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LAST WEEK, I MENTIONED the 17th century Dutch tulip bubble. There’s a lot we can learn from history. Current events, however, can teach us just as much. Below are three valuable lessons I see in today’s market.
Myopia. Open any finance textbook, and you’ll find that most of its ideas are built on the notion of “present value.” This simply means an investment should be worth the sum of its future cash flows. A public company’s stock price, for example, should correlate with its ability to generate profits in the future. This is the reason investment markets generally look forward.
For professional investors, this is their North Star. When researching a company, Wall Street analysts try to estimate its revenue and profits for future years. This can be a very logical approach. The challenge, however, is that these estimates are often guesses because there are too many factors that could affect any given company at any given time.
Consider a recent example: On April 2, in a policy statement dubbed Liberation Day, the Trump administration announced a set of steep new tariffs. This announcement caused the stock market to sell off, with some companies affected much more than others. Just a week later, the administration changed course and announced that most of these tariffs would be placed on hold. The stock market rebounded nearly 10%.
This one example illustrates an important dynamic: Not only do investors not know which way public policy is headed, but policymakers themselves also don’t know. Although markets generally look forward—an approach supported by economic theory—this is of little value, because no one can see around corners. It’s generally fruitless to make portfolio changes based on expectations about the future.
Attention span. In a recent commentary, Bloomberg observed that global markets exhibited contradictory behavior: “The never-ending back and forth on tariffs. An escalating war in Ukraine. Growing concern about the U.S.’s mounting debt and deficits, and a congressional budget process that seems unlikely to address the problem. Sounds like a recipe for a bear market, and yet global stocks just hit an all-time high.”
Why have stocks been rising despite these negative trends? One explanation is that investors believe the White House won’t follow through on its most serious tariff threats. Although that’s one possibility, I believe that isn’t the only reason. Consider Tuesday’s White House announcement stating that it plans to double steel and aluminum import duties. Clearly, we aren’t out of the woods on tariffs.
Why do investors no longer seem fazed by trade-related news? I believe there’s another factor at play. An event that occurred earlier this year can help us understand why.
In late January, a new AI tool known as DeepSeek made news when it became the most downloaded application from Apple’s App Store. Why? According to news reports, DeepSeek requires a fraction of the computing power compared to those needed to build other AI services like ChatGPT. The market reacted swiftly: Nvidia, the primary supplier of semiconductors to AI firms, saw its stock sink 17% in one day. If DeepSeek’s claim that it requires a fraction of computing power is true, Nvidia is in big trouble.
Since then, Nvidia shares have recovered nearly all their earlier losses—but not because the DeepSeek threat disappeared. There has been no update on DeepSeek’s claim to be built on fewer chips. I believe Nvidia’s stock recovered for the same reason that the overall market recovered, despite the risks Bloomberg highlighted: Investors simply have short memories and short attention spans.
It’s hard to explain this phenomenon. Perhaps it’s because news cycles move quickly. Whatever the reason, it’s not rational, but it is reality. And it’s the reason I believe investors are best served by never reacting too strongly to the day’s news. As Tony Hsieh, founder of Zappos, used to say, “Things are never as bad or as good as they seem.” This motto applies equally well to investing.
Permanence. In the investment world, there’s the expression that trees don’t grow to the sky. That is, nothing is forever. Kodak, Xerox and BlackBerry are examples. But when we look at today’s market leaders—Apple, Google and Amazon—it’s hard to imagine that they may one day suffer the same fate. We may, however, be witnessing something like that happening now.
Since ChatGPT’s 2022 arrival, cracks have appeared in Google’s market dominance. According to industry data, Google’s search engine market share, which was over 90% for more than a decade, slipped by a handful of percentage points. About a month ago, Eddy Cue, an executive at Apple, confirmed this. Google traffic on iPhones, he said, had fallen in April for the first time ever. This caused Google parent Alphabet’s shares to fall 7% the next day.
What’s interesting is that Google wasn’t completely unaware of AI before ChatGPT’s release. For years, it had been working on its own AI tool. But for whatever reason, Google hadn’t released it. This decision was reminiscent of Xerox’s famous Palo Alto Research Center (PARC), which invented everything from the mouse to the laser printer to local-area networking, but failed to commercialize any of it.
Google’s decision to keep its AI product under wraps was also reminiscent of Kodak’s 1970s decision refusing to commercialize the digital camera, invented by one of its engineers. Why? Kodak feared it would cannibalize its film business. According to Steven Sasson, the engineer who created that first camera, management’s reaction was: “That’s cute—but don’t tell anyone about it.” The outcome: Kodak ultimately fell into bankruptcy.
These consequences, however, aren’t always a one-way street. After years of dominating the market with its Windows software, Microsoft was repeatedly caught flat-footed—first by the internet and then by mobile computing—but it ultimately found new businesses, and today it’s larger and more profitable than ever.
