As AI stocks soar, investors urged to proceed with care
The op-ed, “AI boom echoes the dotcom bubble, but not in the way you think” (March 5), prompted me to reflect on the distinction between industry booms and market bubbles. While these terms are sometimes used interchangeably, they represent fundamentally different economic phenomena. A boom signals a period of pronounced growth and burgeoning interest in an industry, driven by genuine advancements and market demand. The industrial and the mobile revolutions exemplify the transformative boom.
Bubbles, in contrast, are characterised by asset prices that become divorced from their underlying value, driven by unrealistic expectations and irrational exuberance. This unsustainable growth inevitably culminates in a painful correction, when overvalued assets experience sharp declines, causing widespread economic repercussions. The Japanese asset price bubble in the 1980s and the US housing market collapse in 2008 serve as stark examples.
The AI industry currently finds itself in the midst of a boom, fuelled by rapid advancements in machine learning, neural networks and computing power. These groundbreaking innovations have the potential to revolutionise industries and create new markets.
However, the AI boom is not immune to the risk of bubble dynamics. The dotcom bubble of the late 90s, for example, was fuelled in part by a media frenzy that hyped the potential of internet firms, leading to a surge in speculative investment. Similarly, the current AI boom has been accompanied by extensive media coverage and public fascination with the potential of AI, which could contribute to inflated valuations.
In addition to public sentiment, investments could be risky if they are made without sufficient due diligence or regard for long-term viability. An accommodative monetary policy and lax lending standards fuelled the Japanese asset price bubble, while loose lending standards and the proliferation of subprime mortgages contributed to the US housing market bubble.
As AI stocks soar, investors must prioritise sustainable growth. History tends to repeat itself. In the 1890s, there was the British bicycle mania. The numerous publicly traded bicycle companies that folded when that bubble burst are a reminder of the perils of unchecked hype. To avoid a similar fate, the AI industry and investing public must ground their enthusiasm in realistic assessments.