Podcast Summary
Market Uncertainties: Market uncertainties surrounding US elections, stock market direction, and AI technology challenge thematic investors with potential polar opposite outcomes. Staying informed and adaptable is crucial.
Uncertainty is prevalent in the current market landscape, with significant questions surrounding the US presidential elections, the direction of the stock market, and the future of AI technology. For thematic investors, these uncertainties present tough choices as the potential outcomes could be polar opposite. James Van Geelen, founder of Citrine Research, shares his insights on thematic investing and the current trends he's observing, including the potential maturation of some themes and the continued importance of AI as a technologically innovative theme. As James emphasizes, staying informed and adaptable is crucial in navigating these uncertain markets.
AI Investment: Apple's emphasis on privacy and business-to-consumer applications, along with the potential of 'picks and shovels' investments and advancements in edge AI, make AI an intriguing investment opportunity despite privacy concerns and longer latency for success.
Investing in the future involves both good stories and real economic impact. When it comes to artificial intelligence (AI), while it's difficult to predict exactly what it will look like in the future, there's no denying its use cases. The key to making AI a successful investment lies in its ability to move from business-to-business-to-consumer applications. Apple is seen as a frontrunner in making this happen due to its consumer trust and emphasis on privacy. However, as convenient as AI may be, there are privacy concerns that come with it. Apple's walled garden ecosystem and constant inference capabilities can alleviate these concerns, allowing for productivity gains in real time. Looking back at past technological trends, the concept of "picks and shovels" has proven successful. In the context of AI, this means investing in companies that provide the tools and infrastructure for AI to thrive. With the latency between a company's inception and success becoming longer, it may be challenging for public equity investors to get in on the ground floor of these use cases. Instead, the "picks and shovels" approach may once again prove to be a viable investment strategy. Furthermore, the advancement of edge AI and doing inference on devices is a promising area for investment. This technology allows for faster processing and less reliance on large data centers, making it a potentially lucrative opportunity for those looking to capitalize on the future of AI.
Technology replacement cycle, Apple devices: Apple's new devices could lead to a significant replacement cycle, creating investment opportunities in areas like system on chips and thematic equity. Preparing for events like elections by constructing a long-short basket can help manage risks and capitalize on pricing power.
We might witness a significant replacement cycle in technology, particularly with Apple's new devices, which could potentially leave those who don't have the latest models feeling left behind. This trend could drive investment opportunities in areas like system on chips and thematic equity. However, it's important to note that themes aren't limited to bull markets and can provide investment opportunities during uncertain times as well. Preparing for events like elections from an investment perspective involves starting early and identifying companies that could be impacted by the theme, in this case, trade policies and tariffs. By constructing a long-short basket, investors can manage idiosyncratic risks and capitalize on pricing power.
Political uncertainty and thematic investing: During political uncertainty, it's important to identify potential beneficiary sectors while remaining adaptive to market shifts and maintaining a diversified portfolio.
During times of political uncertainty, it's essential to identify themes and sectors that could potentially benefit from specific policy outcomes, while also being mindful of potential market overreactions and incongruous correlations. For instance, during the 2020 U.S. presidential election, some investors focused on sectors like private prisons, border security, and certain retailers, anticipating a Trump victory. However, it's crucial to avoid overfitting analysis to just a few periods and to remain adaptive as the narrative progresses. For example, the unexpected debate performance by then-candidate Biden led to a significant shift in market sentiment, with the Bidenomics basket experiencing a 5% increase, while the Trump basket saw a 10% uptick. Ultimately, successful thematic investing requires a well-diversified portfolio at both the security and thematic levels.
Second-order effects: Second-order effects can lead to unexpected price movements and production disruptions, making it essential for investors to consider indirect consequences when analyzing trends and making investment decisions.
Second-order effects can have significant impacts on various industries and markets that may not be immediately apparent. Using the examples of the gummy bear and sawdust shortages following the 2008 housing collapse, it's clear that these indirect consequences can lead to unexpected price movements and production disruptions. Therefore, it's essential for investors to think beyond the obvious and consider the potential ripple effects when analyzing trends and making investment decisions. Additionally, uncertainty can sometimes hinder investment theses, as demonstrated by the recent Supreme Court decision on the Chevron deference and its potential impact on the water scarcity thesis. Overall, applying second-order thinking and staying informed about potential indirect consequences can help investors make more informed decisions and navigate market volatility.
Water industry investment uncertainty: Investors may hesitate to invest in the water industry due to legal ambiguity surrounding microplastics and contaminants, but persistent demand and growing awareness make it a potential area for significant returns. AI investment also presents uncertainty, with some success stories but broader questions about the payoff for businesses.
The water industry, specifically the focus on water cleaning due to microplastics and other contaminants, presents an uncertain investment opportunity due to recent legal rulings. Thematic investors seek clear cultural touchstones and may be hesitant to invest in areas with ambiguity. The water industry, with its persistent demand and growing awareness, still holds potential for significant returns, but investors may choose to wait for the resolution of ongoing appeals before making a move. Additionally, the use of artificial intelligence (AI) in various industries, including finance, continues to be a topic of interest and investment. While some success stories exist, such as Druckenmiller's investment in NVIDIA based on AI predictions, the broader question remains whether the current investment in AI technology, particularly in chips and electricity, will lead to substantial payoffs for businesses.
AI Investment: Despite potential concerns of an AI investment bubble, the long-term value of AI for businesses and the possibility of off-the-shelf solutions warrant significant investments. However, it's crucial to assess the quality of AI services and their ability to generate meaningful returns for companies.
While there may be concerns about an AI investment bubble, it's important to consider the potential long-term value of AI for businesses and the possibility that off-the-shelf solutions could become the norm. History shows that revolutionary technologies often come with excessive capital expenditures, but these investments can lead to significant progress and future advancements. However, it's crucial to assess whether the quality of AI services will provide sufficient value for companies to recoup their investments and generate revenue from their customers. Ultimately, the question is not whether there will be an AI investment bubble, but whether the investments will yield meaningful returns. Additionally, the speaker emphasized that every technology has its overstatements and necessitates a certain level of excess investment to deliver on its promise. It's essential to remain open to new opportunities and adapt to the market's natural progression.
Thematic Investing Price and Story Balance: Successful thematic investing requires a balance between an attractive price and a compelling story. The market may not always have priced in the story, but unexpected events can impact prices.
Thematic investing, which involves identifying and investing in companies that align with specific social, economic, or technological trends, requires both an attractive price and a compelling story. The price should be relatively attractive, and the story should provide momentum for the investment. An example given was Nvidia, which was underpriced and had a compelling story surrounding the use of its chips in AI and chat technology. However, it's important not to be too smart and assume that the market hasn't already priced in the story. Additionally, unexpected events, such as tariffs, can significantly impact prices. In the case of Five Below, a retailer, tariffs caused a sharp decline in its stock price, making it difficult to sell items for five dollars or below. Therefore, successful thematic investing requires a balance between value and story.