I’ve been thinking a lot about the understandable angst many people feel in the age of AI. The world is changing so quickly that even AI investors who have been doing startups for 20 years are feeling overwhelmed! So what hope do the rest of us have?!
Well, my goal is to help you understand this strange new world, a world of wonders, terrors, and just plain weird, crazy, and often delightful things😉
I want to share with you some wonderful investing ideas (because we’re all here to grow rich together after all😂), but also help, in whatever way I can, to help you and your family prepare for the age of AI. Not just to survive it, but to thrive in it, financially, professionally, and even emotionally and spiritually!
1. Never Forget The World Is Infinitely More Complex Than You Imagine…But Living Well Is Simpler Than You Think
A lot of questions I get from members, family, and friends are something like “How can we not be in recession when X is going on!” or “Won’t Y destroy the economy because of Z”?
These kinds of questions are understandable, natural even. People react to new information with fear unless they feel highly secure.
So this is where this quote is critical.
This wonderful quote reminds us that life SEEMS contradictory much of the time.
For example, what you might have heard that young people, Gen Zers, are now “screwed” and financially worse off than previous generations.
Actually, at the national level, each generation is growing richer.
“The Plural Of Anecdote Is Anecdotes, Not Data.” Brian Dunning
In other words, you might personally know someone who is struggling, perhaps a young relative who can’t find a job.
My father’s friend's son just graduated from college as an engineer and had to apply to 600 companies to get his first job.
So young people are screwed by the age of AI, right? Youth unemployment is rising due to technology, and there is no going back. No jobs, expensive homes, no families, nothing but misery, alcoholism, drugs, and despair, right?
That’s what it FEELS like to many people living through such uncertainty. And here’s what the data actually shows.
Youth Unemployment Vs Everyone Else Is LOWER Than Historical Average
Historically, over the last 35 years, youth unemployment has averaged 3.8% above overall unemployment, and today it’s 3.4%. It’s been rising off historically low levels of around 2.5% back when unemployment bottomed at 3.4%.
By the way, what has been the historically average unemployment rate since 1950? 5.75%.
In other words, rising unemployment, while it FEELS scary (and if you lose your job, it is terrifying), is mean reversion. It’s returning to historical normal.
OK, but isn’t this time different? AI is coming for all our jobs, right? And so unemployment for everyone is just going to keep rising as Chat GPT gets better and eventually.
Sam Altman’s Plan To Put Us All Out Of Work By 2028😉
It FEELS right to say that ChatGPT is the cause of the weakening job market.
Chat GPT Killed All The Jobs!
EXCEPT The highest increase in unemployment is in the non-AI jobs.
What FEELS like proof that Chat GPT and AI are destroying jobs is actually a spike in job openings to historic levels that peaked in late 2021 (2 openings per job seeker), and ever since, thanks to the Fed raising rates 5% in 18 months to fight inflation, the job market cooled, as the Fed wanted it to. As it was always going to.
The timing of ChatGPT and the apparent sharp decline in job openings is coincidental.
Correlation is NOT Causation.
Nicholas Cage Movies Are Killing Our Children! Look at the Charts!😉😂🤣
Do you see how we don’t have to fear ChatGPT taking all our jobs? It’s Nick Cage’s movies drowning our children that is the real threat! 😉😂🤣
Or the national spelling bee unleashing killer spiders on us!
No, we should not be teaching our children that spelling or Nick Cage movies will kill them, just as we need to remember that the world is more complex than we can imagine, and we must avoid letting scary headlines, intuitive-sounding, and FEELING things lead us astray.
BUT never fall into the trap of judging others and thinking they are “stupid” or less than you, just because you happen to know something they don’t.
All of us are ignorant of almost everything civilization knows. As long as we are willing to learn, adapt, and become better, none of us is “stupid”.
“Act Justly, Love Mercy, Walk Humbly” Micah 6:8
2. Verify The Data…BUT Trust It! No Matter How Crazy It Seems!
One of our members, Piotr Majewski (who may be one of my Polish brothers from another mother😉) was asking me a fascinating question in the chat today.
