There's no doubt that artificial intelligence (AI) stocks are hot right now.
Interest in AI has spiked since the launch of OpenAI's ChatGPT last November, and AI has become the latest buzzword finding its way into every tech CEO's mouth. Demand among investors for exposure to anything artificial intelligence-related has led to surges in stocks most closely associated with AI.
That includes C3.ai, whose shares have more than doubled since the year began; SoundHound AI, which is up roughly 70% this year; and BigBear.ai, which has also more than doubled. Even Buzzfeed stock jumped more than 300% in a two-day span when it said it would use AI to generate some of its content, a clear sign of the hype around the newly released technology.
If you've played around with ChatGPT, it's easy to see why investors are so excited about this new generative AI technology. The possibilities seem endless, and they very well could be, but picking winners at such an early stage of an emerging industry is a difficult task.
A quote by Berkshire Hathaway (BRK.A 1.08%) (BRK.B 1.14%) CEO Warren Buffett offers a reminder of how hard it can be for start-ups to find success in a new field, even if that industry is indeed transformative.
Image source: The Motley Fool.
Why Buffett won't be buying AI stocks
Warren Buffett famously avoided tech stocks during the dot-com boom, believing them to be overvalued.
Asked about his interest in such stocks at Berkshire's annual shareholder meeting in 1999, Buffett's answer was illuminating. He said:
"There's a lot of difference between making money and spotting a wonderful industry. You know, the two most important industries in the first half of this century in the United States -- in the world, probably -- were the auto industry and the airplane industry.
Here you had these two discoveries, both in the first decade -- essentially in the first decade -- of the century. And if you'd foreseen, in 1905 or thereabouts, what the auto would do to the world, let alone this country, or what the airplane would do, you might have thought that it was a great way to get rich.
But very, very few people got rich by being -- by riding the back of that auto industry. And probably even fewer got rich by participating in the airline industry over that time."
Buffett has riffed on that idea at other times, explaining that 2,000 auto companies went bankrupt in the early days of the auto industry. He said that the best move, if you recognized the automobile's transformative effect, was to short horses as that was the most predictable result of the rise of automobiles.
NYSE: BRK.A
Key Data Points
The dot-com bubble offers a more recent reminder of that phenomenon. The internet was another transformative innovation that spawned hundreds of new start-ups. However, most of them went belly up around the time the bubble burst starting in 2000. Some survivors like Amazon and Booking Holdings, formerly Priceline, have gone on to generate fabulous returns for investors, but even those companies escaped by the skin of their teeth.
Amazon sold $672 million in convertible debt in February 2000 just a month before the stock market started to crash, which likley saved the company. Booking's success is largely attributable to its 2005 acquisition of Booking.com in the aftermath of the dot-com bust. Booking became the biggest driver of its business, and the company eventually changed its name to reflect the strength of that business.
What this means for AI stocks
Artificial intelligence isn't directly comparable to automobiles or airplanes, which are both physical machines. And at this point, AI as a category seems so broad that the term is almost meaningless. AI encompasses everything from machine learning, recommendation algorithms, and robotics to self-driving cars, large language models, generative AI like chatbots, and software platforms -- and the chips and data centers that help make this form of high-powered computing run. Nearly every big tech company, from Microsoft to Nvidia to Alphabet and Meta Platforms, is investing billions in some form of AI.
However, the lessons from the early days of the auto and airline industries and the dot-com bubble are still relevant to the AI sector.
To paraphrase Buffett, AI may be a wonderful industry, but that doesn't mean you'll make money investing in it. AI investors may want to take a breath and remember Buffett's words before hopping a ride on the AI hype train.
