If you went to school during the 90s you must remember Pogs, the playground game that briefly ruled the world.
The game would begin by each player bringing out the same number of these little cardboard discs (known as Pogs) and stacking them all up one on top of the other. From there, each person would take a turn and “slam” this stack with their Slammer, a larger, thicker piece that would scatter the Pogs across the ground. Whatever Pog pieces landed face up when you were the one slamming, you kept, and whoever had the most at the end won the game. It was often a decision amongst players whether you would play “for keeps,” which meant that whatever Pogs you ended up with you kept. Of course, this also meant that you could lose some of your own Pogs in the process. Only real gamblers played for “keepsies”.
Maybe it was because of this competitive edge to the game but what started out as an attempt by a schoolteacher in Hawaii to help her students with maths, exploded in popularity and became an almost overnight global phenomenon. Pogs were handed out as an incentive to open a bank account. You could find them in Happy Meals.
They were everywhere, until they were not. By 1997 Canada Games (the company that sold Pogs) were out of business. From world domination to irrelevance in two years.
Some pretty strange things have become very popular over the years. Tamogotchis. Dance mats. Digital cameras. Pokemon Go. Skinny jeans (or flares for our older readers…). The Harlem Shake. Save Chip. Cabbage Patch Dolls. Briefly these trends shine very brightly, then just fizzle out…
Sadly, investment fads do not exit-stage-right quite so quietly. I’ve always thought it odd that investment manias are referred to as “bubbles”. A regular bubble popping is almost unnoticeable. An investment bubble popping resembles a piano being thrown out of a tenth story window.
Anything I read at the moment talks about Artificial Intelligence (AI). AI has the potential to change how we all work, to change whole economies. We are all still figuring out the practical applications, but the potential for the technology seems to be endless, or terrifying, depending on your world view. AI can already take your burger order, it can produce a song.
Unlike recent technological fads (Metaverse anyone?) AI has gained real traction in the short time that it has been in the public consciousness. Chat GPT is the fastest consumer application to reach 100 million users, hitting the milestone in just three months. For context, TikTok took nine months to reach these user numbers, and Instagram did it in two and a half years.
AI technology is not the same as Pogs. It is not going away. Nonetheless, when a technological innovation on this scale occurs, human nature dictates that at some point investors will get overly enthusiastic. The technology itself may not be a bubble, but that does not stop “bubble-ish” behaviour in certain quarters. I think that’s just an inevitability.
I am certain that there will be some companies who leverage and benefit from Artificial Intelligence to make a certain cohort of investors fabulously, unimaginably wealthy. I am even more certain that some utter dross will be funded over the next few years based on a few slides in a deck that mention AI.
Hyping it up
We can see the hype cycle cranking up already. Per Barrons, UBS analyst Lloyd Walmsley notes (emphasis is my own) “that he’s heard venture-capital investors speculate that the market for generative AI applications could be as large as US$1 trillion. He notes that the world has over one billion knowledge workers; OpenAI charges $42 a month for the professional version of ChatGPT. If you assume every one of those people gets two accounts—one general, and one specialized—you get close to $1 trillion”.
Venture capitalists need to deploy their money somewhere. Better to do it in a sector with a literally unbelievable total addressable market. Interest rates don’t need to be zero for this to happen by the way – the narrative is just too compelling.
Again, there are definitely going to be some winners here. We invest in some companies with exposure to the theme, that we believe trade at sensible valuations. But there will undoubtedly be some massive losers too. The unwinding (a generous word for implosion) of the dot com bubble showed us that you can be right on the technology, and still get carried out if you hold the wrong investment. The internet changed the lives of almost everyone on the planet, and yet markets in the early 2000s were littered with the wreckage of stocks in companies with “dot com” at the end of their name.
But before bubbles pop, there is always plenty of money to be made. “When I see a bubble forming, I rush to buy, adding fuel to the fire,” said George Soros, "the man who broke the Bank of England". If you are going to have a punt on one or two fledgling AI companies outside of your main sensible portfolio – have it, but size it appropriately. And just try to remember to get out of the way of the piano before it lands on your head.
By the time you read this, the finale of Succession will have aired on Sky Atlantic – a show so good that I am jealous of anyone who hasn’t yet watched it. In my opinion the star of the fourth series has been Kieran Culkin. His performance in the penultimate funeral episode alone was award worthy. He sure has come a long way from wetting the bed in the original Home Alone…
Have a great week.
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