The Perils of Chasing Trends and Fads
ChatGPT is grabbing big headlines in 2023, but are there opportunities for investors?
The current hot topic for many investors is artificial intelligence (AI). This interest has been sparked by the rollout of the ChatGPT "chatbot," a software program designed to mimic human conversations, answer questions, and perform basic mathematical or computer tasks.
While ChatGPT is often uncanny in the performance of many tasks initiated by early users, the program shows serious defects in its grasp of facts and history. Still, the prospects for such a tool seem quite good, and it will be fascinating to see how the program is eventually integrated into real-world applications online and off.
Fanciful headlines about AI were enough to send scores of investors off in search of ways to profit from "the coming revolution in artificial intelligence." Such is the state of the world whenever a new fad appears on the scene. Unfortunately for most of these individuals, their quests are usually fools’ errands, resulting in a waste of time, effort, and money.
There are many reasons why chasing trends, fads, and emerging technologies is seldom successful for individual investors.
- By the time a technology like ChatGPT reaches the headlines, an enormous amount of capital and resources has already been devoted to its development by large companies and early stage investors. Decades of research and testing has been conducted. While the developments seem new to many people, the general public is already late to the party and shouldn’t fool themselves that they’re getting an early invitation.
- Technologies are often deemed “newsworthy” for reasons other than their applicability to actually solve problems or their commercial viability. An “investment” in these ventures should really be classified as “speculation.”
- The rush to profit from a fad will draw out profiteers who ride the coattails of honest entrepreneurs. It can be difficult to differentiate the shills from honest businesspeople. Given that humans tend to overstate their own intelligence, the task of sorting truth from fiction is even more difficult when a slick sales pitch flatters the egos of investors.
A smarter approach for most individual investors is to look at the companies behind the scenes who stand to benefit from emerging technologies—companies that are already stable, profitable, well-managed, and looking out for the long-term interests of their shareholders. Investors can often find opportunities in small companies that are working in areas that are connected to the fad du jour.
For example, among the companies currently covered in the SmallCap Informer, a number are involved in some of the most transformational technologies emerging today.
A semiconductor equipment manufacturer reports that double-digit growth in cloud computing, AI, and autonomous vehicle technologies is driving demand from their chipmaker customers.
A transportation company recently purchased and now operates an electric-vehicle charging network in Europe as part of its planned support for its fleet customers.
A semiconductor company reports that 73% of cars are expected to ship with cellular connectivity by 2024, requiring just the kinds of chips that the company makes. In addition, this company's products could also be included in self-driving cars, with $50 of RF content projected to be required in each autonomous vehicle produced.
And in this issue, we introduce a company that stands to benefit greatly from ChatGPT even though they are not involved in AI research and development. For this company, there is considerable potential upside from their involvement in the new technology while their existing business minimizes the downside.
Investors who do choose to allocate capital to speculative ventures or startups should fence off those outlays from the rest of their portfolios, and limit the capital involved to just 5% or 10% of their total investment portfolios. By limiting exposure, if these ventures work out, they can boost overall returns nicely; if they flop, the downside is limited.
In any case, there is no replacement for performing due diligence with respect to any potential investment. Research into a company’s strengths, weaknesses, and growth prospects, along with determining its current and potential future valuations, is essential to long-term success as an investor in individual stocks.
In addition to the new company we introduce in this issue, our second recommendation is a past SCI pick in a solid industry. If cracks occur in the near term due to economic conditions, the company’s business surely has a strong base over the long-term.
Stay the course!
- DOUG GERLACH
Read Doug's complete commentary and profiles of two recommended small company stocks in the March 2023 issue of the SmallCap Informer stock newsletter. Not a subscriber? Subscribe to the SmallCap Informer and get monthly small company stock recommendations and updated buy/sell prices for each of the 48 high-quality small company stocks currently covered in the newsletter.