Bill Ackman Has a Warning for Artificial Intelligence (AI) Investors
Key Points
Stocks involved with artificial intelligence have been hot buys, but they've also become expensive.
Bill Ackman suggests that investors may be too focused on just a few areas of the market.
In a downturn or correction, highly valued stocks could be vulnerable to steep declines.
- 10 stocks we like better than Roundhill ETF Trust - Roundhill Memory ETF ›
Artificial intelligence (AI) stocks have been soaring in value in recent years, as investors remain bullish on seemingly anything tied to AI. Whether it's data centers, chatbots, or memory, companies involved in these areas of tech have been among the hottest investments to own.
The problem is that valuations have been getting out of control. Prominent hedge fund manager and billionaire Bill Ackman has seen this before, and he has a warning for AI investors, as now may be a crucial time to consider moving out of highly valued investments.
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Are investors repeating the mistakes of the dot-com bubble?
Ackman believes that there are similarities between what's happening right now in the market and what happened in the dot-com bubble. Chasing the latest trends may be exciting, but he cautioned in a recent podcast that doing so could result in investors focusing on the wrong areas of the market.
What's interesting about markets is people always bring their eye to the new new thing, and the new thing is chips and semiconductors and energy, and that's where the short-term capital is going. What tends to happen is really high-quality things get left behind.
Perhaps the best example of that is what's happening with memory stocks. The newly launched Roundhill Memory ETF (NYSEMKT: DRAM), which invests in stocks in the space, has already doubled in value, despite only beginning to trade in early April. Investors have been loading up on memory stocks due to the current shortages in the industry and rising demand for memory as a result of AI's continued growth. One of the top holdings in the fund, Micron Technology, recently hit a valuation of $1 trillion, but it has been highly volatile of late.
While investing in the DRAM ETF may appear to be a good way to balance your risk and avoid high exposure to a single stock, it still exposes you to a highly expensive and volatile market segment. If the excitement around AI bursts, then these are the types of stocks that can fall significantly.
Many well-valued stocks are still available in the market
Although the stock market appears red hot these days, not all stocks are trading at extremely high valuations. Now may be an important time to consider investments in areas outside of tech, which may provide more value and less risk in the long run.
By focusing on more value-oriented types of investments, you can reduce your risk in the market if there is a correction in the future, while positioning yourself for some strong long-term gains. As history has shown in the past, simply chasing the hottest stocks can be a risky and costly strategy.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology. The Motley Fool has a disclosure policy.
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