| Weekly Roundup Hello, Reader. Good castles have several common characteristics. An advantageous location… like a high ground with a clear view. Natural features… like a spring or a river. And strong defenses… like a moat. Good companies also have several defining aspects. And it may surprise you that a “moat” is one of them. Companies aren’t building water-filled ditches outside of their headquarters, of course. Instead, their needed protection, to use Warren Buffett’s famous term, is a robust “economic moat.” Here’s the “Oracle of Omaha” himself… A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital… The dynamics of capitalism guarantee that competitors will repeatedly assault any business ‘castle’ that is earning high returns…
Therefore, a formidable barrier such as a company’s being the low-cost producer… or possessing a powerful worldwide brand… is essential for sustained success. According to Buffett, an effective moat not only protects a company’s profitability and market share during difficult economic times, but also enables a company to expand its “fiefdom” and profit margins when the economy is doing well. Buffett even goes so far as to say that he wants to see “sharks” in the moats of the companies he owns. Looking back at the dot-com era of the early 2000s, it is easy to see that many of the “high growth” stocks at the time never possessed a true competitive moat. Nor did they possess the financial strength that would have enabled them to build a moat. As a result, they simply disappeared. Many of today’s “leading” artificial intelligence plays find themselves in a similarly vulnerable position. Even those that possess a “proprietary” AI-enabled technology or platform may be facing stiff competition from companies with comparable tech… and better moats. Sure, some companies can be great investments while they are in the process of building their moats. But until that moat is full of water and providing protection, they are vulnerable to competitive assaults. Therefore, if you want to be more selective about your new investments, pay attention to the moats those companies possess… or don’t. The stock market’s lofty average valuation raises the risk profile for all stocks. If today’s high valuations start to lose elevation for any reason, that trend will clip the wings of the entire stock market… at least for a while. That said, the world-altering potential of AI is offering once-in-a-generation investment opportunities. Our mission, therefore, is to capitalize on those opportunities as prudently as possible. Sometimes, that will require investing directly in AI-focused companies, even those that may not yet have completed their moats. Plays with this profile will offer the greatest potential, but also the greatest risks. Therefore, as I have explained here at Smart Money, I believe it prudent to invest in two other types of stocks… - Companies that are applying AI technologies to their businesses, rather than creating them.
- Companies whose business AI cannot easily, or ever, replace.
To repeat what I stated in the July issue of my service Fry’s Investment Report… One of the best ways to invest in AI may be to invest in what it isn’t. Instead, invest in the industries or assets that AI could never replace.
No matter how intelligent AI becomes, for example, it will never morph into timberland. It will never sprout into a lemon tree or transform itself into an ocean freighter, platinum ingot, espresso bean, or stretch of sandy beach.
A select few industries are so “future-proof” that they deserve our attention… and a place in our portfolios…
These are things that an AI-centric world will require, no matter how intelligent it becomes.
A short list of examples might include industries like…
- Shipping
- Cosmetics
- Lumber
- Energy Generation and Storage
- Travel
- Sporting Goods
- Rail Transit
- Agriculture
These industries might not be completely future-proof from the onslaught of AI, but they are at least close to it.
In the list above, I included “Energy Generation,” but did not name any specific type of energy. However, in my recent October issue of Fry’s Investment Report, I recommended a unique energy play that stands to benefit directly from the growth of AI technologies. It is an ETF that holds a broad portfolio of uranium companies – both those that are currently producing, and those that hope to being producing in the future. You see, thanks to a revival in nuclear power, a new bull market in uranium is underway. To learn more about my latest recommendation, click here to learn more about Fry’s Investment Report today. | 
No comments:
Post a Comment