The AI Boom Won't Make Everyone Rich

Editor's note: Few people doubt that AI will transform the economy... But that doesn't mean every hot AI stock will reward investors. In this issue, adapted from his free Health and Wealth Bulletin daily e-letter, MarketWise CEO Dr. David "Doc" Eifrig explains what history's greatest investment bubbles can teach us about separating the winning participants from those doomed to fail...

Making money from a civil war is a breeze compared with investing in a financial bubble...

That's the experience of Jay Cooke... a 23-year banking veteran who helped secure a Union victory over the Confederacy from behind his desk in Philadelphia.

At the time, the North needed to fund its army. But it couldn't sell enough bonds to bring in the money.

So the government turned to northern banks for help. If bankers could get investors for the bonds, the government would pay them a commission. It was a win-win for each party.

Cooke was so successful at selling bonds to fellow bankers that the U.S. Treasury offered him a special deal... $500 million (about $18 billion today) in war bonds exclusively for him to distribute.

It took a massive campaign, including a newspaper ad blitz and a nationwide network of 2,500 agents, but Cooke got the job done. He managed to sell every single bond... and reaped a multimillion-dollar commission as a result.

Then the Civil War ended.

That was a good thing for most of the country. But it meant Cooke needed a new line of work.

He followed the herd into the hottest trend of the time – one America needed to fulfill its Manifest Destiny to the West.

That's how Cooke landed himself in the middle of a bubble... and suffered the consequences.

It's a warning we should remember now. You see, even "surefire" industries – like the AI bubble today – don't guarantee that every investment in them will be a winner...

Don't Confuse a Great Industry With a Great Investment

All anyone in finance in the 1870s talked about was railroads.

The first transcontinental railroad had just been completed, making the rail a key part of our nation's industry. Railroad stocks were up 150% over the prior decade.

As this rapid transition sparked a frenzy among investors, Cooke figured that if he could sell war bonds, he could just as easily sell railroad bonds. He became the exclusive bond agent for the Northern Pacific Railway.

It seemed like a sure bet. No one could deny that railways were the future. Between 1871 and 1900, the U.S. built 170,000 miles of railroad track, nearly quadrupling the total mileage.

But if you bought into this industry in 1873, you immediately got wiped out.

Investors were clamoring for the future, plowing money into both rail construction and railroad shares. But while the industry was real, railroad investments were a bubble. And Cooke had fallen right into the middle of it.

A quarter of all railroad companies went bankrupt. This collapse spiraled into the broader Panic of 1873 – and the bursting of the railroad bubble.

And Cooke's bet on railroads sent him into bankruptcy... only a few years after the greatest banking success of his career.

Even if railroads were the future, it didn't guarantee every investment would succeed.

We've seen this many times over history. Back in 2000, it seemed like you just couldn't go wrong betting on the Internet.

However you measured it, the Internet was the future. And that promise turned out to be completely true...

But once the dot-com bubble burst, the fallout was still even more disastrous than the Panic of 1873.

Today, the same story is playing out with AI...

Much like with railroads and the Internet, AI will be a huge part of the future. But as history has shown us, that doesn't mean the trend will be a straight shot higher.

The AI boom is likely to have several bumps along the way. We don't know how much higher today's hottest AI stocks will go, but we know that not everyone can hold their nose and buy at these valuations.

So if you're considering joining the AI frenzy, make sure you have a strategy to avoid putting your wealth in a "bubbly" stock.

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig

Editor's note: The breakthrough behind Doc's newest research didn't come from Wall Street. It came from the technology Elon Musk uses to keep one of the world's largest satellite networks running. And as back tests show, Doc's strategy – using the same type of predictive principles – can give investors an entirely new way to spot tomorrow's biggest winners.