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In this episode, I’m going to separate two ideas people accidentally glue together:
Idea #1: AI will change the world.
Idea #2: Therefore, the most popular AI stocks should outperform.
This was a common topic for a few of my recent guests, but I’m going to give you a framework for thinking about investing in AI.
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“AI will change the world” is not the same as “AI stocks will outperform”
The key thing to understand about the framework I’m going to share for thinking about AI is that I’m thinking of it as a general-purpose technology—like electricity, railroads, and the internet.
Those technologies don’t show up as one neat product. They show up as a long, messy rollout where the real payoff comes from rewiring workflows, not from a single breakthrough moment.
And you can see the rollout happening in the reports of trillions of estimated dollars that will be spent on AI-related build out. So it’s understandable that people want to make sure they’re either invested in AI companies themselves or have exposure to the companies benefiting from the expanding infrastructure to support AI-related activities.
But it’s unfortunately not that simple.
For starters, the buildout is expensive, and expensive buildouts can crush margins.
When industries are in an arms race, companies spend aggressively—sometimes faster than profits can follow.
Second, creative destruction is undefeated.
The internet changed the world. No debate.
But if you time-traveled back to 1999 and bought the “internet winners” at any price, you learned a painful lesson:
Technology can be inevitable even if today’s leaders aren’t.
And AI is likely to be no different. The winners of the “build phase” are not guaranteed to be the winners of the “use phase.”
So the investing challenge becomes:
How do you participate in the economic upside without pretending you can reliably pick the long-term winners at peak optimism?
Direct vs. indirect AI investing
Here’s the simplest framework I’ve found helpful in client conversations:
Bucket #1: Direct AI exposure — the builders
These are the companies most associated with the AI buildout: semiconductors, cloud platforms, data centers, infrastructure, the tooling.
The opportunity: if AI demand keeps rising, these firms can grow fast.
The risk is expectations. The market is often paying up for “the future,” and the future has a habit of arriving late, unevenly, and with lower margins than people expect.
Bucket #2: Indirect AI exposure — the users
Historically, the biggest beneficiaries of general-purpose technologies are often the broad adopters.
The companies that use the new tool to:
- reduce costs
- shorten cycle times
- improve customer service
- tighten inventory
- and make workers more productive
Over time, that’s often where the profits show up: in deployment.
And this “users” bucket is also where you’re less dependent on guessing which platform wins, which model wins, which chip wins.
You’re simply owning the idea that AI becomes embedded in normal business life.
So if you want the “big point” in one sentence, it’s this:
The steadier bet may be that AI becomes a normal input—and productivity spreads—rather than trying to pick the tool winners.
What this means for portfolio construction
So here’s a few things to keep in mind as it pertains to portfolio construction:
- We want AI exposure–that’s fine—but not AI concentration. Most diversified equity portfolios already have meaningful exposure to the AI buildout through broad market holdings. The danger is turning that into a narrow bet on a handful of names.
- We don’t want to equate economic transformation with tech-stock outperformance. The economy can benefit while profits get competed away for a while—and markets can price in a lot of that optimism early.
- We want to think about the adopters, too—the companies most likely to turn AI into sustained productivity—rather than relying only on the builders.
- We must respect the possibility of AI disappointment. Not “AI goes away.” More like: ROI takes longer, cost of capital matters, competition is fierce, and markets overshoot in both directions.
A good financial plan doesn’t need to make the right call on AI–it really just needs to make sure that it has the direct and indirect exposure to benefit from earnings growth that comes from general purpose technology adoption.
Resources:
The Long Term Investor audio is edited by the team at The Podcast Consultant
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