go whether you like it or not, these corrections are going to happen. And the vast majority of you listening totally get that, which is why we appreciate you.
Steve:
Absolutely. Thanks for checking in and we’ll talk to you again.