Rational Investor

In recent years, the tech landscape has been abuzz with the promise and potential of an Artificial Intelligence (AI) technology advancement which would allow to relaunch the market. It has been been a long wait, but here we are. Most companies rush to integrate AI technologies into their products, with every company trying to put the word AI in its guidance report in the hope to see its market capitalization grow since investors are eagerly seeking to capitalize on this burgeoning market. The subject of quantifying this future marketsize is still an ongoing debate as nobody is able to truly understand the demand and the future AI application impact on products and services. One of the most prominent players in this arena is Nvidia, whose stock price has soared on the back of its AI-related ventures. However, as excitement around AI stocks reaches fever pitch, some analysts are sounding the alarm, warning that these valuations may be indicative of a speculative bubble.

It is important to remind everyone that the psychological mindset of the market is quite polarized by the fact that we are facing a truly fascinating period, and that tech is starting to be a subject moving too fast for our common mind. As it is not an overstatement to assume that most people are optimistic on the AI subject, it should be interesting to remind everyone that the covid crisis exerted adverse impact on major equity markets. What I call the global investor, meaning the market, was praying for a recovery.

What he didn’t expect, was that he wouldn’t get a classic recovery, but an absolute AI boom.
If I summarize, we were in a dark period in which every equity investor was suicidal when looking at his stock portfolio, and almost 2 years later, he’s facing a bull market like he has never seen in 20 years.
There is no way that the common investor is staying rational in this situation.
AI stocks were his savior, it is now his battle horse.

There is no way that his valuations (if he even do business valuation) are not disturbed by his overoptimism. The excitement surrounding AI stocks is understandable given the transformative potential of AI technologies, but these valuations may be unsustainable when you see how much people have jumped in the AI stock train. Everyone wants a piece, completly discarding the essence of valuation.

The valuations of many AI stocks, including Nvidia, have reached dizzying heights, far outstripping their underlying fundamentals. Price-to-earnings ratios and other traditional valuation metrics are often sky-high, raising concerns about overvaluation (you can see my valuation here).
My personal valuation on the subject caused me issues on finance forums but since then we have seen a -15% decline, stating that I was not wrong on the subject. We are only at the beginning in my opinion.
Future earnings reports will bring back reality in the minds of people and they will realize that the demand will be different to what they expect. In the long term, mayble the demande is what they expect, but the short term target is not what they think.

The hype surrounding AI stocks has led to a fear of missing out (FOMO) among investors, driving prices even higher. This herd mentality can fuel speculative bubbles, as investors pile into stocks without fully understanding the real demand and mechanisms.

It truly reminds me of the dot com bubble and you can’t deny me that right. I compare both situations in my NVIDIA stock analysis and as time goes by, the more I’m convinced that I’m right.

That is why I closed my entire position in MSFT, as I don’t want to partake in this madness as valuation as been too uncomfortable for my own taste, and I don’t want no shares in an object of speculation.
Yes, even after buying MSFT at 240$/share and making a +77% gain (I sold at 425$), I still sold my winner.
At the current moment, the only AI stock I still own is GOOGL that I bought sub 100$.

Only thing that you have as a value investor, is your investment principles, and even when it feels unnatural, you have to follow them.

As you know, diversification has been massively promoted as the optimal way to reduce risks and allows you to extend the reach of potential returns on multiple stock investments, something that you wouldn’t be able to do if you own only a few stocks.

But obviously, diversification has the strong tendency to reduce the returns of your biggest winners, furthermore producing more than average results, since from my opinion you can only have a few winners in your portfolio, as really good opportunities are not as numerous as you would think.
It can also be added that investors that focus on diversification, underestimate the energy that is required from them whenever rebalancing their portfolio is needed since you have to search for the right investment(s) (which is already a big responsibility in itself) to make sure that you respect “your diversification requirements”. Therefore, it can cause you to be forced to make a bad decision since you are limited in your investments choices as some of your greatest investments, if there are too big in weight, become automatically prohibited to respect the principle of diversification.
The phenomenon can truly appear to be unnatural as you have to restrict yourself from enjoying a potential moat that could return you much more than could be fathomed.

Starting from these arguments, I should mention that the reasons behind why I am so particularly prone to have a concentrated portfolio is because my risk appetite, at that specific moment in my life, allows me to. As a concentrated portfolio is riskier but enables more returns, I strongly think that this strategy is the best for someone that is starting to invest and/or still has to grow his capital. For a lack of words, there is no better moment to take that many risks.

Reading the book Richer, Wiser, Happier: How the World’s Greatest Investors Win in Markets and Life from William Green, it came to my attention that some fund managers mentioned in book, such as Eveillard, never had the stomach to hold a concentrated portfolio to the contrary to individuals like Buffett and Munger. That fact made me realize that to own a concentrated portfolio you either must be absolutely certain in the quality of your investments, or exceptionally unaware. While some very talented investors such as Eveillard could not put their money in only a few securities as it would kill them of stress, other legendary investors admitted that you only have a few ideas, meaning that it is very difficult to find that many exceptional companies priced at fair or low price, admitting that to have that many investments thesis would be just impossible.

In my modest quality as a still young and learning value investor, I personally have witnessed that I am not able to find more than 5 to 10 qualitative investment thesis concerning stocks in sectors that I feel sufficiently comfortable, in which I absolutely trust the outcomes going my way.

To be able to put around 1/3 of your portfolio behind your idea might seem very stupid to most people, but if you are confident enough in your process, meaning that the facts behind your reasoning are so oblivious after long searches that there is so little room for mistakes, why would you not seize the opportunity?

And I am going to conclude by saying this: if it is too stressful for you to own a small list of stocks, then it means that you shouldn’t even invest in it.