The IPO Frenzy Has Begun — ft. Howard Marks

You have to accept the likelihood that what you're doing is closer to speculating. And I don't say that word pejoratively than analytical investing.

There's a spectrum which goes from what I'll call analytical investing in prosaic, understandable companies to speculative investing in futuristic companies that can't be described at all. You should calibrate your activities based on where you are on that spectrum. That's the whole thing. And it's very hard to do. This is the hardest thing I think I've ever seen in the investment world because of this enormous degree of uncertainty.

There's no question about the fact, to use Alan Greenspan's saying from about 30 years ago, that we have exuberance. That's the only thing we know for sure. He pioneered the phrase irrational exuberance. The question is, is today's exuberance irrational? Number one, I don't think anybody can definitively say so. And the reason I say that is that I don't think I've never heard anybody tell me exactly what AI will be able to do, or when, or for whom, or how much profit it'll produce and for whom. There's an arms race going on between what you described as some of the greatest companies on the planet. I would describe what we call the hyperscalers as mostly the greatest companies I've ever seen. And they're engaged in an arms race. Can only one win? Is it win or take all? Can several win? Nobody can tell me these things. So I don't think there's an analytical or what we call a value-based way to decide whether or not to participate in these IPOs and if so at what price, wherein, you know, the AI, as far as I think virtually all of us are concerned, is a concept we can't define its parameters. And it's a great concept. It's likely to be the most powerful force any of us have ever seen. But that's, I think, that's all we know. And a decision to participate or not participate and what price to participate at is really, well, it's what my South African friends call a thumbsuck, you know. You can't put numbers on a pad and figure out what these things are worth, which is what value investors like me historically have done.

It does feel like that. We have a technological innovation. I've seen several. I've read about many more over the last, let's say, 150 years. This may be the greatest. This may be the most powerful. It's also in many ways the least specifiable. So the technological innovations I'm talking about, let's just for a starting point, let's say the railroads back in the 1860s, and then radio in the 1920s, the automobile, computers in the 1950s and 60s, internet in 2000. It may be revisionist history, but I think we had a much better view of what all of those could do. They didn't have this unimaginable, unlimited upside that AI has, or the, in my opinion, degree of uncertainty. We knew that the railroad would carry goods and people from coast to coast. We knew that radio would carry messages. We may not have known exactly how they would produce profits or how they would become television, but anyway, all the things I mentioned were accompanied by what we call bubbles. People got excited about developments which were unprecedented. They threw vast amounts of money about building the infrastructure for it. There was a winner-take-all race. There was excitement. There was exuberance. The capital flowed in like water. In every case, too much capital flowed in. I think it's fair to say too much infrastructure was built and prices were paid that were too high and a lot of the people who provided the capital for these bubbles lost their money. I think it's fair to say that those comments have been true in every case that I enumerated. So I wrote in a memo recently this year, and I think it's true, that if this technological innovation with its exuberance doesn't produce a money-losing bubble, it'll be the first. And now it could happen. You know, you can't rule these things out. And, you know, maybe this is a good time for me to introduce the rejoinder of the optimist. What do they say? This time it's different. Okay, that was true about the railroads. It was true about radio. It was true about computers and the internet. But this time it's different. And this time we have a development of incalculable, unlimited value. So this time it's really true that there's no price too high. That's what they say, right? But the problem with that is they always say that this time it's different is never different. And they've said it in each of those bubbles that I mentioned. I think so all nobody, including me, should say definitively that this is a bubble, that the people who invest in these early stages of AI will lose their money, that the people who invest in the companies you named will pay prices that they'll never see again. But you must be alert to the possibility. The way people get into trouble is by not being alert to the possibility.

My favorite fortune cookie says that the cautious hold them or write great poetry. So, you know, investing in these companies today could be a huge error, but it could be great poetry and the people who resist because it could be an error could miss out on the greatest thing in history. And that's what makes these decisions so hard. You know, the people who invest today in traditional industries, in transportation, in distribution, in retailing, in real estate, they don't have for the most part the risk of committing grievous error, but they also don't have access to the possibly best thing in history. So you just have, when you sit here with something that's so young and where the future is so unestimable, you just have to deal with it as a concept or not deal.

