Don’t Fear the Bubble…
October 25, 2025
The market’s activity since last we met in this space has only heightened emotions amongst investors. Excitement about artificial intelligence has led investors to add to investments in large tech companies, often disregarding traditional valuation metrics. The rising market has also encouraged those who ply the meme stock waters, generating the necessary headlines and hyperbolic moves in the targeted securities. Though quarterly earnings reports have mostly been strong again, many market participants are increasingly focused on narratives and momentum rather than earnings, valuations, and the financial health of companies.
To be sure, concern has surfaced that the market is experiencing a valuation bubble led by the enthusiastic investing in all things AI. Why the concern? Presumably the presumption is that all bubbles inevitably pop and the aftermath is disastrous. But is that really the case? In just the last few years, we’ve had bubbles in meme stocks (AMC, GameStop), plant-based food stocks (Beyond Meat, Oatly), and SPAC’s (special purpose acquisition companies) all of which eventually popped. When those speculative surges unwound, there was no lasting impact on the overall market. One of the greatest bubbles of our lifetime – dot.com craze – led initially to widespread losses and yet, a few years further on, the market averages had recovered completely and began making new highs. Today, they are over 4x those previous levels.
The consideration of whether AI investing is a bubble is not unwarranted. It is the apparent fear of that bubble that seems misplaced. Investment portfolios often benefit greatly during surges in valuation. Certainly, investors lost money when previous bubbles popped. But not all investors. Were some investors wiped out completely? Probably. The problem isn’t the bubble, however, it is the overconcentration in investor portfolios and the lack of sufficient concern about the growing risk contained in continuing to hold onto large positions. Often, investors are overconfident in thinking that they understand a future that is only beginning to unfold. Consequently, when the turn comes, when the inevitable rationalization of values come, their losses are much greater.
Consider the dot.com mania. It seemed pretty clear that the internet was going to have a tremendous impact…what wasn’t clear was who the ‘winners’ were going to be. You might have created a significant gain in your portfolio riding Cisco stock to its peak – and 25 years later, Cisco stock is still below that peak while the markets are up over 400% so inaction with that position cost you. Did you invest in pets.com and MySpace? If you rode them up and down, the end wasn't pretty. The winners and losers obviously weren’t clear. Google hadn't even appeared yet. What was needed was for investors, and their advisors, to be more active in assessing risk and making portfiolio adjustments. It is almost a given that the scenario that is unfolding with AI will be similar – a dramatic impact on the economy and our lives yet, for investors, far from clear who the ‘winners’ and losers will be.
What can you do with huge gains in Nvidia, Broadcom, etc.? For starters, don’t assume that their stock prices will continue ever higher. Look for tax efficient ways to reduce overly large position sizes. Do you have any currently losing investments? Consider selling, realizing the losses and then using those losses to offset a reduction in some of the big winners. Instead of writing checks, make your charitable gifts with some of these appreciated securities.
And you can always simply take some profits – one of my father’s repeated mantras was ‘nobody ever goes broke taking a profit’ – or maybe wait until January so that the tax consequences are not as immediate as they would be by selling this late in the year. Don’t fear the bubble. Just don’t sit on your hands overconfident that you know how it will all turn out.
All this attention to the AI bubble and the extraordinary valuations of the currently successful participants has completely overshadowed what just months ago had been the primary topic of concern… namely that AI would lead to unanticipated consequences including possibly the eventual subjugation and/or elimination of the human race. You don’t hear much about that anymore which was one reason I found the attached article so interesting. Apparently not everyone fears that outcome…some see it as just another step along the evolutionary process, that human DNA is not sacrosanct, not a given survivor. Very interesting food for thought…
Thanks for coming back to read again.