1) Investors – oops, I mean speculators – got a painful reminder yesterday of why chasing the hottest, most overhyped sectors of the market is a sure route to ruin...
It was a historic bloodbath across the tech sector. The Nasdaq Composite Index suffered its biggest dollar loss ever – a staggering $2.5 trillion, as this Wall Street Journal chart shows:
In my January 27 e-mail, I wrote that "there's a clear spending bubble in the AI sector that's likely to burst this year." And the next day, I correctly said it would continue to inflate until then:
I think the AI bubble could burst later in the year, not immediately.
Here's why: Most bubbles don't suddenly burst. If this one turns out to be anything like those we went through in 1999, 2007, or even late 2021, the biggest moves happen in the run's final phase, where there's a blow-off top before the crash. And that's where I think we are right now.
I waited patiently as rampant speculation and rank stupidity overtook the sector...
Starting four weeks ago on October 12, less than a week after the tech sector's all-time high, I argued in a series of e-mails that the AI bubble had peaked and was in the process of bursting. Since then, the Nasdaq is down 10.8%.
It's even putting Anthropic's much-anticipated IPO at risk, as this WSJ article notes:
Anthropic is aiming to stage the IPO the week before Thanksgiving and has been expected to raise up to $100 billion in an offering that could value the company at around $1.5 trillion.
But three major investors who plan to participate in the IPO say the valuation will likely need to come down, with one saying it could be closer to $1 trillion...
The company could also decide to raise less money than anticipated, perhaps to around $80 billion, said one investor who plans to participate in the IPO…
Another investor who plans to participate wondered if Anthropic might delay its offering to wait for more favorable conditions. Even if the market bounces back, it could be a challenge to persuade institutional investors who have just been burned in the recent selloff to take a big risk on the AI sector again so soon.
I acknowledged in my October 27 e-mail that Anthropic "is a very impressive, market-leading company that's growing faster than perhaps any business of its size in history." So I still think Anthropic is likely to go public this year – as do the real-money bettors on Polymarket, who think it's 73% likely.
But that means there's almost a 1 in 3 chance it doesn't happen by year-end – in which case, the AI sector is going to implode.
2) I didn't just tell my readers what stocks to sell or avoid. I also shared plenty of good ideas of which stocks would do well during the AI bust...
For example, on September 18, the day that Warren Buffett stepped down as Berkshire Hathaway's (BRK-B) chairman, I noted that the stock was trading at an 11% discount to its intrinsic value. And I concluded:
I'm especially bullish because in addition to today's discounted stock price, I'm optimistic that new CEO Greg Abel can create value via operational improvements and capital allocation...
This combination leads me to believe that Berkshire's stock is highly likely to beat the S&P 500 over the next five years, perhaps by a margin of two to three percentage points. So if the S&P 500 compounds at 5%, I would expect Berkshire to do roughly 7% to 8% – with a bias toward the upside.
Since then, Berkshire is up 12.3% while the S&P 500 Index and the Nasdaq are down 3.9% and 8.3%, respectively, as you can see in the chart below. That's 16 points of market outperformance – about what I estimated for five years – in less than two months!
3) Back on June 12, after explaining why I viewed SpaceX (SPCX) as one of the "most overhyped, overvalued large-cap stocks of all time," I shared a list of 10 stocks that I liked. And I added two more on June 15, writing:
I'm confident that this list, on average, will outperform SpaceX (SPCX) and the overall market, as measured by the State Street SPDR S&P 500 Fund (SPY), over the next year...
Every one of these Discarded Dozen stocks trades at or near multiyear lows (in some cases, multidecade lows). All of them generate gobs of free cash flow, and most are buying back shares hand over fist.
Almost five months later, only two of these stocks are down, and four are roughly flat. The rest are up between 21% and 42%, and the average gain is 15%.
That's versus a 23% decline for SpaceX (SPCX) and a 1% decline for the S&P 500, as measured by the State Street SPDR S&P 500 Fund (SPY):
4) Those investors who are dumping stocks because they think Tuesday's blue tsunami means that radical leftist Democrats are now in control of the party – and therefore both chambers of Congress starting in January – are making a big mistake...
In fact, the results showed that centrist Democrats were the big winners on Election Day, as this WSJ article noted:
Senate vote margins tell a similar story: Centrist Democrats outran 2024 Democratic presidential candidate Kamala Harris by an average of 21 percentage points; progressives by just 5. Moderates ran 5 points ahead of Democratic House candidates in their states; progressives ran 5 points behind, Third Way estimates.
Consider the olive branch Texas Senator-elect James Talarico just extended to SpaceX and Tesla (TSLA) CEO Elon Musk, despite Musk spending somewhere between $150 million and $225 million to defeat him. In an interview with NBC News, Talarico said:
I'm a big fan of SpaceX and Tesla. [Musk] is a great business leader and entrepreneur and innovator. I want him to stick to those things... I will work with him when it comes to technology and innovation.
I repeat: Don't let your politics affect your investing!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. Below are five professional photos from the New York City Marathon. Though I didn't hit my goal of 3:44 (the qualifying time for the Boston Marathon for a 60-to-64-year-old man), my time of 3:53:27 was six and a half minutes faster than my previous personal best of 3:59:54 that I ran last year. That's good enough for top 25% overall and top 16% in my age group. All things considered, I think I'm doing a good job of fighting Father Time!