In dealing with the future, the way most people deal with the future is by coming up with a forecast. I argue strenuously that if you want to deal with the future, you need two things, not one. You need a forecast and you need a judgment regarding the probability that your forecast is right. So you can make a forecast about the future of AI. You can make a forecast which is optimistic. But I just think if you say this is my judgment about the future of AI, and by the way, I'm highly confident that I'm right, I think you're probably making a big mistake. You know, I've never met anybody who thinks they can tell me what this world is going to look like five or 10 years from now. And so why should any of the young person you described who's starting, who's laying the foundation for his investment portfolio, why should he conclude that he's probably right when all these other people are? We know it could be great. I bet it's probably going to be great. I said in my last memo that in terms of its basic capabilities, my guess is that it's more likely to be underestimated today than overestimated today. But what we're talking about is how much capital should it receive and what is a piece of a company that engages in this activity worth? And, you know, the value investor, the old-fashioned investor like me and my fellow travelers, what we do is we figure out what a company's like, what it, we look at what it makes today and what potential earning power it's building. We try to figure out what its earnings will be in five or 10 years. We put what we think is a reasonable valuation on those earnings, largely related to the earnings potential in the subsequent decades, and then we look at the price today and we try to figure out whether today's price is fair relative to that earnings power. And, you know, I don't think I've ever seen an industry or companies where that is less feasible. You know, if somebody will tell me what they think Anthropic net earnings will be in 2036, I'll bet them that they're not within 50% of the truth. Of course, we'd have to wait 10 years to find out. But if I'm right, how then you and you make an investment in Anthropic stock in the IPO, you have to accept the likelihood that what you're doing is closer to speculating, and I don't say that word pejoratively, than analytical investing. And you have to, there's a spectrum which goes from what I'll call analytical investing in prosaic, understandable companies to speculative investing in futuristic companies that can't be described at all. And you should calibrate your activities based on where you are on that spectrum. That's the whole thing. And it's very hard to do. This is the hardest thing I think I've ever seen in the investment world because of this enormous degree of uncertainty.

Well, that's what we do for a living and historically we have made those judgments and, you know, pretty well. But then since the internet came along roughly 30 years ago, we have a new concept which is extremely important today and that's disruption. You take what I call a prosaic company in a prosaic industry and you say, well, that it's not so futuristic. We can probably anticipate what it's going to look like in five or 10 years from now and it doesn't have these technological things that are going to make it or break it. But then you think a little further and you say, well, let me think about whether that's right. You know, 30 years ago, we have this word in the value investing business or the investment business called a moat, things that surround a company that are protective, that make it less attackable. And historically the value investor, the cautious analytical investor has preferred to invest in companies with moats. So if you go back 30 years ago, what was an example of a company with a great moat? And a great example is a newspaper. And if you owned the newspaper in a given city, it would be hard for a competitor to start up from scratch. The newspaper from another city couldn't compete against you because the used car ads and the help wanted ads and the movie times would all be irrelevant in your city. And it cost a quarter, let's say, so anybody could afford it. And if people bought one today, they'd still have to buy it tomorrow because yesterday's newspaper is already obsolete. So it's a small amount of money that people are going to spend regularly and they're never done buying it. And it can't be, you know, there are reasons why radio couldn't compete and why the newspaper from the next town could compete. That was a strong set of moats and a lot of smart people invested in the newspapers and made a lot of money. Now it's true of the movie industry and other in particular communications industries. But now the newspapers, a lot of them are out of business and they're under profit pressure. So what happened to the moat? And the answer is that the internet and digital communications came along and put a lot of them out of business and gave them competition that nobody thought was possible 30 years ago. So I'm sorry for the length of this discussion, but what can't be disrupted now by AI? Who can't lose their job to AI? I used to say, well, how about everybody says plumbers? Well, maybe a robot can come into your house and with a camera and assess your situation and make the needed repairs. Then I said, sure. Why can't somebody build a robot that can give you a good massage? And so the world has become a much more uncertain place. The probabilities that can be assigned to the future are much broader today than ever. I think that's an important change. When I was a kid, the world didn't change. A comic book was always a dime. New technologies didn't come along that often. We were pretty confident that the world would look the same 10 years later and for the most part it did. But today I think you have to accept that much more change is possible. So the investor has to recognize that he or she is living in and dealing in a much less predictable world.

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