The AI Revolution & Lessons Of The Internet Boom

by Robert E. Quittner, Jr. CFP^® & CMFC™
Investment Advisor Representative
[email protected]

There isn’t a day that goes by in my life that these two letters aren’t mentioned… AI. It’s everywhere in so many ways. Personally, I use the technology daily in the office and quite often at home. Never for anything critical, and I don’t rely on it blindly… but I use it. Here’s a great example.

Tuesday night, I needed to mow the lawn when I got home (the things you miss when the kids move out…). Unfortunately, my mower wouldn’t cooperate and kept shutting off after a minute. I replaced the carburetor a month ago and it had been running fine. I was stumped, so I turned to ChatGPT. I typed “Honda GCV160 Engine won’t stay running.  Replaced carburetor one month ago,” hit enter, and instantly I had a troubleshooting checklist.

• Gas in tank? Yes, I know that much and had already checked.
• Remove gas cap off and try starting. Might be a vacuum problem. That didn’t help.
• Gas getting to the carburetor? Pulled off the rubber fuel line. Yes, coming through.
• Check for sediment in the carburetor bowl. One small bolt and it was off.
  • Getting closer to the problem as there was sediment in the bowl. Cleaned that out.
• Check the fuel jet in the carburetor. One small, slotted screw and took the jet out and cleaned it up.
• Put everything back together, pulled the cord once and it instantly started!! Finished the lawn with no problem! I also avoided hauling the mower back and forth to the shop and paying an exorbitant bill.

Earlier this year, I asked ChatGPT to design a five-week exercise program to prepare my legs for my March ski trip to Vail, CO. My legs were fresh for all five days of skiing and three days of hiking. Success! I could detail many more personal examples, but I’ll move on.

From an investment perspective, we are cognizant of what percentage of technology we hold in our portfolios. How the ebbs and flows of the stock market and news cycle affect their values. Peter, Jeremy, Kyle, Nick, Austin and I consume a significant amount of financial news daily. AI has become a near-daily news story, and it isn’t just confined to the technology section anymore.

In the last three days, AI stories touched on politics and international relations, jobs, corporate spending, insurance, data centers and electricity demand, chips, and financial markets. Reuters, for example, has an entire, continuously updated AI news section, and the Wall Street Journal likewise maintains dedicated AI coverage.

What makes this different from previous technology cycles is how many separate stories are simultaneously being labeled “AI.” There are really several narratives happening at once:

• The investment/spending story: enormous spending on chips, data centers, electricity, and infrastructure.
• The stock-market story: Nvidia and other AI-centered manufacturers have become major drivers of market performance.
• The jobs/productivity story: companies are reorganizing work and, in some cases, cutting jobs as they invest in and implement AI. Businesses are trying to determine whether AI actually produces enough savings and revenue to justify all that spending.
• The political/regulatory story: governments are wrestling with regulation, national security, and even the local impact of data centers. The EU’s AI Act, for instance, became broadly applicable this month.
• The everyday-life story: AI is moving into search, phones, healthcare, education, financial services, customer service, and entertainment.

And there’s an important distinction I think gets lost in the headlines: AI can simultaneously be a transformative technology and an investment bubble in certain areas. Those aren’t mutually exclusive. The Internet changed the world but that didn’t prevent an enormous technology bubble in 1999–2000.

The chart below illustrates the increasing presence AI has in the S&P 500.

° 2018 is misleading without some context. Technology’s apparent decline from 2017 to 2018 was not simply poor technology-stock performance. The GICS classification system was substantially reorganized in 2018. Alphabet/Google, Facebook/Meta, and other companies were moved out of the Information Technology sector and into the newly expanded Communication Services sector.

The big picture is that technology went from 20.8% of the S&P 500 at the end of 2016 to 36.8% today. That’s an increase of 16 percentage points, or roughly a 77% increase in technology’s share of the index.

My personal viewpoint is that AI is here to stay. I don’t believe we’re looking at a passing fad. AI is already changing how people work, communicate, invest, shop, receive healthcare, and run businesses. If my lawnmower and ski conditioning are any indication, we’re only scratching the surface of what it may eventually do in our everyday lives.

I believe we should embrace its capabilities instead of avoiding it. That’s not to say we should trust it for everything—trusting AI blindly has led farmers to poison crops and some other people to do terrible things. And there is a very important distinction between embracing AI as a technology and chasing AI as an investment.

The internet provides a great historical example. In the late 1990s, investors were correct that the Internet was going to change the world. What many people got wrong was assuming that every company associated with the Internet would be a great investment at any price. The technology was revolutionary, but many of the investments were not. Could AI follow a similar path? It absolutely could.  I don’t know whether it will, and neither does anyone else. That uncertainty is exactly why we believe discipline and diversification are so important. 

That doesn’t mean I expect AI stocks to collapse or that we should avoid technology. Quite the opposite. Some of today’s leading technology companies are very profitable businesses with strong balance sheets, substantial cash flows, and competitive positions. AI may provide them with opportunities that we’re only beginning to understand. At the same time, price still matters, expectations matter, and diversification matters.

That is why Peter, Jeremy, Kyle, Nick, Austin, and I continually look beneath the surface of our portfolios. We want exposure to companies and industries that are participating in innovation, but we also want diversification across other sectors, investment styles, and asset classes.

Diversification can occasionally feel frustrating when one area of the market is outperforming everything else. Why own the investment that went up 6% when another one went up 25%?

Because leadership eventually changes. We don’t know when it will change, what will cause it to change, or which area of the market will lead next. That’s precisely why diversification exists.

Embrace the technology and learn about it. Understand what it can do. But don’t confuse excitement about technology with an investment strategy.

I would venture to say that 25 years from now, we will look back at today’s AI tools the same way we look back at dial-up Internet or the first smartphones, amazed at how primitive they were compared with what eventually followed.

There will almost certainly be enormous winners along the way. There will probably also be companies that spend billions chasing AI opportunities that never generate an adequate return. There will be disappointments. There will be periods when AI stocks fall substantially. And there will undoubtedly be companies we haven’t heard of yet that become household names.

AI may very well change the world. But some of the oldest investment principles—diversification, discipline, patience, and not chasing performance—haven’t changed at all.

And hopefully, the next time my lawnmower breaks, AI can still save me a trip to the repair shop.
Enjoy your weekend!

Rob