The human brain is full of behavioral biases. Even highly intelligent and experienced investors can be fooled by their own cognitive shortcuts. Among the most powerful of these biases is loss aversion – the tendency to feel the pain of losses much more intensely than the satisfaction of equivalent gains.
Perhaps this is why we spend so much time discussing recessions, market crashes, and the next bubble. Financial media constantly asks when the next crisis will arrive. Yet the opposite question is rarely asked.
What are the greatest long-term investment opportunities available today?
Are there secular trends capable of compounding capital at attractive rates over the next decade? Which companies are best positioned to create wealth – not next quarter or next year – but over the next ten or twenty years?
We often discuss how close we are to the next market crash, but much less frequently discuss how long the technological cycle we are living through may actually last.
By the summer of 1932, the Dow Jones had fallen nearly 89% from its 1929 peak. Yet that collapse was not simply pricing in the Great Depression. It was also pricing the premature end of several secular trends that were, in reality, only halfway through their development: electrification, motorization, synthetic chemistry, telecommunications, and mass consumption, among others. History proved that the market was wrong.
The same pattern played out during the Dot-com Bubble. By October 2002, the S&P 500 had fallen 49% from its March 2000 peak. Amazon was down approximately 95%, Apple 82%, and Nvidia 90%. Yet these companies were not disappearing. They were quietly building durable competitive advantages, positioning themselves to benefit from what was still the early innings of the Internet revolution. Their businesses would go on to compound value for shareholders for decades. Remarkably, even an investor who bought these companies at their peak market capitalizations during the Dot-com Bubble would still have earned exceptional long-term returns: approximately 19.0% annually for Amazon, 22.8% for Apple, and 29.9% for Nvidia.
Today, one of the questions I hear most often is whether Artificial Intelligence is a bubble. My answer is always the same: that is not the most important question one should be asking.
People, and even seasoned investors, are often afraid of bubbles and crises. In reality, equity investors should be much more afraid of owning poor businesses. The fundamental question has never been whether a bubble exists. The fundamental question is whether the business you own is capable of becoming stronger despite a potential bubble.
Imagine yourself as a sailor during the Age of Exploration departing from Europe. Before embarking on a voyage across the Atlantic, the most important question was never whether storms would happen. Storms were inevitable. The real question was whether the ship was resilient enough to survive them.
Investing is no different. Rather than asking whether AI is a bubble – which, in our opinion, it is not today, although it may eventually become one – we should be asking a far more important question: Which companies are best positioned to capture a meaningful share of the enormous profit pool that Artificial Intelligence and other adjacent secular trends are likely to create over the coming decades? That is the question that truly matters.
Before attempting to answer it, however, it is worth looking back. History offers countless examples of companies that not only survived bubbles, but used them to strengthen their competitive positions and compound shareholder value for decades afterward.
This is precisely the objective of this new series of letters that Why Capital is launching today.
Over the coming weeks, we will revisit some of the most important technological revolutions in modern history – including Railroads, Electrification, Motorization, Synthetic Chemistry, Agricultural Mechanization, Mass Consumption, Aviation, Semiconductors, Personal Computers, Containerization, the Internet, Cloud Computing, and Artificial Intelligence. For each revolution, we will try to answer three simple questions: What changed? Who captured the value? And why?
More importantly, we will explore how a handful of exceptional businesses built enduring competitive moats that allowed them to capture an outsized share of the value created along their respective value chains for a long time.
If this series achieves its objective, perhaps we will all spend a little less time worrying about bubbles, market volatility, and macroeconomic headlines – and considerably more time studying secular trends, competitive advantages, and the extraordinary businesses that quietly compound capital over decades.
I hope you enjoy this journey back through history, and stay tuned to read the next letters in this series.