You’re left with market risk (i.e., beta) when you do this, but if you have a diversified portfolio you’re probably okay with not putting on an additional specific hedge. That is, if you’re right and the whole market rallies (but your ETF rallies less), you’ll be okay.
If you want to be more tactical, I would look at companies that are AI-exposed and have insane P/Es. You mention Nvidia having gaming hardware, but NVDA’s PE is something like 135.92 right now, which prices in huge levels of growth. Compare 2016, when their P/E was 20-30. An AI winter would collapse the expected growth rate, leading to a corresponding drop in stock price. If you’re not convinced on NVDA, you can make a similar case for other companies whose growth narrative is driven by AI.
Finally, you should ideally have a view on when your thesis is going to play out or what the catalyst will be. Remember that during the dotcom boom/bust, “everyone” agreed that the market was nuts, but it kept going up for quite a while. And of course you should think about how to size your position and how to manage your risk while you have the position on. As the saying goes, the market can stay irrational longer than you can stay solvent.
These are some valuable ideas, thanks! Do you also see any opportunity for long positions? I.e. are there companies/industries that will actually benefit from AI failing?
I don’t have any immediate ideas on long positions—the AI winter isn’t AI failing per se, right? It’s just that we stop making progress so we’re stuck where we are.
Maybe something like Doordash? They filed for an IPO recently, and if you think autonomous robots aren’t going to drive down the cost of logistics then last-mile logistics companies might be underpriced. I have much less confidence in this kind of trade though.
You can short some AI ETFs. https://etfdb.com/themes/artificial-intelligence-etfs/ has a list, although some of those are obviously miscategorized—check the holdings to see how much you agree that they’re representative.
You’re left with market risk (i.e., beta) when you do this, but if you have a diversified portfolio you’re probably okay with not putting on an additional specific hedge. That is, if you’re right and the whole market rallies (but your ETF rallies less), you’ll be okay.
If you want to be more tactical, I would look at companies that are AI-exposed and have insane P/Es. You mention Nvidia having gaming hardware, but NVDA’s PE is something like 135.92 right now, which prices in huge levels of growth. Compare 2016, when their P/E was 20-30. An AI winter would collapse the expected growth rate, leading to a corresponding drop in stock price. If you’re not convinced on NVDA, you can make a similar case for other companies whose growth narrative is driven by AI.
Finally, you should ideally have a view on when your thesis is going to play out or what the catalyst will be. Remember that during the dotcom boom/bust, “everyone” agreed that the market was nuts, but it kept going up for quite a while. And of course you should think about how to size your position and how to manage your risk while you have the position on. As the saying goes, the market can stay irrational longer than you can stay solvent.
These are some valuable ideas, thanks! Do you also see any opportunity for long positions? I.e. are there companies/industries that will actually benefit from AI failing?
I don’t have any immediate ideas on long positions—the AI winter isn’t AI failing per se, right? It’s just that we stop making progress so we’re stuck where we are.
Maybe something like Doordash? They filed for an IPO recently, and if you think autonomous robots aren’t going to drive down the cost of logistics then last-mile logistics companies might be underpriced. I have much less confidence in this kind of trade though.