Burry has argued that as companies such as Microsoft (MSFT.O), opens new tab, Alphabet-owned Google (GOOGL.O), opens new tab, Oracle (ORCL.N), opens new tab and Meta (META.O), opens new tab pour billions into Nvidia chips and servers, they are also quietly stretching out depreciation schedules to make earnings look smoother.
That’s an excellent question, and he’s mostly been leveling the claim against CoreWeave, saying their 6-year depreciation schedule for GPUs is fraudulent because their business requires them to get new GPUs every 18 months or so. That’s because CoreWeave is leading with GPUs, and while they do last for 6 years before needing to be completely replaced, the kind of GPUs CoreWeave customers use are higher-end models. In other words, CoreWeave can claim higher profits on paper because Burry says they will suffer significant impairments in the future that will drive profits down significantly (though not cash flow).
We actually had a Dividend Kings member who worked in AI Datacenters confirm that 6 years is the useful lifespan of GPUs (so did the head of Microsoft’s cloud division, by the way).
Other sources also confirm a depreciation period of around 5.7 years.
In other words, Burry’s leveling of claims against CoreWeave MIGHT potentially be valid.
BUT for Amazon, Alphabet, and Microsoft? They don’t need to replace a Hopper 100 after 3 years, because even though GPUs are useful for TRAINING new models for 18 to 36 months, they remain useful for running less intensive tasks like inference.
In other words, when Microsoft says “We can use the Hopper 100 for 6 years,” they likely can.
And so the idea that the Mag7, whose earnings have tripled since Chat GPT came out, is committing fraud, well, that is not supported by the evidence.
Here is what the hyperscalers’ growth prospects look like today.
3 Months Ago, This Was The Growth Outlook For Hyperscalers
Before this earnings season, when every hyperscaler increased its growth spending plans, the growth spending outlook through 2030 was 13.5% CAGR in spending and 18% CAGR in free cash flow.
Current Growth Outlook For Hyperscalers
The growth spending consensus is now $500 billion by 2030, with 20% CAGR growth spending plans fueling 22% CAGR free cash flow growth (23% FCF/share growth due to buybacks) and FCF margins expanding from 14% in 2023 to 19% in 2030.
This Most Recent Quarter (In case you don’t believe forecasts)
Bank of America agrees, expecting big tech's margins to expand by 5% over the next few years.
So, unless Microsoft and the rest of the hyperscalers are outright committing fraud (they have auditors and their CEOs would go to prison if they did😉), no big tech is NOT likely cooking the books.
Another Layer Of Fact-Checking: M Score Analysis - No Evidence Of Fraud
Amazon
Alphabet
Microsoft
Meta
Oracle
Michael Burry is making a plausible-sounding critique of potential impairments in the future, but he’s not claiming the hyperscalers are committing Enron-like fraud (or they could sue him for slander and win, since the evidence I’ve presented here would likely “bury” him in court😉
Yes, I really am this much of a nerd😉😂
3. Remember Always To Remain A Disciplined Financial Scientist
So far we’ve learned about how the world is more complex than any of us can imagine, and that means you’ll see lots of scary AND TRUE headlines that won’t invalidate equally wonderful AND TRUE facts that ultimately decide what your family’s future.
For example, “Is the future Star Trek? Or Westeros? Are we going to live in an age of abundance or live as serfs of big tech?”
The answer? It’s both…at least for the next 15 to 20 years, most likely.
I don’t literally mean that people will be enslaved to Elon Musk or Sam Altman😉
But I mean that today there are nearly 700 million people who have food insecurity, but also 1.1 billion people who are obese.
It’s both the worst of times and the best of times, because the world is a big and complex place.
Some live in Star Trek-like utopias already, others live in slums.
In the future, those with assets, like stocks, will flourish (at least financially, whether they find a fulfilling purpose in life is up to them).
And that’s where we come in at GNG Research.
A lot of people are going to be uncomfortable with the extreme (and I do mean EXTREME) wealth inequality coming in the future.
The Truth About Stocks & The Rich
According to the Wall Street Journal, 54% of Americans earning $30K to $50K (not rich) own taxable portfolios, and even more own retirement accounts like IRAs and 401 (k) s.
