Cathie Wood Warns of Impending “Reality Check” for AI Investors: 3 Key Takeaways for Savvy Investors

Cathie Wood Warns of Impending “Reality Check” for AI Investors: 3 Key Takeaways for Savvy Investors

Cathie Wood, CEO of Ark Invest, is known for making big bets on emerging technology trends. As artificial intelligence (AI) takes center stage as the next big thing in tech investing, Wood is making his opinions clear.

In a letter to shareholders released earlier this month, Wood proclaimed that a “reality check” may be in store for AI investors. I think she’s right.

Let’s examine Wood’s concerns and assess how AI euphoria is fueling broader trends in financial markets. Although there are some underlying risks, investors need not panic. I see many ways to benefit from the AI ​​revolution, provided you exercise prudent financial judgment.

The peak of artificial intelligence fever

After a poor performance in 2022, stocks rebounded strongly last year. The heavy on technology Nasdaq Composite The index jumped 43%, mainly due to positive sentiment surrounding AI talk.

The euphoria continued until 2024, as the Nasdaq and S&P500 have set and eclipsed new record levels this year. The bullish momentum doesn’t appear to be slowing, which could lead investors to think that anything related to AI is a good area to put their money.

Not so fast! Let’s take a closer look under the hood.

Cathie Wood Warns of Impending “Reality Check” for AI Investors: 3 Key Takeaways for Savvy Investors

Image source: Getty Images.

Less is more

The chart below illustrates the 2023 returns of “Magnificent Seven“stocks – a nickname used to capture mega-cap technology companies Microsoft, Apple, Nvidia, Alphabet, Amazon, MetaplatformsAnd You’re here.

NVDA ChartNVDA Chart

NVDA Chart

It’s easy to see that this small cohort of stocks has delivered eye-popping gains. But given that the S&P 500 reported an overall return of 24% in 2023, there’s something more curious at play here.

Essentially, the Magnificent Seven played a major role in the rise of the S&P 500 and Nasdaq last year. Another way to look at it is that most of the stocks in these indexes have either underperformed the market as a whole or have not risen at a level commensurate with that of the Magnificent Seven.

Look for confirmed winners

Every so often, new terminology enters the traditional investing lexicon. Over the past decade, terms such as “metaverse” and “blockchain” have each enjoyed fleeting popularity. I would say that AI follows the same trend.

This dynamic carries a lot of risk when it comes to investing. Where things can get dicey is when investors embrace thematic investing.

On the surface, investing in broader market themes through exchange-traded funds (ETFs) or other passive vehicles seems harmless. However, investors sometimes bypass index funds and try to identify the “next big thing” on their own. This can be problematic as investors often connect dots that don’t actually exist and blindly take a position in a speculative company that is riding the current wave.

Artificial intelligence is clearly the main theme currently fueling technology investments. Given how much money is invested in anything even indirectly related to AI, it makes sense that some stocks benefit from secular trends rather than proven business results.

In other words, many tech stocks are rising for the wrong reasons. Following the hype often carries risks and can leave you as a bag-carrier when the music inevitably stops.

Although real winners are emerging in the AI ​​space, the chart above suggests that the best investments might be a small set. Of course there is many opportunities beyond megacap technology.

Overall, I think Wood is right: a lot of capital has been allocated to AI, but only a small portion of that will be rewarded. If you want to get exposure to artificial intelligence for your portfolio, I suggest looking into passive funds with diversified holdings. Alternatively, you can also hold equal positions in the largest and most proven players in the industry and monitor performance accordingly.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Spatacco holds positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. The Motley Fool holds positions and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Cathie Wood says a “reality check” is coming for artificial intelligence (AI) investors. Here are 3 things smart investors should know. was originally published by The Motley Fool

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