This month, Peter and Jeff dig into the AI question everyone’s arguing about: Is this the internet in 1996 or the internet in 1999? They get into how the winners and losers may shake out, what AI could actually do to the broader economy and why oil prices are swinging. Plus, get their tip of the month. Twelve minutes, straight down the middle.
Hosted by Creative Planning’s Director of Financial Planning, Jeff Stolper, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!
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Transcript:
Jeff Stolper: I’m Jeff Stolper, Director of Financial Planning and Creative Planning. With me is Peter Mallouk, President of the firm, and we are Down the Middle.
In anticipation of today’s episode and related to what we’re covering, I actually had AI put together my intro. Peter, you want to hear it?
Peter Mallouk: Well, why not?
Jeff: That was excitement. Welcome back to the show, where we try to make sense of the markets, so you don’t have to explain your portfolio to your spouse or significant other. Today, we’re asking the big question, is AI the next internet or the next Beanie Baby? Chip stocks have suddenly forgotten how to go up, oil prices are acting like they just had three espressos and Wall Street can’t decide whether we’re headed for a boom or a timeout.
Peter: If I got an email like that from somebody, I would know it was written by AI. There’s just so many flags in there.
Jeff: All right, so we’re covering AI, and is it a bubble? And then, also we’ll give you a quick update because there is volatility in the oil sector as well. Let’s start with AI. Peter, one big question right now, we’ve just seen so much of up and to the right in terms of AI stocks. Is it a bubble?
Peter: That’s the headline in the media is the AI bubble and overbought and so on. I really don’t see it that way. I look at it very much like the internet revolution from a little over 25 years ago. And with the internet revolution, you had companies like Excite and Lycos that don’t exist anymore, and Yahoo that maybe disappointed that was the early winner everyone assumed. And then Google, it showed up and wound up becoming one of the most valuable companies of all time and still growing very, very fast as if it’s a small company. And you had everything from Pets.com… If you could get internet in your headline, things did really, really well.
And I think the AI is very similar. I think, like the internet, AI is going to transform the world completely, the way we do business, the way we communicate. It will have positive implications. It will have extremely negative societal implications. Again, just like the internet. And there are going to be mega, mega winners. Will they be companies like Anthropic and OpenAI? Or is one of those really Yahoo? Is one of those Lycos? Is one of them Google? It’s too early to tell. Nobody knows.
And you have the companies that make the picks and shovels, like Nvidia, that make everything go, and you wonder about those companies. Do they really have moats? Yes, there’s massive demand, but will other companies be able to make their chips and meet the demand at some point? And who is actually going to have a moat that protects their business? If you think about Apple today, for our listeners that don’t know what we’re talking about, like with Apple, Apple has a moat. If I asked you, “Hey, will you give up your iPhone or one of your fingers?” People laugh at that. But I think 90% of people, if they were told, “It’s your iPhone or a finger,” would give up a finger.
That’s how much of a moat Apple has. People are just so used to this entire ecosystem. They’re on their social there, they’re getting their music there, they’re getting their news there, they’re communicating there. It’s a very symbolic part of their world. The vast majority of people have their phone within eight feet of them almost every minute of their entire life. And so that’s a moat, right? It’s going to take a lot to break that moat.
Does OpenAI have a moat or will one of these be a winner take all like we saw with search engines, for example? Or will there be multiple winners? Picks and shovels, those are the companies that kind of make everything go. Nvidia’s selling chips to everybody. They don’t care if it’s Amazon or Microsoft or Google or Meta, but other people are making them, too. And at some point, supply will meet demand and prices may come down.
So very, very hard to make stock picks in a market like this. And AI also impacts everything else. So, every other company, one way or another, is impacted by AI. Maybe the way they’re communicating with their clients, maybe the way they’re meeting prospective clients, maybe the way they’re handling internal communications or the CRM that they’re using, or how efficient they can operate, all of these different things.