Which way will Google go? It’s an open question. While Google is losing its market share in the traditional search engine business, it’s quietly gaining traction with its Waymo self-driving cars—an important opportunity since the automobile market is exponentially larger than the search engine market.
The bottom line: Investment markets are wholly unpredictable. Even when a given trend seems robust, it can reverse. Even when policymakers make pronouncements, they can change their minds. Even when a company dominates its industry, it can be usurped. As simplistic as it may sound, broad diversification will likely continue to be investors’ best defense against an uncertain future.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
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i remember, a few yrs ago, j bezos said amazon will work until it won’t.
it amazes me how similar amazon is to the old sears catalog
Adam, great article with a lot of meaning. Keep up the great job and your articles are so appropriate and timing is very up to date. Thanks for all you do for Humble Dollar.
Adam, wow!! One of your best, if not best articles and all are gems.
Enron is another example of a high flyer, along with MCI WorldCom Lucent, and the list goes one….
Thank you, Adam. I agree with your recommendation that “broad diversification will likely continue to be investors’ best defense against an uncertain future”. In my previous work life, I worked for over 10 years in a company used to be most valuable in the world. Nowaday, I am not sure it is still in the top 200.
Excellent article. One of the better ones that I have read recently. This column continues to be a value add.
Having worked for many years in the photo industry, I can attest that the Kodak story is far more complex than most people realize. The company had an enormously profitable film and processing business, and a reasonably profitable business making cameras. All of this continued for decades after the first digital prototype was created in the early 1970s.
Kodak was not fundamentally an electronics company, and it had no expertise in producing the basic elements of digital photography — image sensors and displays. Once these elements were in place, in the 1990s, Kodak was an active participant in the digital photography market.
Eventually the film market withered, although it has never died. Meanwhile, the digital photo field has produced relatively meager profits for the many companies involved, some of which eventually sold their interests or dropped out entirely. Even Fujifilm makes most of its profits from Instax cameras and (especially) instant film, rather than its digital models. (Kodak was forbidden by a Supreme Court decision from making instant film.)
So should Kodak have endangered its cash cow by plowing resources into digital? I don’t think the answer is at all obvious.
Jonathan found a jewel when he found you Adam. Love your thoughts and historical perspective.
Articles like this one show that you are a worthy successor to Jonathan.
Thank you for the nice article. Your Myopia section brings to mind “recency bias” in particular – which a quick search yields a first mention in 1st century BC.
The article is chock full of information but reads like a textbook. For me, the HD brand is finance with a personal touch. When an HD article speaks to me, I am attentive and eagerly read the article and comments. I can get macroeconomic news in many other places.
While the Dutch tulip bubble sounds good, the SP500 proved it can perform well for years regardless of valuation.
Prof Shiller the founder of PE10 is a good example of this.
In 2012 (https://money.cnn.com/2012/04/10/pf/investing-Shiller.moneymag/index.htm)
Shiller said “If you plug in today’s P/E of about 22, it would be predicting something like an annualized 4% return after inflation.”
Reality: the SP500 made 13.6% in the next 10 years (04/31/2012-04/31/2022). Let’s deduct the inflation and make it 11%. It was much better than countries with lower PE10 such as Emerging markets.
Those above-average SP500 returns happened thru a period of “free money” when the Fed kept U.S. short-term rates near zero. Seems unlikely to repeat for many years, if ever.
I agree with your larger point that no valuation metric is perfectly correlated with a certain expected return over an interval as short as a decade. Even over longer spans, there are no guarantees.
Good one, a timely reminder. Who said something about diversification being the only free lunch in finance?
Diversification isn’t a free lunch.
I know only 2 free lunches
1) When one fund beats another with a better risk-adjusted performance
2) Concentration in the right wide-range category.
Examples
1) PRWCX vs SPY for 25 years, 2000 to the end of 2024. PRWCX had better performance, SD=volatility, Sharpe Ratio, Sortino.
https://testfol.io/?s=enwkbD75tiD
2) SPY vs 50/50(SPY/VXUS) for 13 years, 2012 to 2024. SPY by itself was better.
https://testfol.io/?s=e0IPVqERP4q
Wow, makes me appreciate my index funds and how hard it is to match Warren Buffett.
Great article. Thanks for sharing.
Good morning and happy Saturday. I have another consideration to add to your list: Supply & Demand. By many measures it appears that more dollars are chasing fewer publicly traded equities. In some cases, those dollars are on “autopilot” (i.e. 401k contributions or automatic investment plans) which create recurring demand regardless of valuations and frequently into the same company shares. It seems to me that an ever increasing number of dollars purchasing a narrow collection of stocks is another factor driving prices higher and reducing the relevance of many historical metrics such as P/E ratios.
Thank you for the wonderful, thought-provoking article. It was the perfect accompaniment to my morning coffee!