Transformative technologies test conviction before they reward it. AI is no exception.
KEY TAKEAWAYS
Apple’s 10,080% return since 2007 only materialized for investors who endured multiple, brutal drawdowns. Volatility was not a bug–it was the entry fee.
Most of Apple’s severe declines were driven by systematic risk, not company-specific weakness. Investors who couldn’t distinguish between macro panic and broken fundamentals missed generational gains.
AI today resembles earlier transformative regime shifts like the iPhone, the Internet, and the PC. These technologies fundamentally changed how we work and live.
The recent pullback in AI stocks is largely rooted in valuation compression and macro fear. Revenue growth, enterprise adoption, and infrastructure investment remain real and tangible.
Transformational wealth creation requires tolerating discomfort. Conviction is tested repeatedly before it is rewarded.
MY HOT TAKES
Systematic fear is where generational opportunity often hides. The market routinely misprices innovation during macro stress.
Drawdowns are the toll booth for transformative returns. If you want moonshots, you must tolerate turbulence.
AI is not a fad; it is a structural shift with multi-decade implications. The infrastructure buildout alone signals durability.
Not every AI company survives regime change. Fire refines the strong and exposes the weak.
Zooming out is a discipline, not a cliché. Long-term charts tell the truth that headlines obscure.
You can quote me: “Some AI companies are marketing departments with GPUs.”
Steady and ready. I’m talking to you. Yeah you. Long-term investor. How many times have you told yourself, “I knew Apple was going to be a great company.” After a few moments of resting on the thought, you follow up with a question: “Why didn’t I just buy it and forget about it.” We all know a guy–a legend–who owned the stock at $93 a share in 2007. For some context, that is like $3 a share after adjusting for the two splits that followed. That guy remembers Steve Jobs announcing the iPhone at Mac World in January of 2007. For some, the announcement of the product was a game-changer, a paradigm shift. The company already staged a coup of the old garde music industry with digital music (iPod), and now it was pitching a wild vision that everyone was going to walk around with some hybrid-MP3-player-phone with a touch screen–a touch screen. The clunky but shiny device would barely fit in a pocket and would replace our beloved, ever-shrinking flip phones. Wait, it also ran applications? It had a camera? You could browse the Web? Most of us thought, “you’ve gone too far this time, Steve, your black turtle neck is cutting off blood flow to your brain; nobody would want a smartphone!” And that was that for most of us–except that guy. He was a believer and he bought the stock right away.
To be clear, Apple already had a pretty good track record of innovating leading up to the announcement, but it was still a consumer discretionary company with niche products. By the time the first iPhone landed in my hot little hand (it was the summer of 2007), the company's stock had already gained some 37%. Jobs must have been onto something–or on something to the many who still doubted the product. Of the non-doubters, think about how many sold the stock after gaining that 37%? If you held on to the end of 2007, you would have gained a cool 104% and felt pretty smart. That excitement wouldn’t last though. The stock tanked in January giving up almost -40%. Talk about a test of conviction. That guy? He had conviction and he held on, but the pain would only get worse after the stock gave up some -57% for the year. The company looked healthy but the global financial crisis was tightening its grip on the throat of the markets. The S&P 500 lost 38% that year and all boats went down with that ebbing tide. By January of 2009, that guy had given up all his gains and was sitting on a loss!
Now, bear in mind that the Dotcom bubble and bust was still pretty large in the rearview mirror at the time, so nerves were being tested. In 2000 alone, Apple lost -71% and the S&P gave up over -40% in that three year bust period. Most people sold and headed for the hills but not that guy–he was thoughtful. He was not about to throw the baby out with the bathwater. No, he would hold on.
How are you doing? Really. What are your thoughts on AI? Do you think that it is a transformative technology? Are you reading this on an iPhone or a smartphone? Do you remember when the Internet was just becoming a thing? Do you remember when your office desk was just a desk–with a pile of papers and maybe a calculator? And a clunky phone–ATTACHED TO THE WALL? The personal computer, the Internet, and–yes the iPhone–were all transformative technologies that ushered in regime changes–tectonic shifts that would create changes in how we do… well, almost everything. They would also create massive wealth for those who understood their transformative nature and stayed the course.
