You saw the news – a Chinese AI company developed its own large language model at a fraction of the price of ChatGPT and its other American competitors. The stock market – and particularly many of the beloved “A.I. stocks” threw a tantrum on Monday. I have some thoughts. But first I’d like to tell you a story…
In 1908, the first Model T rolled off the assembly line, marking one of the greatest engineering achievements in human history. Carl Benz (you recognize that last name) may have invented the first automobile 22 years previously, but Henry Ford discovered how to produce one affordably. The Model T transformed the automobile from a luxury only the rich could dream of owning to a commodity as ubiquitous as indoor plumbing within a few decades. By the end of the 1950s, 75% of American families owned a car.[i]
Ford’s innovation created tremendous economic value for the company. But it arguably created more value for Sears Roebuck. Mass automobile ownership allowed consumers to stray beyond the shopping districts presently clustered in urban areas, so Sears built massive department stores on the outskirts of cities to cater to America’s motorists. Though never employed by or associated with the company, Henry Ford may be the most influential person in transforming Sears from a small mail-order catalogue in 1887 to a 350,000-employee company occupying the eponymous skyscraper – the largest in the world when constructed – in Chicago roughly a century later.
Sears is one of innumerable examples of companies that transformed (and many others came into being) as a result of innovation by an unrelated company in a separate industry. A simple model of the economy goes something like this: innovation creates profits which invites competition which drives prices down which creates efficiencies for other businesses/industries which creates new innovation which invites new competition which drives prices down which creates more efficiencies for other businesses/industries, which… It is the perpetual motion machine that starts with a Model T rolling off the assembly line in 1908 and transforms into you purchasing anything you want on the internet and it arriving on your doorstep within 48 hours in 2025 and continues to who knows what but something amazing in 2100.
The headline innovation the last few years has been artificial intelligence, which spawned all sorts of speculation of productivity growth and breathless conjecture of how it will transform our lives and the economy. And, of course, a few companies – and by extension their stockholders – have made a lot of money. I cannot remember the last time I went 24 hours without hearing or reading something about Nvidia. Every A.I.-adjacent stock has been on an absolute tear the last two years. Whether your portfolio has beaten the S&P 500 has largely been a question of whether you were overweight or underweight semiconductors and other “A.I. stocks.”
But remember the perpetual motion machine mentioned above. Innovation creates profits which invites competition and ultimately drives costs down. That, apparently, is what happened over the weekend when a Chinese company called DeepSeek released its R1 large language model, claiming development costs of under six million dollars compared to OpenAI’s purported $100M price tag to train ChatGPT-4.*[ii] I should note these are the recent claims from an obscure tech company in China. Their veracity – as far as I can tell – is to be determined. Nevertheless, the stock market balked at this news, shedding almost 3% in pre-market trading early Monday morning before clawing back to a not-great-but-not-horrible-considering -1.46% to end the day. Nvidia, maker of the $70,000 Blackwell GPU and leading arms-dealer in the A.I. race shed 17% on the day. Other popular “A.I.-stocks” shared in the shellacking – Broadcom (-17%), Arista Networks (-22%), Taiwan Semi (-13%), and Oracle (-14%) to name a few.[iii]
One headline from China and everyone has forgotten the substance of the A.I. investing thesis. It was never just about a few semiconductor and technology companies. The exciting prospect of A.I. for investors is its widespread adoption will create material global productivity gains. The long-term beneficiaries of A.I. were (and still are) always supposed to be the users, not the producers, as AI eventually becomes commoditized. The idea is AI could transform the economy like the internet did a few years ago (that is what the proponents say, and it is what the AI-company stock valuations indicate). The next milestone in the timeline of human progress that brought us the automobile and the internet. Some company coming from out of nowhere with a drastically more cost-efficient iteration is exactly how it’s supposed to work. Some new innovation is obscenely expensive (Benz), then someone figures out how to produce it economically (Ford), then every other industry innovates due to new demand and/or cost savings (Sears) and new industries are eventually created (Amazon). A new company finding a way to drastically reduce the cost of A.I. is a bullish development for the long-term investor.
Well, bullish for the diversified long-term investor. Monday is a reminder of why we don’t try picking stocks. The global economy is far too dynamic and innovation far too fast to consistently pick the winners. Many of the companies that returned astronomically the last two years opened the day in an instant 15%+ drawdown due to a weekend headline. Whether they will continue their drawdown or rebound to new highs is unknowable to everyone and blissfully irrelevant to the diversified investor. If you could go back to the first half of the 20th century, you wouldn’t just want ownership in Ford. A portfolio with exposure to Ford along with all the companies that leveraged his innovation is preferable. Automobiles turned into a horrible business as competition squeezed margins. Ford’s last reported profit margin is sub-2.5%, and Ford stock has returned -18.91% (yes, that’s a negative sign) since the turn of the 21st century.[iv] It was the users, not the producers, who most benefited from Ford’s innovation. Rather than trying to pick the winners in the stock market at a given time, we prefer portfolios that benefit as the perpetual motion machine of economic progress inexorably grinds on.
Sean Cawley, CFP®
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This commentary reflects the personal opinions, viewpoints, and analyses of Resolute Wealth Management. It does not necessarily represent those of RFG Advisory, clients, or employees. This commentary should be regarded as a description of advisory services provided by Resolute Wealth Management or RFG Advisory, or performance returns of any client. The views reflected in the commentary are subject to change at any time without notice.
[i]https://lsintspl3.wgbh.org/en-us/lesson/1950s/
[ii]https://www.fastcompany.com/91267354/deepseek-explained-china-llm-chatgpt-nvidia-microsoft-stock-ai-rattled
[iii] YCharts
[iv] YCharts