Should You Buy and Hold an Artificial Intelligence Portfolio? – Morningstar
The lesson from internet stocks.
Once upon a time, a transformative new technology enthralled the marketplace. Silicon Valley venture capitalists opened their wallets, as did retail shareholders. Veteran portfolio managers were bemused. No doubt the industry would prosper, but given its sky-high valuations, and the fact that many of these first-stage businesses would fall by the wayside, were those stocks worth owning?
The past has returned. As with 1999′s internet companies, today’s artificial intelligence startups face directly forward. Rarely is upcoming change so apparent. Without question, AI technology will dramatically reshape the economic future.
This leads to the logical investment question: How would those early internet buyers have fared had they purchased a basket of shares and stashed it away for the next 25 years? Mutual fund history tells us nothing. Of the 12 funds that had the word “internet” in their names when the millennium began, only one still exists, and that fund invests more than half its equity assets in energy stocks, including a 17% position in Texas Pacific Land Corporation TPL.
So, fuhgeddaboudit. For the purposes of this column, fund records are useless. So, too, are the track records of internet stock indexes. They show the return for portfolios that are monitored and updated. Of the 10 largest companies in today’s Dow Jones Internet Index, only two were publicly traded 25 years ago. Most of the industry’s current giants, such as Alphabet GOOGL and Meta Platforms META, were founded during the following decade.
To assess the startups’ fates, I found a January 2001 version of the Dow Jones Internet Index. Many of its holdings have long since been forgotten. (If you know what happened to Covad Communications, Excite@Home, or Tibco Software, or indeed that they ever existed, you are ahead of me.) I located the fate of 38 of that index’s 40 positions, sorting the outcomes into three groups: 1) Still Existing, 2) Purchased, and 3) Bankruptcy.
Better than I had expected! Most of the list’s businesses had persisted (in some form) rather than liquidating into a puddle. But had they retained significant value? It’s one thing for a company to be so coveted that it is purchased before its second birthday—as with YouTube, for which Google paid $1.65 billion. It’s quite another to drift for a decade, attempting to right the ship, before selling the business for pennies on the dollar.
I could not find the performance records for three of the 38 companies, but I was able to compute returns for the rest. When possible, I began the calculations in March 1999, when the Dow Jones Internet Index went live. However, as my reference article of holdings was published two years later, it included several firms that were not in the index’s initial version. In those cases, I used the stock’s inception date.
I concluded the study this February, which marked the index’s 25-year anniversary. The next chart shows the cumulative total returns for those 35 stocks. This time, I created five groups, ranging from 1,000%-plus grand slams to money-losing strikeouts.
Make that “grand slam,” singular. The only 10-bagger on the list, to use Peter Lynch’s term for a spectacularly successful investment, was an online retailer with the peculiar name of Amazon.com AMZN. Three companies gained between 5 and 10 times their original outlay, and three more at least doubled their money. That was it for the triumphs. No other stock kept pace with inflation over the period. Nearly all finished in the red.
That most stocks stink is no secret. Long-term equity performance is asymmetrical, with a few winners carrying almost all the baggage. But internet startups seem to have carried that principle too far. Over stock market history, found professor Hendrik Bessembinder, 51% of all stocks have suffered negative lifetime total returns. Among the 35 internet stocks, though, the failure rate was 71%, or 25 of the 35 entrants. That is a tough hurdle to clear.
I then measured how the entire portfolio would have performed. For that exercise, I used only the 23 stocks that existed in March 1999, because the proper comparison for AI stocks is when the sector is booming, as with AI today and internet companies in spring 1999, rather than after a downturn has already occurred. I split a $10,000 one-time investment among those 23 companies and let the portfolio ride—no trades, not even rebalancing.
One question remained: How to treat stocks that were acquired? After some deliberation, I decided to invest the proceeds into the Morningstar US Market Index. Ignoring that money would understate the portfolio’s return. On the other hand, employing other assumptions—such as dividing the proceeds among the portfolio’s remaining companies—would add complexity without meaningfully altering the conclusions. So, the simpler approach it was.
The illustration below contains four comparisons: 1) The entire internet portfolio, 2) the internet portfolio without Amazon, 3) the previously mentioned Morningstar US Market Index, and 4) inflation.
The good news for the internet portfolio was that, albeit with spirit-breaking volatility—the reason the internet funds vanished—it eventually surpassed inflation. What’s more, if the portfolio had contained another company that became as successful as Amazon, it would also have outgained the US stock market. The bad news, of course, is that investment “ifs” don’t pay the bills.
