Prophet & Loss

Whenever someone finds out I’m a financial advisor, they almost jokingly ask me what individual stock they should invest in to ‘hit it big.’ This is the financial equivalent of asking your doctor which essential oils you should use to cure cancer. It just doesn’t work like that. Some are even so bold as to ask me which stock is the next Apple, Nvidia, Tesla, whatever. They want in on the AI craze. So let me break it down from an advising perspective:

When Ford invented the automobile, everyone knew it was the next big thing. So naturally the market flooded with around 2,000 would-be car companies trying to be the next Ford. You know how many major car companies we have today? Fourteen. That means that nearly every investor who bought these individual stocks trying to pick the next Ford lost money – even though they were right. So I’m going to take a page out of Warren Buffett’s book of logic: don’t buy cars, just short horses.

So now we have a shiny new craze on Wall Street: the AI revolution. Some people are in love with it, and some people swear it’s going to morph into a giant sentient monster and kill us all like a Harlan Ellison story. Either way, the prevailing sentiment is that AI is coming for us. So the question is not ‘what is the next Apple?’ The question is simply, ‘how do I profit from this scary new future?’ So let’s look at it through the lens of shorting horses.

Market sectors have something called negative correlation. Think of a seesaw. When one sector is doing well, whatever sector is most negatively correlated is usually doing poorly. When airlines are booming, you can bet that fossil fuels are suffering and gas is cheaper. When the price of gas goes back up and the fuel sectors bounce back, now the airlines are suffering. That’s why we’re always pushing diversification in portfolios. You want to have a ton of seesaws in your portfolio balancing each other out.

So if AI is the next big thing and you’re absolutely positive that there’s going to be a tech boom, what is on the other end of that seesaw? Defensive stocks.

If the tech sector is the evil twin scribbling on the walls and screaming in the grocery store, then defensive stocks are the quiet, well-behaved A-student. Sectors like utilities (think power, water, and gas) are typically the most negatively correlated to technology. You know what else is defensive? Healthcare. Consumer staples. Scary, right?

So what do we do? If I were your advisor, I would tell you to diversify as much as possible and then I’d look at your portfolio to see where there might be a safe opportunity to grab some upside potential in the tech sectors. But I’m not your advisor, so I don’t care. Short healthcare and utility sectors and try to rake in the cash while the world burns.