Artificial Intelligence Envy

| June 29, 2023

Dear fellow investors, 

Charlie Munger says, “Envy is a really stupid sin because it’s the only one you could never possibly have any fun at.” The stock market is always loaded with stocks you don’t own that produce spectacular returns. If you aren’t practicing a successful investing discipline, it is especially tempting to envy those who are benefiting from the latest euphoria.

As you can see from the chart above, outside of the glamorous AI-related stocks no money was made in the first half of the year. This makes investors very envious of those results and forces managers to bend their portfolios to the will of the mania. Simultaneously, investors are impatiently pulling money away from value funds and moving it towards participation in the euphoric names.

We have regrets over companies that we owned or wanted to own which have great price performance over the long run. This is only true when we owned them or analyzed them when they were out of favor and fit our eight criteria for stock selection.

However, we are never disappointed that we don’t own incredibly expensive and popular securities. Ben Inker from Grantham Mayo Van Otterloo recently pointed out that the deep value segment of the S&P 500 Index has only been this cheap in six of the last 636 months. I personally learned in my early years (1980s) as a stockbroker that whenever I chased popular stocks, it was near the end of the popularity streak.

We have several important charts showing how late we are in this particularly long-lasting mania for tech stocks. First, since these techs make up a huge percentage of the S&P 500 Index, speculators are attacking it with options.

Second, there is plenty of evidence that today’s market darlings are a potential ticket leading to heartache and stock market failure. Here is a list of past situations that led to heartache:

  • RCA 1929
  • Manhattan Fund 1967
  • Nifty Fifty DIS/KO 1972
  • INTC/CSCO/Lucent 2000
  • Beyond Meat/Peloton 2021
  • Magnificent 7 2023?

Third, we are bumping up against Dotcom Bubble limits in valuation:

We are never envious of successful growth stocks that don’t have the underpinning of our eight criteria for stock selection. Unfortunately, the market for most stocks will be affected by the damage which will be done when this fad hits the wall and does the normal destruction that occurs when financial euphoria gets unwound.

Much like the 2000-2003 debacle, we expect some of the capital coming out of glam tech stocks (maybe 20%) will gravitate toward value stocks like we own. Fear stock market failure!

Warm regards,

William Smead, Smead Capital Management

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