Nobel laureate economist Robert Shiller wrote a book just before the Covid pandemic called Narrative Economics. It’s about how human beings have the propensity to become detached from their reason easily and how stories (true or not) about things — including the value of investments — spread or “go viral,” as we say now.
Over the past 24 hours, two articles have been published warning investors to be careful about investing in AI stocks for the reasons Shiller discusses.
First, financial journalist Brett Arends compares AI darling Nvidia to Russia when the country run by Vladimir Putin was part of the “BRICs” (Brazil, Russia, India, and China) investment theme. After chronicling the dismal returns of these countries’ stock markets since putting them together became a thing or a narrative in 2009, Arends concludes, perhaps less gently than Shiller, “humans are suckers for a good story.”
The two reasons why growth stocks often don’t do well is because they are priced too richly even for the growth they achieve and because they attract competition.
Second, fund and stock researcher Morningstar (your author’s previous employer) published a piece wondering if the “magnificent seven” stocks carrying the entire market this year are now overpriced.
According to the firm’s analysis, Nvidia, Apple, Tesla, and Microsoft are all overpriced, while Meta, Amazon, and Alphabet are still trading below analysts’ fair value estimates. Only Alphabet, however, trades at a sufficient discount to its fair value as ascertained by Morningstar to warrant a 4-star rating. A 5-star rating would mean a sufficient discount for purchase with a margin of safety.
As a group, these AI darlings aren’t cheap.
AI may change the world in meaningful ways. It likely already has. And the magnificent seven may continue to soar.
But if they do, you’ll have to consider how much they reflect a narrative that has gone viral and captured our imaginations.
