Magic pixie fairy dust

We talked about artificial intelligence once already here. And, to be fair, if you did as I did and have largely ignored it all in the months since, you are much less rich than you would have been had you instead just ignored me. As it tends to go. The thing about waves is that when we are in the middle of one, the ride is exhilarating. And it feels terrible to not be enjoying the ride.

You don’t feel the pain until the wave is over, and the bottom falls out underneath you.

And to be clear: We are definitely in the middle of an AI wave here. Nvidia, a fine company, saw its market capitalization increase by one full Texas Instruments market cap on a single day. The rest of the S&P 500 has taken note:

A little inside baseball for you: This is not an indication of fraud, and those who imply that should be ignored. Yes, it is certainly possible there is considerable fraud being committed under the banner of AI. That’s how it goes. But this chart should be read like a thermometer; illustrating the heat of the topic. And the motivation behind it is simple human nature.

Say you are an IT professional. You like cool new stuff. You want as much funding as possible. Go to your CEO and say, “I want money for servers” and you are likely to be told to use the servers they already bought you. Go to them saying you need funding to pursue an AI initiative that can yield super-duper benefits to the bottom line, and no CEO who has had CNBC on at any point in the last few months will say “no.”

And let’s face it: AI is a nebulous concept. A wide range of companies have been doing interesting things around machine learning for a long time now. It is pretty easy to classify that stuff as investments in AI. So these companies are likely telling the truth. What has changed at this moment is not so much the business strategy, but the branding. That alone should be enough to give a long-term focused investor pause.

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Your mileage may vary, but it helps me to replace the words “artificial intelligence” or “AI” with “magic pixie fairy dust” when I hear execs talk or read transcripts. Ok, not sure it really helps me. But it does amuse me. And I think it makes a point.

For example, I’d argue that Kraft CEO Miguel Patricio’s AI drop is just as meaningful for investors if the alternate words are used…

Kraft is an AI company in the same way that Nvidia is a mac & cheese specialist. Just try to convince anyone that Kraft hasn’t been using tech and planning software to try to improve planning and reduce waste for years. What has changed is the branding of that effort.

Or how about Expedia’s Peter Kern?

Probably only funny to me. Even if so, please do not miss the other little thing Kern mentions in that quote. Which is, perhaps, the more important point: “While we have been using AI and ML for some time…”

As noted above, there is no AI revolution at hand. It is business as usual inside corporate HQ at all of these 100+ companies who mentioned AI in the most recent quarter. What has changed is the branding. This is a pretty clear indication we are mid-wave.

So what’s an investor to do?

There’s money to be made in riding the wave, if you so choose. Chances are this mania will last longer than a person like me would think it will. Just do understand the risks. Even good companies, like Nvidia, are priced at nosebleed levels relative to their own history and their hyped-up sectors. From Koyfin again…

I can’t do half the job discussing valuation as Jim Gillies does here, so go listen to that. Just be mindful that the growth required from here is going to come up against the law of large numbers. At near a trillion-dollar market cap it takes a lot of future sales to move the needle, and there is substantial future growth priced into the shares at this level.

Psychology appears to be about the only thing that can justify the valuation, let alone gains from here. But at least in the near-term, psychology is a big part of why a market moves.

Personally, my answer is to largely do nothing. I did sell about 75% of my holdings in one stock. It was a smallish, speculative position but it is up more than 250% since last Fall when I bought it. I don’t think it is that good of a company. I bought it as a long-shot, and would be crazy to fall in love with it now that it has (for now) worked out. I used the proceeds to add to a beaten-down financial services company with an equally weird name.

I probably should sell more, but there is the potential for me to be wrong and for it to really be different this time. There is also nothing caught up in this wave that was a large enough position to make selling today life changing. So… we’ll see.

The problem with riding the wave is predicting when the wave ends. For all my efforts, I am yet to develop a reliable way to predict the future behavior of crowds. This wave is not the time to start.

I have big plans for the summer. Most do not involve sitting in front of a computer terminal waiting to see if today is the day when things suddenly change. I’ll instead keep working on getting rich a little more slowly, spending as little time as possible thinking about current valuations, and giggling to myself about “magic pixie fairy dust” every time an AI expert or a CEO goes on CNBC.

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