And so the market’s trying to guess who’s the winners or losers. Now we’re seeing some very clear early losers. It used to be the safest part of the market was investing in United States, big technology companies that had recurring revenues based on subscriptions. So think of Oracle or Salesforce where somebody pays for a CRM in their business, a client relationship tool in their business. At Creative Planning, we use Salesforce, and every month we pay a certain dollar amount for every single one of our employees, and every year it goes up, and every year we have more employees. So of course companies go, “Well, I’d love to replace that.” But no one would replace it because the moat was significant that you’d have to upset all your employees by moving everything. You’d have to have another place that could handle it just as well and where the cost would be better, too expensive to build on your own.
Well, now with AI, a lot of people think people will build their own. They’ll be able to use AI agents to build their own CRM and save a ton of money that’s recurring expenses, which is the number one cost a business wants to get rid of, isn’t it, a recurring expense. So you see tax subscription software, legal subscription software, medical record software, companies like Salesforce and Oracle, down 40% to 60% to 70% because the market’s making an early judgment that they are not going to be able to survive this, that people will use AI to replace them.
You see other companies benefiting from expected synergies, like they will be able to do things more efficiently, like companies that have big call centers. Well, AI agents will actually solve problems faster and better and leave clients happier and cost much, much less. And so, they’re starting to see the benefit.
And you’re seeing people bet on who may be the winner-take-all companies like an Anthropic or an OpenAI or so on. But it is way too early to tell how this plays out. But the good news is, like with the internet revolution, it results in economic expansion and the diversified investor is going to win. There’s going to be negative years, probably like always, one in four years. But overall, it will make companies more profitable as a group. So the diversified investor can expect to be a winner. The one placing bets can expect to be very surprised, at least with a few of their bets one way or another.
Jeff: I’ve had a couple experiences where I had total recognition that AI is going to disrupt a lot of things, all the things that you just mentioned, software costs, how people run their business, all of that. But the one for me, I was at my son’s baseball game recently and one of the dads had used AI to build this piece of software very quickly where he could track stats for all of the kids, which is an amazing use for it, but it made me realize, “This is really, really going to be a disruptor.”
And I think you’re seeing that within the market, too. You’re seeing, as you mentioned, all of these stocks that you wouldn’t otherwise think would be disrupted initially be disrupted. So where do you see it going from here? Is it best to be diversified and not pick the one horse and instead pick the whole race?
Peter: Like Bogle said, “You quit looking for the needle in the haystack and you buy the haystack.”
And when people say, “Oh, the S&P 500’s done better than the rest of large US cap stocks because Nvidia did so well, and before that Google did so well, and before that Apple did so well.” Well, that’s actually the point is you catch the thing that goes up a couple thousand percent, it lifts up the overall return and you crush most of the alternatives.
I saw this recently with an update I just did recently on my bet with Mark Cuban where he said, “Only an idiot would diversify. We’ve got all these stocks, just pick the two stocks that are going to do the best.”
And we went back and forth, and I took the S&P 500 and said, “Hey, if I was going to have large cap investments for myself and my clients, I’d use the S&P 500.”
And he said, “Well, only a fool would do that. I choose Amazon and Netflix.”
And this was a little over five years ago, so we just went through the five-year update. Amazon and Netflix are amazing companies. They’re two of the most successful companies of all time. They continue to grow. Their client base has widened, their profits have gone up over the time of this bet. But at the halfway mark, at the five-year mark, the S&P 500 is crushing Netflix and Amazon by such a wide margin that it looks very difficult for it to catch up.
Why? Because in the S&P 500, I’ve got the benefit of getting the Nvidia and whatever’s going to come next. And I think that’s the benefit of the diversified investor. Most people would be surprised to know the majority of stocks perform worse than a treasury bond, worse than just a couple percent. You really need to capture those high-flyers to be a winner.
Jeff: And very hard to pick which one of those stocks is going to be a high-flyer.
So very different story when we shift gears a little bit to oil. AI is going to impact people one way. Certainly oil, the price of it and how it performs absolutely impacts people. Why don’t you give us a quick update? We talked about this, call it four or five months ago, but we continue to see volatility in the sector and that’s hitting people in real, real life. Is this more of an event-driven thing still, or do you see it more of an indicator?