The 19 wealthiest families own as much as the bottom 50% (2.4%), but as you can see, the bottom 50% have seen their net worth roughly 4X in the last 5 years (largely thanks to the Mag 7 by the way).
In other words, the rich have gotten richer, and the poor have gotten much, much richer, faster than at any time in history.
So when you hear someone root for a stock market crash so that the “rich get what they deserve,” remember that if Elon Musk loses 50% of his wealth, he’ll still have around $200 billion.
If my father’s portfolio is cut in half? He never gets to retire.
Pension funds, including those for teachers and firefighters, are invested in the stock market, and thanks to the genius of global capitalism, right now nearly 2/3 of Americans ARE participating in the AI boom by owning the stock market.
We ARE (mostly) growing rich together, and even though we have a lot of progress to make, these are important facts we need to remember.
How To Stay Sane And Safe In The Age Of AI
The Mag 7 has tripled earnings in 3 years and is on track to 8.4X by 2030 (8 years) and 12.5X over 10 years by 2033.
In other words, “Where is the proof that AI is profitable”? Well, 3X earnings in 3 years is pretty good proof, and we’re on track (based on current FactSet consensus) for the largest earnings boom in the history of the world.
$10 Trillion In Annual Robots + AI Spending By 2050
So how am I investing my family’s money?
25% bonds (long or short)
25% commodities (long or short)
25% growth (long)
25% value (long)
Wait, didn’t I just say that big tech could potentially 12X their earnings between 2023 and 2033? Yes.
And wouldn’t that potentially justify a 20X return from the October 2022 lows to 2033? Yes, it also would.
So why am I not “all in” on Nvidia, Amazon, and the hyperscalers alone?
Why bother owning anything other than the masters of the universe? 😉😂
What happens if I get married in the next year or two (fingers crossed, but I have to meet vegan Tracy first😉)?
What happens when my parents retire in a few years? Or the ZEUS family expands to 29 people (current estimates within 15 years).
What about a crisis with our new company?
What if the Mag 7 grow at their expected rates (through 2030) all the way to 2047 (Fundastrat’s blow off top for tech)?
Then it would be a potential 400X in 25 years, 100% justified by fundamentals.
And along the way, how many bear markets and crashes will they experience?
Nvidia’s median bear market is a nearly 60% crash.
In 2022, it fell 63%. Meta fell 70% in the 2022 bear market.
Amazon was undervalued going into the bear market and still got cut in half.
Investors have made a fortune in these companies…and they still crash from time to time.
Imagine having to buy a house during 2022’s bear market?
Imagine being “all in” on NVDA (up 9X since Chat GPT came out) and then watching it fall 37% during the trade war crisis.
Are you going to cancel buying a house? Cancel getting married? Postpone having kids? All because of the timing of the corrections of the greatest companies in history?
This Is Why ZEUS Isn’t All AI Growth Names
A portfolio that’s typical peak decline is a gain during the last seven bear markets.
In the last 18 years, about 80% of the market’s upside in a rising market and 57% of the downside in a falling market, BUT the deeper the correction, the better it does (due to the hedges kicking in).
Nasdaq-like returns with much lower volatility. That is the magic of asset allocation and diversification.
That’s the “bucket investing” where you have growth, value, deep value, high-yield, whatever kinds of buckets you need, and then fill them with the best companies and ETFs.
That’s what lets you be confident and “Greedy when others are fearful” on a day like today.
Today’s Trades (Portfolio Tracker Is Being Fixed, And We’re Going To Fully Connect To Plaid soon, so no more manual updates necessary)
A few limits filled and the last of the daily crash rules (no dry powder for those at this point).
BUT note the really great deals I got on those BAM and HUM limits.
BAM is offering 18% to 20% CAGR 5-year growth guidance, AND they have credibility in that because their capital calls mean that as long as they can find profitable investment opportunities, the contractual AUM is there. Once they complete a fundraiser, they need the deals in place, and clients are legally obligated to send them cash that becomes fee-generating AUM. When alternative asset managers give guidance, it’s very high-confidence growth guidance.