This result surprised me. When beginning the project, I already had Amazon in mind and figured that a few champions such as eBay EBAY would have propelled the internet portfolio to relative victory. But the winners were too few and their gains insufficient. Only VeriSign VRSN, eBay, and Priceline (now Booking Holdings BKNG) beat the overall stock market, and not by a very wide margin. To return to the baseball metaphor, the portfolio needed more extra-base hits, and more of those needed to be home runs instead of mere doubles.
This test is a sample size of one, but it strikes a cautionary note. At least with internet stocks, most of the industry’s future leaders arrived not with the first wave of technology, but the second. In effect, the companies in the first wave threw ideas against the wall hoping to find one that would stick. The firms that succeeded them learned from their predecessors’ mistakes. They benefited rather than suffered from arriving later.
For those with the patience to own an investment as volatile as the AI sector, buying and holding a stock basket might make sense. However, based on internet stocks’ history, one need not rush to do so.
The opinions expressed here are the author’s. Morningstar values diversity of thought and publishes a broad range of viewpoints.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
John Rekenthaler is vice president, research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.
Rekenthaler joined Morningstar in 1988 and has served in several capacities. He has overseen Morningstar’s research methodologies, led thought leadership initiatives such as the Global Investor Experience report that assesses the experiences of mutual fund investors globally, and been involved in a variety of new development efforts. He currently writes regular columns for Morningstar.com and Morningstar magazine.
Rekenthaler previously served as president of Morningstar Associates, LLC, a registered investment advisor and wholly owned subsidiary of Morningstar, Inc. During his tenure, he has also led the company’s retirement advice business, building it from a start-up operation to one of the largest independent advice and guidance providers in the retirement industry.
Before his role at Morningstar Associates, he was the firm’s director of research, where he helped to develop Morningstar’s quantitative methodologies, such as the Morningstar Rating for funds, the Morningstar Style Box, and industry sector classifications. He also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.
Rekenthaler holds a bachelor’s degree in English from the University of Pennsylvania and a Master of Business Administration from the University of Chicago Booth School of Business, from which he graduated with high honors as a Wallman Scholar.
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We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
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Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.
© Copyright 2024 Morningstar, Inc. All rights reserved. Dow Jones Industrial Average, S&P 500, Nasdaq, and Morningstar Index (Market Barometer) quotes are real-time.
This article was autogenerated from a news feed from CDO TIMES selected high quality news and research sources. There was no editorial review conducted beyond that by CDO TIMES staff. Need help with any of the topics in our articles? Schedule your free CDO TIMES Tech Navigator call today to stay ahead of the curve and gain insider advantages to propel your business!
Once upon a time, a transformative new technology enthralled the marketplace. Silicon Valley venture capitalists opened their wallets, as did retail shareholders. Veteran portfolio managers were bemused. No doubt the industry would prosper, but given its sky-high valuations, and the fact that many of these first-stage businesses would fall by the wayside, were those stocks worth owning?
The past has returned. As with 1999′s internet companies, today’s artificial intelligence startups face directly forward. Rarely is upcoming change so apparent. Without question, AI technology will dramatically reshape the economic future.
This leads to the logical investment question: How would those early internet buyers have fared had they purchased a basket of shares and stashed it away for the next 25 years? Mutual fund history tells us nothing. Of the 12 funds that had the word “internet” in their names when the millennium began, only one still exists, and that fund invests more than half its equity assets in energy stocks, including a 17% position in Texas Pacific Land Corporation TPL.
So, fuhgeddaboudit. For the purposes of this column, fund records are useless. So, too, are the track records of internet stock indexes. They show the return for portfolios that are monitored and updated. Of the 10 largest companies in today’s Dow Jones Internet Index, only two were publicly traded 25 years ago. Most of the industry’s current giants, such as Alphabet GOOGL and Meta Platforms META, were founded during the following decade.
To assess the startups’ fates, I found a January 2001 version of the Dow Jones Internet Index. Many of its holdings have long since been forgotten. (If you know what happened to Covad Communications, Excite@Home, or Tibco Software, or indeed that they ever existed, you are ahead of me.) I located the fate of 38 of that index’s 40 positions, sorting the outcomes into three groups: 1) Still Existing, 2) Purchased, and 3) Bankruptcy.
Better than I had expected! Most of the list’s businesses had persisted (in some form) rather than liquidating into a puddle. But had they retained significant value? It’s one thing for a company to be so coveted that it is purchased before its second birthday—as with YouTube, for which Google paid $1.65 billion. It’s quite another to drift for a decade, attempting to right the ship, before selling the business for pennies on the dollar.
I could not find the performance records for three of the 38 companies, but I was able to compute returns for the rest. When possible, I began the calculations in March 1999, when the Dow Jones Internet Index went live. However, as my reference article of holdings was published two years later, it included several firms that were not in the index’s initial version. In those cases, I used the stock’s inception date.
