Overall, it is fair to say that over the last few years, we have been witnessing a sort of artificial intelligence craze, a mania. It is everywhere in our daily lives: news, social media, photos, videos, corporate layoffs, search engines, and so on. Naturally, among stock market offerings, there are plenty of companies campaigning with AI. In many cases, artificial intelligence has nothing to do with their core business, yet they still try to profit from it and exploit every opportunity tied to AI. After all, it currently carries strong marketing value, regardless of whether the given service makes sense, adds value, or is profitable. The most extreme example I have come across is an e-commerce logistics company that is building an AI-based film production system and a streaming platform to distribute micro-dramas produced with artificial intelligence. One gets the feeling that micro-dramas are probably not the business that will deliver a satisfying return in the long run. A money pit. It is as if they intentionally wanted investors to view the company as worthless — and sure enough, the stock price plunged significantly.
In such periodic crazes, the general consensus is always that a revolution is on the horizon that will permanently change the world, and that after this, everything will be different. Of course, it will obviously bring change, but this mania will also cool down—just like every similar craze before it. When it does, AI-based services will rationalize. A significant portion of the things tried in recent years will disappear because they make no sense and their operations are unsustainable. Besides, companies will be forced to make their services profitable anyway, so there will certainly be a major drop at some point. But when? Pretty much ever since ChatGPT broke into the public consciousness, people have been predicting a major stock market decline, yet so far it hasn’t materialized. Obviously, that time will come, but certainly not when the entire market expects it. Instead, a relatively unexpected, hard-to-predict event will trigger a sell-off in tech companies, pulling down a large portion of the market with it. Something similar will happen to what occurred during the internet revolution, when the dot-com bubble burst.
As an investor, how should one approach such a seemingly uncertain market environment?
The best thing we can do is avoid the stocks of high-profile technology companies that make the news weekly and whose quarterly reports are closely watched by every analyst, retail investor, and institutional player alike. It is not worth taking the risk on these purchases, as there is a high probability of buying near the market top. Once prices start falling, it will inflict considerable psychological strain as the value of our original investment shrinks significantly. On top of that, plenty of tech companies will go out of business (likely the majority), so we cannot even necessarily hope that the stock price will recover within a few years. Therefore, buying shares in “cool,” exciting companies in this market is currently very risky as a retail investor. Although the gains of recent years are undoubtedly tempting, we should let the train speed ahead without us for our own good. Calmness and patience pay off over time. Achieving satisfying returns can be much more peaceful if we think long-term, let go of the temptation of the mainstream tide, follow our own heads, and start hunting for less popular or currently less visible valuable businesses. Naturally, it is good to have some expertise so we don’t jump into the world of individual stocks completely clueless. If we don’t feel the urge to deal with corporate reports and business lines, or if we are simply unsure of ourselves, we should entrust our money to a passive, index-tracking ETF (in our calculator, you can create sample calculations for yourself based on average returns).
Following the surge in inflation and the global interest rate hikes of 2022, the general market expectation was that inflation—and consequently interest rates—would gradually decline. It was as if people expected the interest rate levels of the 2010s to be welcomed back soon, with everything returning to how it was a few years ago. Obviously, this is absurd, but it genuinely seemed to be the general view among markets and investors. And indeed, a downward trend did begin, only to come to an end. Now, the world likely has to adapt to a higher interest rate environment for the next decade (which is not necessarily a bad thing). AI investments require massive amounts of capital, driving up the demand for money, which leads to rising yields. Furthermore, global uncertainty has increased, so investors demand higher returns for their money. And, of course, there is this year’s Iranian-American war, which brought an increase in energy prices and caused inflation to start climbing again (though there was no consistently declining trend in either the US or Europe before that anyway). If we think in terms of a higher interest rate environment expected over the longer term, it is worth looking around the stocks in the financial sector. Banks and insurance companies, in particular, could come into our focus as investors. A higher interest rate environment can mean larger net interest margins for banks, backed up by fee-based business revenue. For insurers, rising premiums can boost revenue, and they can realize higher yields on their invested portfolios. Naturally, the rule holds here too: the inherently popular, high-profile companies typically trade at higher valuations, meaning a buy at current prices offers lower long-term expected returns. It is worth searching for companies that are not retail-focused and operate in less popular business lines (profit margins are usually lower on retail products, such as consumer banking and life insurance). Look for higher-margin businesses and low stock prices relative to company value. Medium-sized companies are perhaps ideal in terms of size, though good opportunities can also be found among the stocks of mega-caps and micro-caps.
Among banks, I would look at those with a corporate focus, perhaps specifically Western companies with a presence in Asia. There are regions where significant growth in deposit bases can be expected for both retail and corporate clients. Then there are the major Japanese banks, whose growth is another opportunity to profit from: as the interest rate environment rises, they can realize meaningful margins, and client investment assets could expand in the future, given that inflation has been present in Japan in recent years, shifting consumer investment attitudes. Moreover, these banks also hold a strong presence in other Asian countries, so asset and revenue expansion can be expected from there as well.
In the insurance sector, what Lowell Miller mentions in his book The Single Best Investment holds particularly true: among insurance companies, those that prove to be the best investments are the ones farthest from the industry mainstream. Typical examples include mortgage insurers, which have performed relatively consistently over the past decade, with good value-for-money buy opportunities among them. Reinsurers (which take on a portion of traditional insurers’ risk) can also be interesting due to their balanced performance, and underpriced companies promising good long-term returns can be found in this sector as well. Specialty insurance targeting niche markets is another good option, as these companies can collect higher premiums. Of course, good investments at good prices exist outside the financial sector too, but to me, this looks like a strong option for a retail investor right now. Naturally, opportunities may shift in a quarter, half a year, or a year from now.
In short, investors have plenty of opportunities even in the current market environment, but it pays to look outside the mainstream market. Ignore the stocks featured on the front pages of financial and economic news sites, and give the tech sector a pass for your own peace of mind. Investing in stocks promising high returns is always risky, and people usually buy heavily into these papers after they have already produced extraordinary gains in a short period. If you are truly set on the tech sector, it is better to wait a few years and, after the “carpet bombing,” look through the ruins of these companies to see who survived, whether their prices are favorable, and if they have sustainable, long-term growth prospects. I look forward to what the coming years will bring with great anticipation.