The AI Boom, and the Lessons of History
All through history, from tulip bulbs to dot-coms and now to AI, every big new idea brings both frenzy and fortune. The lesson for investors? Don’t bet on the needle. Own the haystack.
How much do you remember about the dot-com bubble? The frenzy of internet IPOs, the soaring Nasdaq, the spectacular collapse? Between 1995 and 2000, nearly 500 internet companies went public, raising more than $44 billion. At the peak in 1999, valuations defied gravity. Many traded at price-to-earnings ratios north of 200, or had no profits at all. Telecom companies raised another $100 billion to build the infrastructure of the digital future.
Then came the bust. From 2000 to 2002, the Nasdaq shed 78% of its value. Analysts estimate 80–90% of those dot-coms disappeared. And yet, from the wreckage, enduring giants emerged: Amazon, eBay, Priceline (now Booking Holdings), and later Google. These few survivors didn’t just make it through; they reshaped the global economy.
The lesson was clear: innovation does transform the world, but only a handful of companies endure.
The AI Investment Surge
Fast forward to today. Artificial Intelligence has captured the imagination of investors, governments, and the public, and the financial numbers dwarf the dot-com era. In the first quarter of 2025 alone, AI startups raised $73 billion, more than half of all global venture capital activity in the period.
By mid-August, the year’s total had already exceeded $118 billion, surpassing all of 2024. OpenAI raised $40 billion in a single round, nearly matching all dot-com IPO proceeds from 1999. Goldman Sachs projects $200 billion in annual AI investment by year-end, with long-term estimates topping $1 trillion by 2030.
In other words, AI is attracting more capital in one year than the entire internet boom did across five years. The enthusiasm is global. SoftBank, sovereign wealth funds, the European Union, and China are committing hundreds of billions. AI isn’t just a startup story; it’s a geopolitical race with unknown consequences.
Why Bubbles Happen (and Why They Matter)
Across centuries, bubbles follow familiar patterns. Often, the bubble follows a big new story: railroads, radio, the internet, real estate, blockchain, and now AI. The story is often about a real thing; these innovations do change the world. But not every company tied to them is a sound investment; in fact, most are anything but.
Often, bubbles are fueled by excessive optimism. In the late ’90s, analysts claimed, “This time is different.” During the housing boom, people believed home prices could never fall again nationally. We know how that ended in 2008: carnage in hot markets like Phoenix and Las Vegas. Valuation discipline matters always.
Bubbles are inflated with easy money. Loose credit, speculative fervor, and abundant capital accelerate the cycle. Bubbles inflate quickly and deflate even faster.
Another phenomenon marks bubbles: there are lots of entrants, but few survivors. Hundreds of IPOs yielded a handful of giants. In crypto, 80–90% of projects vanished. It seems rational to expect AI to follow the same pattern.
Another trait of bubbles is that pain follows pleasure. The Nasdaq lost nearly 80% after the “Tech Wreck” in 2000. Japan’s Nikkei took decades to recover from its 1989 peak. Crypto has endured multiple two-thirds drawdowns. This is the nature of creative destruction: the bust clears the field for durable winners.
On the bright side, bubbles do tend to create enduring winners. Amazon, Google, Microsoft, and others rose stronger after the internet bust. AI, too, will most likely produce lasting giants, but they’ll only emerge after volatility and consolidation and, for many, epic disappointment.
Today’s Market Context
After a strong run this summer, tech stocks have cooled modestly, with the Nasdaq slipping about 2% in August. Valuations remain elevated: the S&P 500 technology sector trades at ~30x forward earnings, well above its 10-year average of ~18–19x. Volatility is ticking higher, though still comparatively orderly.
The underlying storyline of bubbles is one of both turbulence and promise. AI spending is exploding across semiconductors, data centers, and software. Goldman Sachs estimates AI could lift S&P 500 profits by 30% over the next decade. But near-term payoffs will be uneven, and not every dollar invested will yield durable returns. Many will likely be big losers.
The Timeless Wisdom: Own the Haystack
Faced with a frenzy of new names, investors are tempted to find the next Amazon or Google. But history shows the odds are slim. Out of thousands of internet companies, only a handful became trillion-dollar giants. The era produced a large number of cautionary tales, among them Cisco Systems, the darling of hardware firms during the dot-com bubble.
After a massive run-up in the late ‘90s, Cisco lost 30.94% and 53.93% of its value in 2000 and 2001, respectively. Since then, Cisco has underperformed the S&P 500. An investment of $10,000 in Cisco made on January 29, 2000, would be worth $37,433 by August 26, 2025. A similar $10,000 investment in the S&P 500 would be worth $116,560 over the same period. Just because a company dominates a niche market does not mean it will be an outperformer in the stock market.
We can thank Jack Bogle, founder of Vanguard, for his valuable advice: “Don’t search for the needle in the haystack. Just buy the haystack.” By owning a diversified index or broad-based fund, investors ensure they capture tomorrow’s winners without gambling on tomorrow’s Pets.com or even Cisco Systems.
Regular readers of The Chronicle will remember our fondness for Warren Buffett’s timeless adage, which is also apt: “The stock market is a device for transferring money from the impatient to the patient.”
Bogle and Buffett are two giants of investing whose advice combines quite nicely: avoid concentration risk, and let time work its magic. These are essential tenets of family office style investing because they work reliably.
What This Means for Investors
Bubbles generally, and this current AI craze specifically, remind us of a few other timeless lessons of investing. First among these, and as basic as it gets, is this: stay diversified. Don’t make big bets on individual AI names. The winners will emerge over years, not quarters and even years, and certainly not over days or weeks.
Here are some fundamentals to keep in mind. Keep discipline: great stories will always eventually need great earnings. The sugar rush of high valuations only raises the chances of disappointment. Resist the temptation to trade on headlines. Headlines are the leading cause of FOMO, a major enemy of investor success.
Use volatility wisely. Market pullbacks are normal and often create opportunities for rebalancing. Amazon, today one of the most valuable companies in the world, lost 95% of its value during the Tech Wreck and took several years before showing any profit at all. Among all stories on Wall Street, Amazon’s is one where the rewards of patience were most significant.
Closing Thought
AI may be the story of our era, just as the internet was a generation ago. The excitement is real, the opportunities are vast. But the pattern is timeless: bubbles come and go, hype gives way to reality, and a few enduring companies reshape the investment landscape.
The smartest investors don’t gamble on the next big name; they own the haystack, stay patient, and let innovation and time do their work.
Does your portfolio balance risk and reward in a way that produces enough growth to make your future secure without the downsides that so often accompany a concentration in new ideas? Does your financial plan contemplate the volatility that naturally accompanies stock market investing? If you don’t know, let us offer you a complimentary analysis that could be extremely valuable for you.
