Artificial intelligence is rarely out of the headlines. From new AI tools and workplace automation to discussions about productivity, jobs and economic growth, the technology is attracting enormous attention from businesses, investors and consumers alike. And with that attention comes a familiar question:
Could AI be creating an investment bubble?
The truth is that nobody knows for certain.
What we do know is that history offers an important lesson for investors: a revolutionary technology does not automatically make every company involved a great investment.
We’ve Been Here Before
Every generation experiences a technological breakthrough that changes the world. Today, that technology is artificial intelligence. Before that it was smartphones, the internet, electricity and railways. What’s interesting is that many of these technologies genuinely delivered on their promise. Railways transformed travel and commerce, electricity changed how we lived and worked, and the internet revolutionised communication, shopping and access to information. However, while the technologies succeeded, many of the investments surrounding them did not.
The dot-com boom of the late 1990s is perhaps the best-known example. Investors poured money into internet businesses amid excitement about the digital future. In many ways, they were right, the internet went on to transform almost every aspect of modern life. Yet many of the companies attracting the greatest attention, including Pets.com and Webvan, failed completely when the bubble burst.
A similar pattern occurred during the railway boom of the 1840s. Railways changed Britain forever, but many railway companies failed to deliver the returns investors expected.
The lesson is not that investors should avoid transformational technologies. Rather, it is that identifying a technology that will change the world is often much easier than identifying which companies will ultimately benefit most from it.
Artificial intelligence may prove to be one of the defining technologies of our generation. But history suggests that while the technology itself may succeed, not every company associated with it will necessarily do the same.
A Great Technology Doesn’t Guarantee a Great Investment
This is an important distinction that investors sometimes overlook. When excitement around a new technology builds, it can become easy to assume that every business connected to it will benefit indefinitely. In reality, successful investing depends on much more than simply identifying an important trend.
Competition matters.
Valuation matters.
Profitability matters.
Management quality matters.
A company can be involved in a revolutionary technology and still prove to be a disappointing investment if expectations become unrealistic or growth fails to match the enthusiasm surrounding it. It is important to separate our view of a technology from our view of an investment opportunity.
Why We Get Carried Away
Human psychology plays a significant role in investment markets. When a new technology captures public attention, investors naturally begin imagining how large the opportunity could become. Behavioural economists have long studied phenomena such as herd behaviour, recency bias and fear of missing out (FOMO), all of which can influence decision-making during periods of excitement. As Morgan Housel, author of The Psychology of Money, has often highlighted, successful investing is often less about intelligence and more about behaviour. Markets are driven by people, and people are not always rational – that doesn’t mean enthusiasm for AI is misplaced. Far from it, it simply means that excitement and investment returns are not always the same thing.
What Does This Mean for Investors?
For most investors, the rise of AI is unlikely to change the principles of good investing.
Diversification remains important.
Long-term thinking remains important.
Building a portfolio aligned to your goals remains important.
Trying to predict which technology company will be the biggest winner over the next decade is extremely difficult. History suggests even professional investors often struggle to get these calls consistently right. Instead, many investors benefit from maintaining a disciplined approach and ensuring they have exposure to a broad range of companies, sectors and opportunities.
Looking Beyond the Headlines
Artificial intelligence may well prove to be one of the most significant technological developments of our lifetime.
Its potential applications are already being explored across healthcare, finance, manufacturing, education and countless other industries.
For those interested in learning more about the technology itself, the UK’s Alan Turing Institute provides valuable insights into current developments, while the International Monetary Fund’s research on AI and the economy explores some of the potential economic impacts.
But when it comes to investing, it is worth remembering that technological progress and investment returns are not always the same thing.
Final Thoughts
AI may transform industries, create new opportunities and reshape parts of the global economy. But investors have seen similar moments before. The technologies that changed the world were not always matched by investment success for every company involved. The challenge is not deciding whether AI is important but remembering that a great technology and a great investment are not necessarily the same thing. For long-term investors, keeping that distinction in mind may prove just as valuable as understanding the technology itself.