00:00 Speaker A
You’re talking about managing AI concentration risk. Maybe it starts there. Are investors too focused on this AI trade?
00:06 andy
That’s a conversation we have with every advisor we talk to. We work very closely with financial advisors across the wealth sector. The first thing to consider is to take a big step back and realize that everyone investing in the general public is trying to achieve a specific goal or outcome. Maybe it’s retirement, maybe it’s to make more money, whatever.
00:27 andy
So the first thing you should do is take a step back and look at how things were done in that situation. Maybe people are a little closer to the finish line right now. So every time we have a conversation, we talk about maybe pulling back a little bit and taking some of the winners and reallocating them to other parts of the portfolio.
00:41 Speaker A
Have you ever gotten any backlash against Andy? People would say, why should we trim the winner? It’s working. What are the dangers of doing nothing?
00:46 andy
Yeah, well, of course, I mean, you know, sometimes I feel like I don’t fight the tape or whatever.
00:50 andy
But never in modern history has there been such a concentration of seven or ten stocks. Well, 34% of the S&P 500 is magazines and 40% of the top 10 stocks. So there you have it.
01:00 andy
And the second part of that is, um, what I would suggest is that these big companies have an opportunity to go deeper into the AI industry, and it’s expanding. You can look at everything from the construction industry to companies that make liquid cooling to companies that make networks and fiber optics.
01:12 Speaker A
In other words, get away from just picks and shovels.
01:13 andy
It’s, well, I think a lot of it constitutes pick and shovel, but for me the concentration risk is in these big 7 to 10 companies, and I think you can ride the AI boom without necessarily being concentrated in those companies.
01:30 Speaker A
Well, the question is, is this a .com 2.0 comparison? What do you tell your clients about that?
01:34 andy
There aren’t as many of us as you might think, but we certainly were early on. Well, there are some basic points. For example, if you index the price of the S&P 500 against earnings per share and look at the .com bubble, you see this huge disconnect where prices are running away from reality. And of course, if we were to do the same thing today, a lot of what we’re seeing in price movements so far has been justified by earnings growth.
01:50 andy
So the big question is, will it start to peel off at some point? Look, I strongly believe in it, but no one knows exactly what will happen in the future. But what I think makes sense is to be cautious and acknowledge it and say, “I don’t know.
02:02 andy
If that huge exposure that I have now stumbles, how would I feel about a 10, 15, 20% drop? What else can we hold to help mitigate that? I think that’s a smart conversation that we’re having with our advisors.
