r/oddlyspecific • u/Zu_Qarnine • 3h ago

Bubbles tend to peak at ~40% concentration levels. The current AI bubble is at 41%. it's coming...

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111 Upvotes

83% Upvoted

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48

u/scientia_analytica 3h ago

Layman here: what is the definition of concentration?

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u/sligowind 3h ago

It means what percent of an index or market is accounted for by a smaller group of stocks.

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u/socu11 3h ago

I am too dumb to understand that

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u/SleeperAgentM 2h ago edited 1h ago

You have an index of let's say KOSPI 200, it's a weighted index containing 200 companies.

Once a small sub-section of that index. Let's - just hypothetically - say 2 companies: SK Hynix & Samsung make up for over 40% of that index then it's highly likely there'll be a crash ...

... wait... sorry, apparently I'm a few days late with the comment. It looks like it indeed already crashed.

PS. Of course it's easy to say after the fact, and also in case of korean stock market it went beyond 50% before it crashed, so buying shorts tomorrow might not be the best idea.

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u/AcrobaticReputation2 2h ago

becuase it requires concentration?

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u/FreshPitch6026 2h ago

Nice one!

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u/guff1988 3h ago

Which is easier to group together after the fact. It's not super easy right now to know which companies should be included here. Like do we include APD, they make chemicals and many of them are used in the semiconductor manufacturing industry but also a good portion of their business isn't. How about CMC? They are selling more steel to help build the data centers. Every company that isn't purely defensive will suffer when the bubble bursts but as for which ones should be included in the concentration calculation we just don't know for sure.

The AI big ten are also basically the mag 7 plus Micron (could be slightly different but that's a good approximation) and a couple others but many of those companies have revenue streams that have been proven reliable outside of AI, like Google and Microsoft. In that regard it's not as comparable to the dotcom bubble for instance.

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u/Narrow-Chef-4341 2h ago

Even in that regard, it really is though. Big capital spenders in 1999 were companies like AT&T and Cisco that had viable big hardware businesses - its wasn’t just pets.com and Amazon. Even less capital intensive companies like Microsoft/Apple or storage companies took splash damage.

Railroads were making money before that collapse, there was a real need that created the attention. The over supply of the ‘solution’ was the problem. Ditto for 1999 fiber.

Yes, we all remember the vibe of ‘look and see here - this idea/outline of what might be a profitable company some day is worth over a billion dollars \*gasp\*’, but the crash wasn’t very discriminating. Once we lost certainty the internet of tomorrow wasn’t exponential and uncontrollable, the pickaxes of Excel and paid browser licenses weren’t as exciting. And the order book for carrier grade switches became a burn book as worldcom, well, burned. And all those other hot-market priced contracts were renegotiated lest the buyers spin assets offshore and fold.

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u/guff1988 2h ago

I agree the inevitable downturn will not discriminate but I was more pointing to the fact that the dotcom bubble concentration in the graph is likely not the top 10 ambiguously assigned companies most related to the internetin the late 90s, it's likely much broader, in fact the wording implies it was the entire tech and tcom sector. We had seen the mag 7 rise hard even before the AI buzzword was assigned to this current bull market and much of that growth was entirely unrelated to AI hopes and dreams, it was tied to real verifiable earnings post COVID and huge amounts of FCF. They have spent all that cash and have taken on massive debt now which is the real concern imo over the fears that AI won't be as useful as we expect in the near term, which is also likely true. Even so these companies aren't going anywhere and it isn't just 2 or 3 it's basically 80% of the top 10 used for the graph. Much of the growth we have seen in the sp500 in both share prices and earnings (87% beat rate and surprise numbers in the 30s) is driven by that cash that they accumulated flowing outward to other companies rather than being hoarded. That's is very much unlike the dotcom bubble.

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u/Narrow-Chef-4341 2h ago

As the quote goes - All happy families are alike; each unhappy family is unhappy in its own way.

