The History of Tech is a Big Warning for Investors in Nvidia, Microsoft, and Other Ai Companies, Says This Story Investor

Terry Smith, renowned as the fund manager overseeing the £23.7 billion ($30 billion) Fundsmith Equity Fund, is often hailed as Britain's counterpart to Warren Buffett. However, he recently navigated a year where his performance fell short of the benchmark, the MSCI World Index. Smith attributed this underperformance to weaknesses in holdings such as Estee Lauder, McCormick, and Mettler-Toledo, among others. Despite this, Smith maintains an impressive annualized return of 15.3% since 2010, standing approximately 4 points ahead.

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In his annual letter to investors, Smith delves into the prevailing dynamics of the stock market. He notes a market consensus that identifies Nvidia as the frontrunner in chip design for artificial intelligence, while Microsoft is perceived as the leading provider of an AI model. However, he questions this prevailing sentiment, highlighting the historical trend of early leaders in major technological developments facing subsequent challenges.

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Smith reminisces about the early leaders in various tech sectors over the past half-century, emphasizing that they did not always maintain their initial dominance. He points to examples like Intel in microchips, AOL in internet service providers, Nokia in mobile phones, Yahoo in search engines, Research In Motion (Blackberry) in smartphones, and Myspace in social media.

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The rhetorical question he poses is significant: "Where are they now?" He goes on to provide a brief status update on these once-dominant players, showcasing how their positions have shifted over time. For instance, Intel is striving to re-establish itself, while Apollo Global Management now owns both AOL and Yahoo after their downturns. Nokia and Research In Motion have exited the phone business, and Myspace no longer exists.

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Despite expressing skepticism about the prevailing market narrative, it's worth noting that Smith does hold Microsoft in his portfolio. Microsoft, following Meta Platforms, emerged as the second-best driver of performance for his fund.

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However, Smith clarifies that even if all the so-called "Magnificent Seven" (referring to the perceived winners in AI and chip design) meet his fund's investment criteria, he would avoid owning all of them due to the concentration risk it poses.

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In essence, Smith's reflections and cautious approach underscore the ever-evolving nature of the technology landscape. While certain players may emerge as frontrunners in the current narrative, historical patterns caution against assuming perpetual dominance. Smith's skepticism prompts investors to critically assess prevailing trends and maintain a diversified approach to mitigate risks associated with concentration in specific sectors or companies.