Growth is difficult to assess with any precision, so investors tend to overpay for it. You can buy the best company, but if you overpay you will not make any money. For example, researchers at the Darden School of Business examined a portfolio of high-growth companies, comparing it with that of low-growth companies over the period 1968 to 2007. They found that the low-growth stock portfolio, on average, outperformed the high-growth stock portfolio by 22 per cent per year.
Bubbles and their chances of bursting are difficult to see until it is too late. They need a catalyst to burst – and historically, the most frequent catalysts have been rising inflation and interest rates. Bubbles, and related exuberance, encourage large amounts of borrowing and margin investing, both of which suffer when rates rise.
We should never forget AI involves machines not people, and can be inaccurate, incomplete or biased. In my opinion, AI and machine learning will not be able to replace investor insight and “between the lines” reading of nuanced economic numbers, will not significantly reduce the demand for labour to the extent markets expect and will not be the panacea about profitability expected by the markets.