How to think about the current AI craze compared to past bubbles

A version of this story originally appeared on TKer.co

Will artificial intelligence prove to be a bubble like the one we witnessed 25 years ago with the boom of the Internet?

Financial author Phil Rosen asked me for my thoughts on his platform, ““

I think we should be optimistic about the future, but also concerned about how things will develop when we get there.

Whenever you make a game-changing breakthrough in innovation and technology, excitement about the opportunity will inevitably lead to an investment overflow.

As I’ve written over the past two years, I believe that . Companies have identified ways to use AI to do things more quickly and more often at lower cost. This is the core proposition of productivity-enhancing technology: it and/or money.

It will pay people to save time and money. Economics 101 teaches us that where there is demand, there will be supply.

This offering comes with staggering amounts of investment, with mountains of capital expenditures to fund cash, tons of venture capital flowing into new startups, and much of the savings reallocated into publicly traded companies developing AI technology.

Many of these investments will be profitable. Many will flounder.

This behavior is not new. It echoes past technological breakthroughs.

In 1990, Warren Buffett made this observation about the automobile boom of the early 20th century.

“It changed the country,” he said. “There were at least 2,000 companies that entered the car business because they clearly had this amazing future. And of course, you remember that in 2009, there were only three companies left.”

Another example of a previously hot industry is rail transportation.

We often talk about how big the tech sector is as a share of the stock market, and compare it to the dot-com bubble. But it is nothing compared to railways a hundred years ago.

“Markets were dominated by railways at the beginning of the 20th century, accounting for 63% of US stock market value and about 50% in the UK,” UBS analysts said. .

I don’t know much about the 19th century. However, I understand that there are hundreds of railway companies that have been funded by those eager to profit from building the country’s logistics infrastructure. The rise of industry also came .

Railroads and automobiles continue to deliver on their promises to save us time and money. But we wouldn’t have what we have today without excessive investment and some financial blowouts.

Although we are excited about the stock market returns we have achieved in the AI ​​boom, it would be a mistake to become complacent.

The emergence of new technology usually comes with volatility in the markets .

But also, market crashes are not guaranteed. Even if we get what could be considered a collapse of the AI ​​bubble, it will be close .

Keep in mind that former Fed Chairman Alan Greenspan gave what he had to say Four years before the dot-com bubble reached its peak. More importantly, the S&P 500 is at its post-bubble low than when Greenspan gave that speech.

Assuming we are experiencing an AI correction, there is no way to know the depth and duration before it occurs. Maybe it already happened. There will probably be multiple bumps in the market’s move higher.

For most investors, the best move is to stay invested , To recover from.

If you are unable to do so And you don’t want that The stock market may not be right for you.