Howard Marks: How to Invest in AI Without Getting Destroyed by the Bubble

In his recent memo “Is It a Bubble?” Howard Marks examines the speculative fervor surrounding artificial intelligence. He observes that “bubbles usually coalesce around new financial developments or technological progress” and notes that “newness plays a huge part in this. Because there’s no history to restrain the imagination, the future can appear limitless for the new thing.”

This dynamic is clearly at play in AI, where astronomical valuations are fueled by transformative expectations.

Marks highlights the critical distinction between two kinds of bubbles: “mean-reversion bubbles,” which merely rise and fall, and “inflection bubbles,” which can accelerate progress.

He references the view that “inflection bubbles based on revolutionary developments accelerate technological progress and create the foundation for a more prosperous future, and they destroy wealth. The key is to not be one of the investors whose wealth is destroyed in the process.”

This frames the central dilemma for investors today—how to engage with a potentially world-changing technology without falling victim to the excesses that typically accompany it.

The memo details numerous areas of uncertainty, from questionable circular deals to the aggressive use of debt.

Marks warns that “debt magnifies losses if there are losses” and that its use in a sector with high technological uncertainty adds significant risk.

He also points to extreme speculative behavior, such as startups raising billions without a product, noting this “lottery-ticket thinking” is driven by the dream of an enormous payoff despite an “overwhelming probability of failing.”

Yet Marks acknowledges the strong fundamentals underpinning some of the enthusiasm, contrasting current valuations with the dot-com era.

He presents data showing that “during the internet bubble of 1998-2000, the p/e ratios were much higher for Microsoft, Cisco, and Oracle than they are today for the biggest AI players.” This suggests the situation may not be as frothy as prior manias.

Ultimately, Marks concludes that while parallels to past bubbles are “inescapable,” the outcome remains uncertain.

He quotes Sam Altman, who said, “Are we in a phase where investors as a whole are overexcited about A.I.? My opinion is yes. Is A.I. the most important thing to happen in a very long time? My opinion is also yes.”

For investors, Marks advises a moderate approach: “no one should go all-in without acknowledging that they face the risk of ruin if things go badly. But by the same token, no one should stay all-out and risk missing out on one of the great technological steps forward.”

The memo “Is It a Bubble?” serves as a balanced guide for navigating a market gripped by both extraordinary potential and familiar excess.

You can read the entire memo here:

Howard Marks Memo: Is It A Bubble?