The Only Free Lunch

One of our most asked questions is, “Should I own AI stocks?” And in this case, ‘stocks’ usually means Nvidia.

Indeed, the companies that lead transformational events in our economy – for example, the industrial revolution or the internet boom – traditionally have provided investors impressive returns.

In response, we suggest that most investors’ ETFs or mutual funds these days already contain a generous helping of AI. If you own the S&P 500, your top holdings are NVDA, MSFT, AAPL, AMZN, META, and AVGO. So yes, most market participants own AI. Maybe you do not have the shares directly, but if you own the S&P 500 you have an 8% allocation to NVDA. If you own the Vanguard Growth Fund, you have 12% in NVDA and 12% in MSFT.

It is also important to recognize that AI is increasingly prevalent in sectors outside traditional technology. Healthcare providers, financial institutions, automotive companies, and manufacturers integrate AI into operations, research, and customer experiences. Investors in these sectors may possess an economic stake in the growth of AI, as their chosen companies adopt and capitalize on machine learning, automation, and data-driven insights.

Healthcare: AI is used for diagnostics, predictive analytics, and personalized medicine.
Finance: Banks and fintech firms use AI for fraud detection, algorithmic trading, and customer service automation.
Automotive: AI powers self-driving technologies and smart manufacturing.
Utilities: How you power these AI machines.

Year to date, technology is not the leading sector in the S&P 500.

AI may be a newer technology, but efficiency through technology has increased the average employee revenue. When looking at the average revenue generated per employee in the S&P 500, that number is $642,000. Meaning it takes 1.55 employees for the S&P companies to generate $1,000,000 of revenue today. If you look back to 1991, it took 2.46 employees to produce $1 million of adjusted inflation revenue.

If you accept that AI investing is real and will continue to be transformational, you would then ask should you own what is powering the infrastructure, or should you own companies benefiting from the transformation? It is often hard to talk about diversification when a few stocks are seemingly driving all returns. Unlike a fad, like the comeback of the fanny pack, diversification remains a steady influence. If you look at the chart on Cisco below, you will notice that it took 25 years for CSCO to claw back to even. Cisco was the stock of the internet era. You needed their switches to build the infrastructure; they were the backbone (sounds like another familiar stock today). That stock was held by so many investors, and I might add they owned too much.

Also look at some ‘boring’ stocks like Tractor Supply and Domino’s. Ever heard those names at a cocktail party? Right…didn’t think so. But a diversified investor has taken advantage of those along with the current hot stocks.

As we talked about last month, the current AI investment thesis could continue for a few years. But like prior market pain points, such as the dot-com bust and sub-prime mortgage meltdown, most financial stress comes from debt and risk. If you have too much risk, it may be a good time to take some off. Strong is regret-avoidance, young Jedi, so no looking back as you could watch the stocks go higher. As Harry Markowitz is credited as saying “diversification is the only free lunch.”

Thank you for your continued support. We look forward to speaking with you. September is portfolio review month, if you or a friend/family member would like a review of your positions or risks, please reach out.

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