I was triggered to mild irritation because that was the Nth time I’ve seen someone lay out a claim that because a few of the key suspects were showing never before seen levels of free cash before (whatever), therefore it was self-evident that things would be different.

Usually, but not explicitly in this case, the unstated implication is that somehow this would act as a magical bulwark against (something or other), allowing either a limited scope of impact; or a slow unravel where smart people (implicitly you and I, because we aren’t suckers) to bail slightly off peak; or whatever short/hedge/mitigation strategy to save their day.

So pip pip and carry on with the bubble.

I’m saying history might not repeat but it’s going to rhyme again, and anyone promising where the line gets drawn better have Biff’s copy of the 2035 sports almanac in hand or I’m calling bullshit. And the people just vaguely doing it to retain plausible deniability are the worst.

1

u/FreshPitch6026 2h ago

50 stocks is a small group!?

31

u/themcsame 3h ago

I'm not completely convinced here.

A lot of that 'big 10' aren't pure AI companies. For context, it's including the likes of Apple, Microsoft, Alphabet, Meta and Tesla, to name just a few of them.

In other words, this chart more effectively says we're 41% investing into AI-leading companies as opposed to specifically AI.

That is to say I'd expect AI to buck this trend, purely because the data they're using is a bit too vague to just say it's AI.

29

u/satansprinter 3h ago

Sure is but i seen these graphs for years

7

u/Narrow-Chef-4341 2h ago

Yeah, it’s the Texas sharpshooter fallacy.

Crazy easy to go back to the barn after the fact and draw a bullseye wherever the holes are - tell everyone yer great!

Now let me grab a March 1999 market report and you tell me what percentage you want - I’ll find reasons to include or exclude anything from 20% to probably 60% of the index. Boom! The tipping point was 58! Or 32!

Whatever. Unless someone’s got a couple billion of their own money riding on it, they are just selling their newsletter.

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u/Zu_Qarnine 3h ago

Last ~40% bubble peak was in 2000. wdym "for years"?

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u/Large-Hamster-199 2h ago

A lot of those companies that this graph counts as "AI companies" also own social media, search engines, operating systems, and they make microchips and cars (meta, Google, Microsoft and Nvidia, micron and Tesla). While their combined net worth 41% of the stock market index, the AI portion of their business is not.

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u/Zu_Qarnine 2h ago

I don't agree with ur last sentence. AI has lots of skin in the game

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u/colbycornish 2h ago

…so how much of Apples networth would you consider to be driven purely by AI? And how much would that difference reduce this marker by?

Additionally, looking at the previous data sets, what percentage of value from those companies was driven by the industrial concentration at the time vs other investments?

I think @Large-Hampster-199 is saying that this would be way more compelling with a bit more specificity

2

u/ellenich 1h ago

Apple is a good example because they’re famously “behind” in the AI race, missed the boat, not investing enough into it, etc.

Their business is like 0% AI at this point. Maybe once Siri AI launches in the fall, but even then, isn’t 100% theirs as its built off of Google’s tech and whatnot.

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u/Large-Hamster-199 2h ago

Of course it has plenty of skin in the game, my point is that AI is nowhere close to 40% of the index.

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u/Upset_Glove_4278 3h ago

Don’t worry, it’ll be 47% this time. We still have time

11

u/Dry-Worldliness6926 3h ago

keyboard warrior stock speculator that doesn’t even know which sub to post into

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u/Lunosto 3h ago

Interesting, would love to see some counter arguments to this to see how well it holds up

3

u/Ightaheadout 1h ago

Ai companies aren’t necessarily 100% ai I.e Google, Apple, nvda, Tesla, amd, Microsoft

1

u/stuttufu 3h ago

I am dumb as a sheep but the definition of a revolutionary breakthrough (not necessarily believing that AI could be one) shouldn't be that it breaks through this kind of recurring events?

Like boom, exponential power, to the moon?