Peter: I think oil’s been fascinating because you just almost flipped a switch on January 1, and it just behaved completely differently. And the reason I think for that is several fold. One is a lot of people were like, “I don’t know what is safe with AI anymore. Can I invest in Oracle and Salesforce? Are those going to bounce back or not? Are companies like Google? Are people going to quit searching there and go to Claude and ChatGPT? Who are the winners and losers?”
And so some people said, “I’m just going to go to a place where I think it’s kind of safe and AI is not going to ruin this business. I’ll keep making money and I don’t need to get the grand slam, but I don’t want to strike out.” And oil companies became a place you could curl up in a ball in a corner with your blanket and be generally pretty safe. Probably AI was not going to replace oil. They might make the oil companies more efficient, but they’re not going to make the company go away.
So you add that factor in this space, but of course nothing impacts it more than the supply and demand and the price of oil. And of course, what’s happening between Ukraine and Russia was not helpful. And the market looked at that and said, “Okay, not helpful. The price of oil is going up. We see some disruption. Russia’s a big producer. U.S. is a big producer.”
But it bet, the price of oil was telling us there was a bet the war would stay contained and hopefully someday resolve. Then you add the conflict between the United States, Israel and Iran. Now we have a much bigger impact on oil. Again, one of the biggest producers and controlling a channel that drives a large percentage of this. So we’re seeing the price of oil up and a lot of pressure pushing it upwards that’s very real.
But again, the market’s betting the war will stay contained and eventually reach a resolution. Now, is the market right? I don’t think anyone would’ve guessed we’d still be dealing with Russia and Ukraine at this point, especially after Trump campaigned so much on ending that war. I don’t think anyone expected what’s happening with Iran to continue this long, but the market keeps going, “Okay, we were wrong, but we still just think a few more months.”
If it really thought this was going to go on for another year or two or spread, we would see oil prices go much higher. To your point in your question about oil impacting everybody, some people think, “Oh, well, it impacts me going to the gas station,” which is something that impacts most people.
But it actually impacts everybody, as you said, because if you go to a restaurant or a grocery store and buy vegetables or a cheeseburger or whatever, that had to get there somewhere. It was in a vehicle that uses oil. And so, oil is in so many products that people don’t think about, and it is delivering everything everywhere. It’s like a tax on everybody.
And so, we want prices to come down because it makes it easier for Americans to run their households instead of having this implied tax increase across everything that they’re purchasing. It’s a very negative function of the economy. And if either of these wars spreads or is expected to sustain, we would see oil prices go higher, and it could actually by itself lead to a recession even without anything else.
Jeff: Not saying that that indicator’s there right now, but-
Peter: Definitely not right now, but that’s why we pay so much attention to the price of oil.
Jeff: Sure. All right, Peter, let’s move to our tips of the month. What do you have for us?
Peter: Everyone should review all of your beneficiaries. So, you have a life insurance policy. You also might have a life insurance policy through your work. You probably have an IRA, you probably have a 401(k) or something like that through your work, bank accounts, and so on. Look at the beneficiary forms. Just ask to see them. Make sure it’s who you want listed there. It’s such an incredibly negative outcome when someone is not listed as a beneficiary or the wrong person’s there or the person you’ve named you no longer have a relationship with or has passed or so on. Just make sure those are current. How about you, Jeff?
Jeff: Mine is to search for unclaimed properties. So if you’ve had an old retirement account, unclaimed check that’s gone dormant for a couple years, those institutions are required by law to turn over the unclaimed funds to the state, but most often to the treasurer of the state. And they actually keep a repository of all these in one place. So my tip is to go to either your state treasurer’s website or where you have historically lived, or there’s another one that aggregates all of them, www.missingmoney.com, and search for your unclaimed property. You never know what you’re going to find.
Peter: I’ve been in the room where people have done that and found a significant amount of money, so that’s definitely worth doing.
Jeff: What a great way to make your own day. Take the time to do it. I’m Jeff Stolper, Director of Financial Planning at Creative Planning. With me has been Peter Mallouk, President of the firm, and we are Down the Middle.
Disclosure: This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels.
