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Two books that contextualize the AI hype
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  1. Narrative Economics: How Stories Go Viral and Drive Major Economic Events by Robert Shiller

  2. Dot.Con: How America Lost Its Mind and Money in the Internet Era by John Cassidy

A few days back, someone posted about AI stocks and value investing, as though there was a value angle to AI stocks, so I wanted to give these two books as resources in the event that anyone wished to explore the topic further.

Shiller gives a general overview of how narratives impact the behavior of financial market participants, providing examples that range from the craze of the 1920s to Bitcoin, whereas Cassidy is specifically focused on the Dot-Com Bubble. The general lessons that emerge from these books:

  1. When narratives hype new technologies or business strategies, there is a propensity for market participants to disregard valuation sensibilities. For example, stocks will trade at 50, 100, even 200 times earnings. Some will trade at commensurate P/S ratios, as they don’t have any earnings.

  2. On the grounds that the technology and innovation are so profoundly disruptive as to be unlike any previous moment in history, analysts and pundits will rationalize these outrageous valuations.

  3. The hype is so pronounced and all-consuming that these rationalizations are widely believed, and doubting them seems tantamount to denying the future.

  4. Many companies will rebrand to capitalize on the hype, even if their company is wholly unrelated to the prevailing narrative. (This point is mostly from Cassidy.)

  5. The irrationality of the boom—the valuations, the growth projections, the funds lavished on unprofitable businesses—is, for most, only visible in retrospect, that is, once the boom goes bust and speculation yields to sobriety. (Again, Cassidy.)

In brief, when narratives hype technology, related stocks will trade at high valuations, which is not reconcilable with the principles of value investing. In fact, the value investor is inclined to see such flights of fancy as pure speculation, as antithetical to prudent investment decisions.

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1 year ago