Ferg's Finds

This is a short weekly email that covers a few things I’ve found interesting during the week.

Article(s)

Rob Arnott: the ‘big market delusion’ in AI stocks

I think the same thing is happening now with AI. The narrative with dotcom is this is going to change everything — how we buy goods and services, communicate, research, socially interact, run businesses. All true, but all have happened more gradually than initially expected. Substitute AI for internet, and you have exactly the same narrative today. It’s a classic example of a big market delusion. Not because it’s wrong, but because it will happen more gradually than people expect. 

Big Market Delusion: Electric Vehicles (this is the original article).

Podcast/Video

I always enjoy listening to Felix lay out his road map for the markets: Felix Zulauf: Markets Will Be Gut-Wrenching Next Year

Quote(s)

There are three ingredients for success – aggressiveness, timing and skill. If you show enough aggressiveness at the right time, you don’t need that much skill.

-Howard Marks

Tweet

Researchers have been raising general alarms about AI’s hefty energy requirements over the past few months. But a peer-reviewed analysis published this week in Joule is one of the first to quantify the demand that is quickly materializing. A continuation of the current trends in AI capacity and adoption are set to lead to NVIDIA shipping 1.5 million AI server units per year by 2027. These 1.5 million servers, running at full capacity, would consume at least 85.4 terawatt-hours of electricity annually—more than what many small countries use in a year, according to the new assessment.

Charts

Nothing like a long term chart to put everything in perspective.

Something I'm Pondering

I’m pondering how multiples are an expression of enthusiasm for a sector and company.

Last week I mentioned Horizon Kinetics 4th Quarter commentary, which highlighted this:

Just over a month later, Nvidia now has a P/E of 31.4 and makes up 4.26% of the S&P500.

Opening Finviz this morning to have a quick look at the markets and skim the news, 31% of the mainstream media was about Nvidia.

Having concluded the Mag7 is in for a big dose of mean reversion, what can I do about it?

• Shorting is too hard (look no further than Tesla as a case study).

• Hiding out in energy micro/small caps that have limited exposure to large indexes (my preferred position).

• Raise some cash in preparation for things to get disorderly in large liquid names I’m interested in offshore oil, coal and tankers.

The below capital return difference can only be ignored for so long.

I hope you're all having a great week.

Cheers,

Ferg

P.S. If you’re interested in my story and why I started this Substack, you can read the story here.