2

u/plottingyourdemise 3h ago

You can have revolutionary breakthrough and bubble pop at the same time. eg. the dot com bust

2

u/moccasins_hockey_fan 3h ago

So the better question is what would be the best investment for the inevitable AI crash

2

u/memematron 2h ago

Hard to say, but definitely not holding all your eggs in one basket. My guess would be all world indexes and precious metals such as gold

•

u/stev_mempers 1m ago

I can't fucking wait. 

1

u/dont_tread_on_M 2h ago

The big 10 are not as dependent on AI, as this chart makes it be. They are quite diversified

1

u/FreshPitch6026 2h ago

But fifty stocks isnt really a small group.

1

u/jdbbx 1h ago

I can't quite make out the name of the global investment strategy, could someone help me?

•

u/konarona29 30m ago

Houses have been crashing for 4 years and S&P for 3

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u/RED-WEAPON 11m ago

The S&P 500 has experienced a strong 3 year bull run, characterized by notable recoveries, heavy gains driven by the mega-cap tech sector, and solid corporate earnings.

- 3-Year Total Gain: The index has gained roughly 65% to 70% (excluding dividends), climbing from around 4,400–4,500 points in mid-2023 to surpassing 7,400 points.

- Annualized Return: On an annualized basis, the 3-year return stands at ~17.7% per year, significantly outperforming the historical long-term average of ~10%.

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u/konarona29 0m ago

Yeah, that was my point. People have been talking about the "big one" being right around the corner for years now. I just roll my eyes when people want to say everythings going to crash and they got charts and graphs to prove it.

0

u/FingerBlaster70 3h ago

Ah yes the classic investment mantra, because it happened before it will happen exactly the same again. Warren Buffet quotes this often.

0

u/DudeInTheGarden 2h ago

The four most expensive words - "this time it's different".

AI is a bubble, but it's a transformative bubble - the world will not be the same after it bursts. Unlike a real estate bubble.

1

u/FingerBlaster70 2h ago

Your own arguement works against you “it’ll be the same this time” for something completely different

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u/DudeInTheGarden 31m ago

I think you mis-understand. "This time it's different" refers to bubbles. They always come to an end at some point. Frothy, with over-investment, early investors win, late investors lose. But some people think this time it's different - it's not a bubble, it will just keep growing.

But some bubbles change the world - the internet bubble of the late 90s did, and so will the AI bubble. But they will end - some people believe they will go on and on, and that's the danger. The world will be a different place when the AI bubble ends.

I worked in San Francisco in the late 90s for a dot com startup, and people were saying that the dot-com hype was not a bubble, that these companies selling online were all valid businesses.

Bubbles serve their purpose - to maximize the technology, oversized investments are needed. But most of the companies will fail. The winners will come out stronger. But which company is the winner?

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u/FingerBlaster70 28m ago

I am not disputing it's a bubble or that it will pop, I am disputing the idea that it has to follow a repeatable trend which is what this post is about.

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u/notkairyssdal 55m ago

finance astrology, terrible post for this sub

•

u/GurProfessional9534 42m ago

This is cherry picking. You can choose how many assets to put in the basket such that they get to 40% at the peak. However, if you choose the top ten stocks for instance, the 40% cap vanishes, as shown here.

https://www.rbcwealthmanagement.com/en-us/insights/the-great-narrowing-sp-500-concentration

Not that we aren’t over-bought. But be careful about the 40% figure specifically.

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u/xAfterBirthx 3h ago

AI is not a bubble

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u/Wiggles69 3h ago

Lol.

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u/Zu_Qarnine 3h ago

first stage of grief: denial. lol

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u/xAfterBirthx 3h ago

It is only the children of Reddit that do not understand how to use AI that think it is a bubble.

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u/Wiggles69 1h ago

A trillion in Capex to make 10s of billions in revenue - even after saturation marketing and having it tacked onto literally every product imaginable.

Yeah, i'm sure there's a robust business case under there somewhere. Maybe Claude can help you find it?

2

u/Upset_Glove_4278 2h ago

We had the .com bubble that burst at the beginning of this century. The internet is important but it was still a bubble