I concluded the study this February, which marked the index’s 25-year anniversary. The next chart shows the cumulative total returns for those 35 stocks. This time, I created five groups, ranging from 1,000%-plus grand slams to money-losing strikeouts.
Make that “grand slam,” singular. The only 10-bagger on the list, to use Peter Lynch’s term for a spectacularly successful investment, was an online retailer with the peculiar name of Amazon.com AMZN. Three companies gained between 5 and 10 times their original outlay, and three more at least doubled their money. That was it for the triumphs. No other stock kept pace with inflation over the period. Nearly all finished in the red.
That most stocks stink is no secret. Long-term equity performance is asymmetrical, with a few winners carrying almost all the baggage. But internet startups seem to have carried that principle too far. Over stock market history, found professor Hendrik Bessembinder, 51% of all stocks have suffered negative lifetime total returns. Among the 35 internet stocks, though, the failure rate was 71%, or 25 of the 35 entrants. That is a tough hurdle to clear.
I then measured how the entire portfolio would have performed. For that exercise, I used only the 23 stocks that existed in March 1999, because the proper comparison for AI stocks is when the sector is booming, as with AI today and internet companies in spring 1999, rather than after a downturn has already occurred. I split a $10,000 one-time investment among those 23 companies and let the portfolio ride—no trades, not even rebalancing.
One question remained: How to treat stocks that were acquired? After some deliberation, I decided to invest the proceeds into the Morningstar US Market Index. Ignoring that money would understate the portfolio’s return. On the other hand, employing other assumptions—such as dividing the proceeds among the portfolio’s remaining companies—would add complexity without meaningfully altering the conclusions. So, the simpler approach it was.
The illustration below contains four comparisons: 1) The entire internet portfolio, 2) the internet portfolio without Amazon, 3) the previously mentioned Morningstar US Market Index, and 4) inflation.
The good news for the internet portfolio was that, albeit with spirit-breaking volatility—the reason the internet funds vanished—it eventually surpassed inflation. What’s more, if the portfolio had contained another company that became as successful as Amazon, it would also have outgained the US stock market. The bad news, of course, is that investment “ifs” don’t pay the bills.
This result surprised me. When beginning the project, I already had Amazon in mind and figured that a few champions such as eBay EBAY would have propelled the internet portfolio to relative victory. But the winners were too few and their gains insufficient. Only VeriSign VRSN, eBay, and Priceline (now Booking Holdings BKNG) beat the overall stock market, and not by a very wide margin. To return to the baseball metaphor, the portfolio needed more extra-base hits, and more of those needed to be home runs instead of mere doubles.
This test is a sample size of one, but it strikes a cautionary note. At least with internet stocks, most of the industry’s future leaders arrived not with the first wave of technology, but the second. In effect, the companies in the first wave threw ideas against the wall hoping to find one that would stick. The firms that succeeded them learned from their predecessors’ mistakes. They benefited rather than suffered from arriving later.
For those with the patience to own an investment as volatile as the AI sector, buying and holding a stock basket might make sense. However, based on internet stocks’ history, one need not rush to do so.
The opinions expressed here are the author’s. Morningstar values diversity of thought and publishes a broad range of viewpoints.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
John Rekenthaler is vice president, research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.
Rekenthaler joined Morningstar in 1988 and has served in several capacities. He has overseen Morningstar’s research methodologies, led thought leadership initiatives such as the Global Investor Experience report that assesses the experiences of mutual fund investors globally, and been involved in a variety of new development efforts. He currently writes regular columns for Morningstar.com and Morningstar magazine.
Rekenthaler previously served as president of Morningstar Associates, LLC, a registered investment advisor and wholly owned subsidiary of Morningstar, Inc. During his tenure, he has also led the company’s retirement advice business, building it from a start-up operation to one of the largest independent advice and guidance providers in the retirement industry.
Before his role at Morningstar Associates, he was the firm’s director of research, where he helped to develop Morningstar’s quantitative methodologies, such as the Morningstar Rating for funds, the Morningstar Style Box, and industry sector classifications. He also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.
Rekenthaler holds a bachelor’s degree in English from the University of Pennsylvania and a Master of Business Administration from the University of Chicago Booth School of Business, from which he graduated with high honors as a Wallman Scholar.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.
© Copyright 2024 Morningstar, Inc. All rights reserved. Dow Jones Industrial Average, S&P 500, Nasdaq, and Morningstar Index (Market Barometer) quotes are real-time.
This article was autogenerated from a news feed from CDO TIMES selected high quality news and research sources. There was no editorial review conducted beyond that by CDO TIMES staff. Need help with any of the topics in our articles? Schedule your free CDO TIMES Tech Navigator call today to stay ahead of the curve and gain insider advantages to propel your business!
