Few Win and Even Fewer Survive

Hype Trains Always Pick Up Speed

The beginning of the 1900s sparked a transformation that would change the U.S. forever. Cars were still a luxury, but in 1908, Henry Ford’s assembly line and “any color as long as it’s black” (because black paint dried the fastest) made the automobile affordable to the average person. Aviation first took flight in 1903; by 1908, the Wright brothers were making their pitch to the U.S. military. Telephones, electricity, and natural gas all had significant impacts on our economy. After the first transcontinental railroad was established in 1869, the rail network and its economic impact grew exponentially. By the 1920s, it is estimated that there were 1500 publicly traded railroads in the U.S. Today, they are still the most cost-efficient means to ship goods long distances, even after more than 150 years. However, if you were a long-term railroad investor in 1900, it didn’t work out so well.

By 1940, the roster of Class 1 railroads had declined from about 400 to 132. In 1960, the number dwindled to 100, and now there are only 6. Unless you were extremely lucky to choose the right railroad, mergers and bankruptcies were in your future. A 1902 issue of The Commercial and Financial Chronicle (I have a PDF of the May edition) listed about 217 publicly traded railroads, plus about 100 street railroads. San Francisco may be the only street railroad remaining, moving people around the city. Denver City Tramway Co. was quoted at $83 in 1902, and at its peak, it had 250 streetcars. It is safe to say the automobile was not a friend to the street railways. By 1950, Denver City was down to about 50 cars, and its assets were eventually sold to what became RTD. Union Pacific also appeared in the 1902 paper. Unless you were fortunate enough to invest in one of the few surviving railroads, your railroad investments left you with about enough money to buy a pass on RTD. Of course, there was money made along the way on railroads, but the Great Depression spurred the beginning of bankruptcies and consolidation. It evolved into a very difficult time for investors. There appears to be a lot of similarities between the railroads of a century ago and AI today.

Most Don’t Reach the Destination

AI is only going to become more important to the economy. Who the ultimate survivors will be, and if they will earn an attractive rate of return on the massive amounts of dollars being deployed, is the question. The October 23^rd edition of the Wall Street Journal exposes some real concerns that are developing. It highlights the increasing ‘circular’ nature of the AI ecosystem. An example illustrates how Nvidia is investing $100 billion in OpenAI, and in return, OpenAI will then buy millions of Nvidia’s specialized chips. Nvidia also owns 5% of Core-Weave but then sells chips to Core-Weave. Furthermore, Nvidia has committed to buying any unsold cloud-computing capacity from Core-Weave through 2032. This sort of sounds like the railroad robber barons of the late 1800s, but this is all legal. Just because it’s legal doesn’t mean you should invest.

AI is undoubtedly going to make our economy more productive, just like railroads, electricity, airplanes, and automobiles did in the past. This means you should not buy into AI at any price; it will be extremely difficult to pick the winners. The challenge with AI today is that everyone wants to get in, and prices have been driven very high. Using Microsoft Co-Pilot, ChatGPT, and Perplexity is free at the basic level, so it is hard to connect the dots as to where they are going to make enough money to justify their spending hundreds of billions of dollars. Wait, just ask AI! The world is going to get some great dividends from AI; medical research is only one potential game changer. It will make the economy more productive, and maybe (we can hope) it will help pay our national debt. However, there are risks with AI. Video and audio can be fabricated to misrepresent the person copied. AI is not perfect, and now you must be even more cautious with anything regarding your money.

AI did not write this article, but while doing research using the same search engine and the exact same question, it produced three different variations for an answer. Trust but verify.

Observations on the Market No. 412