The purpose of this weekly is to sharpen my thinking by sharing thoughts about industries and companies that fit into powerful long-term investment themes. It is also a place to share insights into decision-making, takeaways from the past week, and random thoughts that arise. Thank you for reading this piece! Feedback is welcomed. 

This week: 

More Prior Era Reflections, Party Like It’s 1995 

More Prior Era Reflections; Party Like It’s 1995 

If AI is a transformational change like we believe it is, it should follow patterns from previous transformational eras. We have already seen and felt the impact of AI on the results of a handful of companies. As we wrote about in prior posts, it is entirely possible that the impact of AI could be significant and there could be pockets of over-enthusiasm right now. 

These are just a few tidbits we have been discussing recently in terms of mindset. 

Emotion will swing more initially and settle in at some point as the picture gets a little clearer. There is a lot of optimism right now, but we could go through a period of the opposite emotion. We see this as almost inevitable, and those who keep their eye on the long term will see the most rewards, we believe. 

A story that comes to mind comes from 1995. I was a technology analyst for an asset manager, and we had both long-only small-cap portfolios and a long-short hedge fund. I was a regular on the technology conference circuit, attending many each year. Robertson Stephens, a technology investment banker and brokerage firm, decided to host a specialty conference in 1995 for semiconductor companies. 

This was unusual, and it was the first semiconductor-specific conference. At least, that’s what I was told by the other more experienced investors. Semiconductor stocks had performed very well in the past few years, and there was a lot of enthusiasm. My very experienced Portfolio Manager wanted me to go to the conference. I sensed that he wanted to go short (borrow and sell the stocks) to profit from a potential drop in prices from what he believed were inflated valuations.

I reported back that attendance was overflowing, and I had not seen many of the investors there on the circuit. The Chief Economist from Texas Instruments (TXN) gave a keynote presentation touting what they saw as explosive growth for the industry in future years, gave a very enthusiastic projection, and was given a standing ovation. 

As it normally goes in the investment world, this level of enthusiasm has poor forward results. Inevitably, investors see the past returns, a straight line the same for the future, and well, things don’t go in a straight line as we know. 

The relative performance of semiconductor stocks for the next few years was not good. There was too much enthusiasm from investors, but also from company managers who overbuilt capacity and the cyclically of the industry reared its ugly head. 

What followed the period of underperformance was a period of growth and significant outperformance because the longer-term positive dynamic hadn’t changed, the timing wasn’t what was expected. I suspect many of the investors I didn’t recognize at the conference got burned and didn’t participate in the key theme. Semiconductors would be needed to build PC proliferation and for networking the PCs. The wild projections from the economist at Texas Instruments came true, just not in the year it was predicted. 

I tap this story because this could very well happen with AI beneficiaries, including semiconductor companies. We will keep one eye on the horizon and one eye on enthusiasm and risk. There could be swings in emotion, but the opportunity could be huge. We believe the ability to observe both will be key. We can have all of these be true: AI is massive, investors get the timing wrong, and emotion swings in both directions. 

Another thing I learned from that period is that being an active listener to the management teams can yield steadiness when emotion is present. Whether we are in a period of euphoria or depression (using the extremes…), companies will be building. What we can control is awareness and be listening for clues about what the future holds for them. We can choose to observe emotion for what it is. The best management teams will keep building and stay in their lane. 

My story

I am an investor and entrepreneur, having started two investment companies. I am the Founder and CIO of ArrowSide Capital (http://www.arrowside.com), based in Boston, MA. I have more than 30 years of experience in the investment business, investing in companies geared toward innovation and growth. The blog is named 

The Zen Innovation Investor because I believe it is so important to remain calm and focused during the rapid pace of change in the world today. I am keeping a view of the long term while also keeping abreast of developments in the world of innovative companies. I view this as a place to sharpen my thinking and provide some insights that are thought-provoking. 

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