Pessimists (Part II)

Back in 2010 Hugh Hendry said, “I would recommend you panic” and I loved it. Glad I didn’t panic, though. (photo courtesy the FT)

Even though I know the pessimist playbook and even though I’m an optimist by default, I can’t help but eat up every last word from Ed Zitron and Patrick Boyle. And last week Aswath Damodaran, the ‘Dean of Valuation,’ joined the party when he spoke of his increasing concern about AI spending, specifically that Big Tech can’t articulate what exactly it is they’re building.

Zitron is the most famous (infamous?) of the AI doomsayers. He reminds me of Hugh Hendry from back in the Great Financial Crisis: speak a lot, speak in absolutes, and speak on any platform that will have you. And repeat your thesis over and over again but with different examples.

Zitron’s argument has to do with circularity. Money from Tech Company A and Tech Company B accounts for almost half of tech Company C’s revenue and estimated growth. But C’s revenue and estimated growth come from building products that A and B say they’ll need.

A and B flood money to C. C takes that money and builds infrastructure for A and B. A and B then flood that money back to C. But where’s the end product?

There are more players and I’ve grossly oversimplified his argument, but that’s the crux of his message. Where are the real customers? It’s “to rob Peter to pay Paul” writ large.

Damodaran’s argument is a lot less doomsayerish. But that it’s coming from someone of his stature is concerning. Big Tech can afford to spend billions upon billions (it’ll be trillions soon, I’m sure) on building data centres and improving LLMs, that’s what Damodaran makes clear. But the big issue—and it’s massive—is that none of them have articulated what it is exactly they’re building. They are spending so much (Amazon and Google’s free cash is sinking like a stone) on a business model no one can explain. Talking about how great things are going to be in the future is not a business model.

Dead pan and no-blinking Boyle starts off by saying that no, what’s happening isn’t Enron all over again. Those hyper-doomsayers are out to lunch. And though the accounting from Big Tech is clever, it isn’t fraudulent (maybe it will be, but who knows?). It’s clever because they’re excluding stock-based compensation from adjusted earnings and their depreciation timelines leave a lot to the imagination. And those two clever plays might be flattering their earnings reports.

All three have consensus regarding the story Big Tech are telling (or not telling). Right now, the market is eating up the futurist utopia story like a Ken Follett page-turner. But if their story fizzles out like the end of so many Stephen King novels, then the market will crush them because the market is vicious. Especially when the story being told might be built on a house of cards (see: every single time a market gets stupid). All it’ll take for the party to end is one of the Big Tech companies saying, “Hey, you know what, we aren’t going to keep spending so much money on this.”

The pessimistic take sounds smart, it has legs, and I love learning about it–I listened to Zitron for two hours this morning. But that doesn’t mean I’m going to change how I manage money. And it shouldn’t change the way you do things either. Remember:

1. Bear markets are normal. But no one knows when they’ll come. The three gentlemen above might be right (or could also be wrong). But will the market drop 40% after it goes up another 100% or more? Not a soul knows, so stay invested and roll with the punches. Here’s the math quickly so you see what I mean.

   • Investor A stays invested. $1,000 investment doubles to $2,000 then gets hammered and drops to $1,200. They won’t make a change no matter what.
   • Investor B thinks the crash is coming tomorrow. Puts their $1,000 to cash. The crash happens. They still have $1,000 and their brain will tell them the worst is yet to come.
   • Investor A came out ahead and had one thing to think about: staying invested. Investor B had to deal with a lot more.

2. Diversification is your best friend. Invest globally, invest in all kinds of companies, and invest in line with your tolerance for risk and volatility.


3. If you know you need money within a year or two (or three) it shouldn’t be invested in stocks. Then you don’t need to worry about the eventual crash.


4. Go ahead and be entertained by all kinds of market commentators. But don’t confuse setup and payoff.


5. Never give into fear, fear of missing out, or peer pressure.

In Part I I said pessimists sound like intellectuals and optimists sound like salespeople. And people would rather feel smart than be sold something. Please take in whatever content you want. Watch and listen to Zitron, read Damodaran (he’s damn good), and blink back at Boyle. But don’t make an investment decision based on what they or anyone else says.