Stock Market Investors

For a quarter of a century, the hyperscalers have been some of the most profitable and technologically innovative businesses ever created. The reason was clear: their marginal cost per additional customer was almost zero. Costs were fixed and scale was effectively unlimited, which meant margins widened as volume grew. In the years before the current AI build, Alphabet earned 39 cents and Microsoft earned 61 cents on every dollar of capital . Paying 24 to 33 times profit to own them was aggressive but defensible. […]

As portfolio managers, we must practice what Charlie Munger called “ignorance avoidance!” Therefore, regardless of when the mania for all things AI dies, we believe there will be a bloodbath in the S&P 500 Index, and that would be “no country for old men,” who have built their financial futures around ongoing indexing success. […]

In my 45 years in the investment business, we’ve observed numerous peaks of excitement. In 1987, a bull market that started at a 1982 bottom below 800 on the Dow Jones Industrial Average (DJIA) peaked at 2,722. It then crashed 43% in 78 days. In 1990, just following a nationwide Savings and Loan Crisis, the S&P 500 Index bottomed at 322 and peaked at 1,517 in June of 2000. The proceeding bear market took the index down to 916 on June 1, 2002. The index never officially bottomed until September 1, 2008 at 896. It has now hit a recent peak of 7,580. […]