And with BAM, 94% of its earnings are annuity-like, which is why management is guiding for the most stable dividends in the industry, growing in line with EPS at 18% to 20%. So 3.4% yield + 18% to 20% growth is 21.4% to 23.4% CAGR total return guidance from a management team that’s delivered 20 years of such returns and has said it has a clear vision for how to do it again.
That’s why I love BAM so much. Because it’s the only company I know of that has delivered 40 years of 20% Buffett-like returns AND is guiding for similar returns in the future AND has a clear growth runway to achieve it.
BAM is the ultimate “don’t overthink this, just buy and hold and reinvest the dividends and management will make you rich” dividend blue-chip investment.
PEGY Adjusted BAM Total Return Potential
The market loves accelerating growth, and based on management guidance, we’re potentially looking at 3 consecutive years of accelerating growth (19% or 20% in 2028).
Remember that with BAM, the entire thesis is yield BAM is THE stable yield play in alternative asset managers. So ask yourself: what yield are investors likely to demand from a growth titan like BAM? Historically, it’s been 3%, and I think that is a very likely future fair value yield because with 18% to 20% growth, why would investors demand 4% or 5% yield when the earnings stream is so stable that management can payout 95% of earnings consistently and safely? BAM is majority-owned by BN, its parent company, and those stable dividends are how Brookfield Corp (BN) gets cash from BAM.
BAM owns the actual funds, all the funds collecting those juice fees that clients are happy to pay because Brookfield has delivered excellent returns since 1902.
So I’m thrilled to be able to buy more during this temporary market freakout.
Humana’s thesis is simple. This is a company that historically trades at 20X and is trading at 18X today, even after accounting for the guidance cut for next year.
Based On Management Guidance & Median Consensus
And of course, Nvidia was just a 5% crash rule buy, but NVDA estimates keep climbing each week.
NVIDIA at $185 is 29X forward earnings vs historical 38 to 42
Nvidia’s PEGY fair value PE is 38, the low end of its historical range, BUT that PEGY fair value PE will likely climb towards 42 as the growth risk is, for the foreseeable future, to the upside.
All AI Spending Flows Through Nvidia
Nvidia is like the central bank of AI, with a finger in every part of the boom, and the spending is expected just to keep getting bigger.
Global AI Data Center Spending Could Hit $4 trillion PER YEAR By 2030, according to Morgan Stanley, Citigroup, IDC, and Nvidia
According to Jensen Huang, 60% to 70% of AI data center spending is on hardware, and Nvidia has $500 billion in orders through the end of next year ($450 billion for 2026 and beyond).
They don’t have the TSMC wafers actually to deliver that much, BUT the point is that everyone in the world is clamoring for GPUs and other AI datacenter hardware.
As long as demand is higher than supply, Nvidia is a chip utility with bond-like free cash flow stability…growing at 50% this year and 40% next year (and up to 120% if they could somehow fulfill all their orders).
A Chip Utility Growing at 50% This Year, 50% Next Year (And Guess What, 2027 Estimates Rise to 40% On OpenAI deal alone!)
A company growing at 50% is one that you don’t really have to worry about, especially when it’s trading at a 24% historical discount to its historical PEGY and even more undervalued relative to its historical PE ratio range of 38 to 42.
Even conservatively, using trailing results, NVDA has 47% upside potential in the next year, and 82% over the next two years.
$4 trillion in data centers in 2030 = $2.8 trillion in potential NVDA sales.
13X growth in 5 years (realistic best case scenario based on Nvidia, IDC, Morgan Stanley, and Citigroup’s estimates of AI spending)
That’s right, NVDA, which is up 9X in 3 years (with EPS up 20X), could increase sales, earnings, and free cash flow another 13X in 5 years, if those spending forecasts (which rise every quarter) come true.
Is this a bubble?
Soaring Stock Prices Matched By Soaring Earnings Do NOT A Bubble Make😉
I would LOVE to go as high as 15% on NVDA in ZEUS, but AGIOS (my Augmented Governance & Intelligence Operating System) says 12.5% is the optimal level because NVDA has such explosive growth that it might consistently approach the 20% risk cap on Ultra SWANs.
20% max risk cap with 10% max overweight if the reward/risk is high enough = 22% NVDA is the max we can go.