Now, this looking-back stuff makes it easy to tell the story because we all know how things turned out for that guy. Through yesterday’s ugly close, he collected a 10,080% return–his $1000 investment is now worth over $100k. But let’s be really clear, the moonshot was far from a smooth ride. Since buying the stock in 2007, that guy suffered through eight drawdowns of over -25%! Two of them exceeded -40% and the Global Financial Crisis drawdown was over -60%. Of those drawdowns, only 2 of them were attributed to questions about the company’s performance, or idiosyncratic risk, while the rest were rooted in systematic risk (market or macro factors). I am not going to go through the math of calculating how much money that guy would have lost if he sold after each of the systematic drawdowns, but it would be pretty painful.
And that is where we are today with AI.
This recent rut in tech and AI names feels eerily familiar. Growth has wobbled at the margin–but still in many cases at double digits. CAPEX is being scrutinized. Monetization timelines are being debated by people who were asking what a “cloud” was just ten years ago. Valuations have compressed. The narrative has shifted from “AI will change everything” to “AI is a bubble” in about the time it takes to refresh a social media feed.
Babies. Bathwater.
AI represents a massive tectonic shift. New worlds are being created in real time. Entire workflows are being redesigned. Industries are being re-plumbed. Software is no longer static. It is dynamic, adaptive, self-improving. That is not incremental change. That is geological. 🌍
And just like the earth, those changes are borne out of fire. 🌋
When tectonic plates shift, there are earthquakes. There is friction. There is heat. The bigger the opportunity, the bigger the growing pains. Infrastructure has to be built. Chips have to be manufactured. Data centers have to be powered. Models have to be trained. Mistakes will be made. Capital will be misallocated in places. Some companies will overpromise and underdeliver. Others will quietly build the rails of the future while the market obsesses over quarterly guidance.
If you want the reward, you have to tolerate the tremors.
This is not to say that every company with “AI” in its slide deck deserves your capital. Not all AI companies have THE stuff. Some are marketing departments with GPUs. Some are renting hype. Some will absolutely fall by the wayside. That is how regime shifts work. The railroad boom created titans and bankruptcies. The Internet boom created Amazon and Pets.com. Fire burns away the weak material and tempers the steel.
But at this stage, many still do have the stuff. Revenue growth is real. Margins are real. Demand for compute is real. Enterprise adoption is real. Governments are investing. Corporations are reorganizing. This is not a science project. It is becoming an arms race.
So when systematic fear sweeps through the tape and everything with a silicon chip gets sold, you have to ask yourself: is this idiosyncratic weakness or macro panic? Is the business broken, or is liquidity tight? Is the model obsolete, or is the multiple compressing because rates ticked higher?
If you sell the future because the present feels uncomfortable, you will likely repeat the Apple mistake. And let me caution you: this will not be the last time conviction is tested. Not even close. AI is far from done–really far. We are in the early stages of a multi-decade transformation. There will be more 25% drawdowns. There may be a 40% one. The headlines will get louder. The doubters will get bolder. You will question yourself. That is the toll booth for transformative wealth creation.
If you are unsure, pull out your smartphone 📱 and look up Apple’s stock chart since 2007. Zoom out. Then zoom in. Then zoom out again. Feel the volatility. Feel the fear. Feel the doubt. Then look at where it sits today relative to that moment when a man in a black turtleneck said we were going to carry the Internet in our pockets.
Stay focused on the babies. They are there. They are being tested by fire. And if you can be steady and ready, you might just be that guy next time.
YESTERDAY’S MARKETS
Stocks sold off yesterday, sparked by weak housing numbers, but tech took the brunt of the punishment pulling everything growthy down with it, leaving plenty of bathwater–and babies in the streets. Gold and Bitcoin continued to decline and both 2 and 10-year note yields eased.
NEXT UP
Consumer Price Index / CPI (January) may have slowed to 2.5% from 2.7%. Core CPI probably slipped to 2.5% from 2.6%.
Next week we will get more important earnings releases in addition to more housing numbers, FOMC meeting minutes, Personal Income, Personal Spending, a first look at Q4 GDP, flash PMIs, and the PCE Price Index. That’s a lot, so you better check back in on Tuesday (Monday, markets are closed for President’s Day) to get your calendars so you can be the only one with a map in the middle of nowhere.