Technologies Change, but Market Behavior is Remarkably Consistent

Most business-related websites today are nervously anticipating the latest financial results from Nvidia, a company that has become both hugely valuable and a barometer for the economic health of AI. (I wrote this post before the latest numbers were released.)

It’s at his point that I must ask myself: Why am I being so restrictive? The truth is, with the AI trade now accounting for an outsized share of U.S. and global economic activity, the entire economy is arguably exposed to and affected by the ups and downs of AI.

Fortunately, for stock markets and the personal wealth of the fortunate few, AI has experienced far more ups — significant ones at that — than downs. AI’s exalted state of wealth creation explains the anxiety of those awaiting the latest word from Nvidia, which might once again give the market enough encouragement to keep the current run from coming unstuck.

Of course, Nvidia is not entirely in command of the narrative. Rising analyst and investor expectations continually push and expand the envelope that Nvidia must fill. At some point, disappointment will ensue, not because Nvidia has a poor quarter or gives lackluster guidance on what’s coming next, but because expectations ultimately become impossible to meet. It’s the nature of a beast that it will eventually consume itself, at which point the narrative will begin again, with Nvidia or with some other company.

But if Nvidia falls, relatively speaking, so will many others. Therein lies the considerable risk of buying into momentum at the top of a cycle. Nobody knows exactly when stocks have reached the top. On the way up, though, as when riding a particularly sky-scraping rollercoaster, you feel the vertigo before the precipitous plunge catapults your stomach into your throat.

Cisco’s Cautionary Tale

I read last week that Cisco’s shares and market capitalization are only now, after 25 years, regaining the heights they experienced before the dotcom bubble finally burst, in painful increments, beginning in 2000.

How old are you? That might seem like an interrogative non-sequitur, but allow me to explain. If you’re 25 or 30, maybe you can afford, financially and temporally, to buy and hold stock for 25 years. If you’re 50 or 60, you literally have no time for an investment that might be under water for more than a decade, much less a quarter of a century. I’ve said it before: timing isn’t everything, but it’s a lot. Besides, as one gets older, time becomes more precious.

All of us, however, have selective memory. Perhaps it’s a survival instinct. We tend to accentuate the positive retrospectively, except in relation to events that are egregiously horrific, thus indelible.

Was the bursting of the dotcom bubble horrific? I suppose it wasn’t, not in the grand scheme of things. We did not suffer cataclysmic devastation or wholesale loss of life. In fact, life went on, as it always does. Still, the bursting of that bubble obliterated considerable wealth and upended countless careers.

Many companies back then went out of business or were permanently impaired, and not just the likes of Pet.com and other meretricious web startups.

It might shock you to learn, or to recollect, that of the $7 trillion decline in the stock market at the dotcom peak, about $2 trillion was extracted from the capitalizations of telecom companies. More than twenty telecom companies went bankrupt, and the industry was left owing about a trillion dollars. Among the telco pelts claimed in the aftermath of the dotcom crash were WorldCom and GlobalCrossing, The problem was that, after the bubble burst, telecom companies were lumbered with massive overcapacity. Demand shrunk as dotcoms and online retail divisions of established companies withdrew from the market or spontaneously combusted like a Spinal Tap drummer.

Technologies and their Unruly Markets

In some ways, the psychology of booms and busts is analogous to a gambling addict’s latent, unconscious self-destructiveness. I’ve heard it said and seen it written that the point, the endgame, for the most inveterate gamblers is the thrill of the chase, of playing the game and taking risks. Even when they win, they keep going until they lose. Indeed, they will gamble until they lose. Perhaps you’ve seen the t-shirt that says, “It’s only a gambling problem if I’m losing.” Unfortunately, for problem gamblers, losing is inevitable. They will play until economic necessity calls time on proceedings.

Professional gamblers are a different beast. I’ve known of a few of those over the years, and they are surprisingly disciplined people, capable of enviable self-control and strategic retreat from situations that offer scant upside but plenty of downside. They treat what they do as a job, and they take it seriously and do their research. It’s not cinematic stuff; it’s hard work, and it usually doesn’t yield extravagant riches.

I’ve known gambling addicts, too, and they tend to lack any semblance of self-control. They are in thrall to their habit, slaves to the rush.

Analogies and comparisons are necessarily slippery. I’m not saying that those heavily invested in Nvidia or other AI companies have an investment-addiction problem. They don’t. What I am suggesting is that they might not know when to take their profits and seek shelter from a market storm.

I can empathize with their outlook. Market momentum is thrilling. There’s a new thing that’s getting hugely popular, and you (the investor) are on it. You’re riding the dragon, watching the stock prices climb ever higher, and you don’t want the ride to stop.

It’s Always Different, Yet Always the Same

Cisco investors didn’t think the party would end back in 2000. Right until the stock price plummeted, and beyond, many held on. Depending on when you obtained your shares and at what price, you either made a profit or you were subject to a chastening education, at great cost to your personal finances.

Many people today, perhaps especially those who weren’t at the sharp end of the markets in either 2000 or 2009, believe that things are different this time. But you know what? We (I’m using the “royal” we here, for which I apologize) thought the same thing back in the late 1990s as technology stocks went from strength to strength amid the dotcom boom. Information technology and the Internet (big I) were remaking the world. How could it not be different from the old industrial economy and its clunky markets? Well, ultimately, we discovered that some things were different, but some weren’t. The Internet and its technologies had a profound impact on the world, but that didn’t preclude a market bubble from forming and finally bursting.

Maybe things will be different this time, as AI takes its turn in the market glare. What I will suggest to you, however, is that the while the technology in question is different, the dynamics of human psychology are the same now as they were then. In the tech industry, we underestimate or undervalue the human elements, and we overestimate the power of technological artifacts as things in themselves.

The industry often perceives technology at the forefront, and people in the background. Today, for example, AI and its coterie of enabling infrastructure are in the spotlight. The market, though, remains a venue for the push and pull of rowdy human emotions that follow a well-established narrative, regardless of technological impetus.