On January 1, 2000, the world got a reprieve from a much-publicized technological Armageddon when it turned out that the Y2K crisis was not a crisis after all.
Still, a real threat loomed if anyone paid attention to the stock market.
As you will recall, a new life-changing activity known as the Internet was going to make us all rich, not just the oligarchs behind the technology.
Dot-com stocks — even those of companies that weren’t making money, and that means most of them — were also meant to defy common sense and gravity.
We were in a “new paradigm” – the code word for the irrational exuberance of the era in which emotion rather than indicators drove stock market valuations.
At the time, few heeded the warnings that not all companies with the “new economy” suffix were destined for greatness.
That didn’t matter to the masses of new investors who flooded the markets, armed with the opinions of TV financial touts and new discount brokerages, while continuing to buy by clicking on a computer screen.
People with no real knowledge of Wall Street suddenly rivaled Warren Buffett for their acumen in picking these stocks without a loss.
It was all the rage in the financial media at the time, overwhelming the casual Cassandras who just didn’t get it.
There is a problem
That is, until reality sets in.
In March of that year, the historic rise in stocks was revealed as one of the largest investment bubbles in history.
Amid the frenzy and subsequent collapse, many of the companies’ business models were downright insane; most are simply overvalued by the market.
Some of them held real, tangible promise, but they too had to survive correction.
The losses were staggering.
A generation of investors has been burned.
The technology market took years to recover from the fallout.
History, I’m afraid to say, repeats itself when it comes to market manias.
This is why our current mania regarding all things AI will almost certainly follow the same trajectory, with investor losses to follow.
It’s difficult to pin down exactly what caused the Internet’s mood change at the time – and what will spark the next artificial intelligence 180 –.
The most likely culprit: the collective instinct of the smart money of hedge funds and institutions to do their own research and filter out the TV touts, as opposed to the fake Buffetts who don’t.
As they did during the dot-com craze, these investors now sense that something is wrong with AI, data and the Wall Street sales machine.
Then as now, big investors began to make profits and then some.
When the market crashed in 2000, it wasn’t just speculation, like the promise that Pets.com would become the next Microsoft.
The aforementioned tech giant was also swept up in this change in mood, as was almost every public company linked to this groundbreaking venture.
Scary stuff for small investors who dove into the market and never looked back until they lost everything – and many did.
What’s even scarier is that most investors either don’t remember those crazy days or are blissfully unaware of the past as they evaluate what’s happening with AI and want to be part of the hype.
Don’t be greedy
The hype about AI is so similar to the dot-com hype that it’s almost breathtaking.
The sales pitch is almost the same: revolutionary stuff (which is true) that will make all investors, not just oligarchs, rich (which is really not the case). That might be true one day, but if history is to be believed, that day is a long way off and getting there will be complicated.
I can’t tell you if last week’s market ructions – a rise in rates after a bad inflation report and then a sell-off in AI stocks – is the herd making its final statement on AI rearing its ugly head like it did in 2000.
There might be more foam to come; IPOs from hyperscalers like Anthropic and possibly OpenAI could happen in the coming weeks and months.
But common sense and history teach us that this will not last.
Interest rates will rise because AI competes with the federal government’s massive borrowing needs.
The correction is coming for AI and all the companies that exploit its technology by spending heavily, largely using debt, the main ingredient of any crash.
If history is any guide, it’s time to take your profits and not get greedy – or pray that the AI you’re betting on is a survivor of the coming crash.
Gn bussni
