VD 103: Am I a Luddite?

In This Issue:

• Am I a Luddite?

• Stock in Focus: Norma Group

• The Rationality Test: Warner Bros.

• What I Read in the Past Weeks

• News from Our Companies

• Doubler Portfolio Update

Am I a Luddite?

I was recently called a Luddite in a discussion about AI and tech companies, especially concerning their valuations.

The Luddites were nineteenth-century textile workers in England who would sneak out at night to smash the machines that threatened to put them out of work. Since then, ‘Luddite’ has been a derogatory term for someone who is anti-technology and anti-progress.

Am I a Luddite? Not at all. I belong to the generation that had to boot up a PC with DOS, learned to program in Turbo Pascal, and managed the IT—especially network communication—for our own shops, even setting up our own webshop. So I’m certainly not anti-technology or anti-progress; quite the opposite.

I’ll even take it a step further: out of everything we’re imagining today about AI and its possibilities, at least 90% will surely come true. This is another technological change that, like the steam engine, the car, the radio, the internet, and so on, is underestimated in the long run.

But, and here’s the kicker, it’s vastly overestimated in the short term. Just as the internet was also overestimated. The Dot-com bubble happened around the turn of the millennium, but consumer behavior—and with it, the economy—truly changed only with the iPhone. The iPhone was launched in 2007, seven years after the bubble burst.

The reason for this is very simple. New technology is developed, but then humans have to adapt, create the applications, and only then will it significantly change our economy.

Companies announcing mass layoffs now due to AI are simply using it as an excuse. AI is already great, and it helps me tremendously with research and analysis, but replacing a third of your staff, as ABN Amro is doing? We’re nowhere near that yet. There are other motives at play there.

Moreover, the discussion was about investing, and then the question isn’t even whether you believe in technology and AI. The real question is whether you believe the massive investments happening today can be made profitable.

The truth is that for most companies today, it’s a gamble, a gamble driven by the fear of being left behind. For Microsoft and Google, I can see the potential for profitable applications because they can connect them to existing, profitable applications: Office and Search. For the others, profitability doesn’t seem to be right around the corner yet.

For and Against

It’s perfectly possible to believe in technology and AI as a person, but not as an investor. Or at least not in the current valuations of the companies. I am clearly in that camp. What we’re seeing in prices today cannot be rationally explained; the math just doesn’t add up.

Will there be winners? Certainly, but who can say with certainty today who they will be and whether their price today is reasonable?

Or as Howard Marks writes in his latest memo, “Is It a Bubble?”:

“Who will the winners be, and what will they be worth? When a new technology is assumed to be world-changing, it is invariably assumed that the leading companies that possess this technology will be of great value. But how accurate will that assumption prove to be? As Warren Buffett noted in 1999: “The auto was the most important invention, probably, of the first half of the 20th century. . . . If you had seen at the time of the first cars how this country would develop in connection with autos, you would have said, ‘This is the place to be.’ But of the 2,000 companies, a couple of years ago it turned out only three car companies survived. So the autos had an enormous impact on America, but the opposite effect on investors.”

And that’s the way it is with every technological bubble.

So, I’ll stick to other segments of the market. It’s not that these are free of technology—all our ‘boring’ companies are also supported by technology—but as a facilitator, not as the product itself.

PS: There are a few more very nice passages in Marks’s latest memo; more on that in the ‘What I Read in the Past Weeks’ section.