NVDA with dynamic rebalancing (buying on the corrections) is why a 12.5% position could become a 22% max overweight by year-end rebalancing.
YES, my AI council really is that nerdy😂
Even though NVDA is the most obvious AI play, even though the greatest CEO runs it in history, and all the data says “ALL IN ON NVDIA YOU MORON! DON’T OVERTHINK THIS!” Risk management requires following the optimality rules, and if 12.5% NVDA is the base-case allocation, then that’s how ZEUS “rides or dies” with the techno wizard of Denny’s😉
ZEUS 11/13
Dynamic Rebalancing in action. NVDA is supposed to be 12.5% and it still is. BAM is supposed to be 4.2% and it still is.
HUM is opportunistic at 3%, a solid 4X potential over 5 years.
THIS is how I practice disciplined financial science.
Between all my meetings today, I didn’t have much time to do any market watching. Sure, I grabbed BAM on a 5% crash rule, but its automated primarily limits that are filling every day.
I don’t have time or desire to stare at a computer screen watching stocks…Because I stare at a computer screen all day in Zoom calls and writing reports like this one🤣
Aswath Demodoran also uses limit orders, because he knows himself, he won’t buy a company if its crashing, but if you automate things, then you’ll remain a disciplined investor, even if you’re too busy to be a disciplined investor😉.
Sanity Check! Why The Market Is Falling And Tech Is Crashing
Today is a super busy day for me (3 meetings and this report was meant to be an update about MELI and FRT, but we are “overcome by circumstances”.
The shutdown ended today, and the market fixated on the idea that the Fed might not cut in December.
Let me be very clear about this. This isn’t the ZIRP era of slow growth. The Fed is NOT some wizard levitating the market!
This is the age of AI. Now Jensen is the wizard levitating the market😂
And as we’ve just seen, the AI boom is alive and well.
15% S&P EPS growth this quarter.
14% S&P EPS growth next year.
Strong Economy
I was surprised to see real-time GDP fall to 2.0% from 2.5% last week. Retail sales came in at 5.9% (up from 5.7% last week, 5.2% 2 weeks ago, and 5% 3 weeks ago).
However, 2% growth is still above the growth scare line that Schwab says would tip a 10% to 15% correction into a 15% to 20% correction.
And don’t forget why recessions matter.
Historically, As Long As GDP Growth Is Positive, it’s a V-shaped recovery:
1.55X AVG Length of The Decline
2 months from peak to trough = 3 months back to record highs.
Friday, Nov 14th, is the NY Fed and Atlanta Fed’s next updates on real-time GDP growth. I’ll include them in tomorrow’s article.
My quarterly update on Nvidia.
Yahoo Finance is partnering with us for content, and NVDA earnings are next Wednesday.
This was always the biggest article on Seeking Alpha (By FAR), so we’re using it for marketing to boost membership, since we have $41 in monthly operating costs to cover once free trials launch at the end of November.
Actually, we’ll be collecting revenue at the end of December, so we appreciate your patience on yet another Nvidia article.
We have to do what we have to do to survive. Food, like sleep, is still a thing😉🤣😂
Bottom Line: The Age Of AI Is Full Of Wonders And Terrors Alike, BUT If You Are Smart, Kind, And Humble, Your Family Will Thrive
The world is scary, wonderful, terrifying, and delightful, all at once.
And as long as you remember that all models are wrong, but some are useful, then you’ll remain humble, generous, and kind, the very type of person that will thrive in the age of AI.
Because when the machines can do everything…what is left for humans to do? The one thing we’ve always been great at…being human!
Humans are supposed to congregate in groups of 150 or fewer, talk, love, trust, and form families based on strong communities and circles of safety.
Everything we do today? We’re not made for it, we struggle, we fear, we lash out in anger and hatred.
Billions! Trillions! Quadrillions! Our minds are not capable of understanding numbers like these.
Humans are wonderful, flawed, and magnificent social creatures who feel most comfortable in our little shires, whether that be a church, an Olive Garden, or a family gathering.
And that’s ultimately what the age of AI and the genius of global capitalism is all about.
Letting us get back to being human, to returning to our shires, so that we can revel in what we’re good at.
While our robot partners do everything else🤗
