Bob Desmond: Be cautious of hot themes like AI (and 2 high quality stocks you should look at instead)

LiveWire11-22

Note: This episode was recorded on Thursday 31 October 2024. Back in September, at Livewire Live 2024, Claremont Global's Bob Desmond argued that we may have reached peak AI - and that investors would...

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And the early investors always make really good money from these themes,\" he explained.You can go back to the railroads, you can at the dot.com boom, lots of areas where you have a life-changing technology, but the investors or speculators who come in late when that turns can often lose a lot of capital. So I think this is quite well through. And the second thing I'll just caution on is the capital cycle. So whenever you get hype, a lot of capital will come into a sector which inevitably lowers returns, that's just the laws of economics. So I think it's just history. 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And the early investors always make really good money from these themes,\" he explained. \n\"But what tends to happen over time is the hype really, really builds up. Warren Buffett's got a great expression, 'What the smart people do in the beginning, the fools do in the end.'\" \nThere are many examples of hype around new technologies throughout history, like the railroad boom and the dot com bubble - but investors (or speculators) who join the party late are often unrewarded for their risk - or worse, lose a lot of capital. \n\"Whenever you get hype, a lot of capital will come into a sector which inevitably lowers returns, that's just the laws of economics,\" Desmond said.  \n\"I think if you are involved, just be very careful around that.\" \nIn this episode of The Pitch, Desmond outlines why investors should be cautious of the AI theme right now, how he thinks about valuation, and where he believes investors should be looking instead. \n\nEdited Transcript \n\nAlly Selby: Hello and welcome to The Pitch brought to you by Livewire Markets. I'm Ally Selby and in case you missed it, we had an amazing investor event a few months ago called Livewire Live. During the event, Bob Desmond from Claremont Global told investors that they should be avoiding hyped themes right now, particularly AI. So where should investors be looking instead for opportunities? To find out, we're sitting down with Bob for an episode of The Pitch. Thanks so much for joining us today, Bob.\n\nWhy should investors be avoiding hype themes right now, particularly AI?\nBob Desmond: I think there were a lot of very smart people some years back that picked say something like Nvidia (NASDAQ: NVDA) and could see what was coming down the pipe. And the early investors always make really good money. But what tends to happen over time is the hype really, really builds up. And I think Warren Buffet's got a great expression, 'What the smart people do in the beginning, the fools do in the end'. And history is littered with so many examples of changing technologies. \n\nYou can go back to the railroads, you can at the dot.com boom, lots of areas where you have a life-changing technology, but the investors or speculators who come in late when that turns can often lose a lot of capital. So I think this is quite well through. And the second thing I'll just caution on is the capital cycle. So whenever you get hype, a lot of capital will come into a sector which inevitably lowers returns, that's just the laws of economics. So I think it's just history. I think if you are involved, just be very careful around that. You need to have a very good grasp of the technology, we don't profess to, and be very clear about your valuations.\nOn valuation, how do you think about it and should investors be paying up for stocks with serious momentum behind them? Like what we've seen with Nvidia? Or should they be looking for mispriced opportunities elsewhere?\n\nI mean, obviously, we are quality investors and we do put a lot of emphasis on valuation. So you'd expect me to say, focus on quality and valuation. But I do think where we are in the market now, there's a lot of momentum. There's a lot of good news. A lot is priced in at 22 times on the S&P 500 stock ownership. It is at all-time highs in the States, so there are enough red flags out there. \nBasically, in the market now, we are saying the soft landing is baked in and soft landings historically have been very hard to get right. If you have any deviation from that, and recently there's been a hint that rate cuts may not be as much as people expect or anything else, what often happens is a company misses earnings or there's an unforeseen event. So, for the stock markets to keep going up, the news has to keep getting better. I think at this point of the cycle, you really want to focus on quality, balance sheet strength, and most importantly, valuation.\n\n\n\n\n\n\n\n\n\nLivewire's Ally Selby and Claremont Global's Bob Desmond \nIf investors shouldn't be following themes, where should they be invested instead? What makes an amazing investment in your view?\n\n\nFor us, it's always timeless. So, we want to buy really high-quality businesses that have enduring competitive advantages, that we have a very high degree of confidence in what their earnings will be in three to five years' time, that we're really comfortable with the people who run that business, that they understand the competitive advantage, and most importantly, they build a business for the long term and they allocate capital well, obviously ethics helps as well. And then again, just pay a good price for that so that in the end it's buy quality, buy it at the right price, avoid hype and think long-term.\n\n\nDo you think about mega themes like decarbonisation or AI? Does that come into your process or you are only looking at companies? \nNot really. Well, not at all. We do it all bottom up. So, at the end of the day, we are looking for those sorts of financial attributes, but then we are also looking for business models we feel comfortable with. That means slow change and an enduring competitive advantage. \nThe thing that's difficult with mega themes, is it's very exciting, but on the flip side of that, is that change is very rapid. So, you have to constantly be on top of that change. And the second derivative of that is you have to pick the winners in that theme. And obviously, once we've discovered that the theme's going to be really exciting, there are a whole lot of other smart people that have discovered that too. \nIt's hard to make money out of areas where everyone's crowding. So, we prefer to go where there's going to be some negative news. The company missed an earnings number and that will give us the valuation entry point and the quality, hopefully, is enduring.\n\nAre there any mispriced opportunities that you could reveal to our audience today? \n\nThere are not many mispriced opportunities, I would say, at the moment. I mean, it's an everything going up rally. I do think quality as a whole looks quite attractive. I can just look at our fund as it stands today, the multiple on the fund is about 5% below its tenure average, so that's not bad when the market is probably around 30% above its long-term average. \nI think that quality has lagged, and obviously, what tends to happen in these types of markets is, if everyone's buying all the hype over here, they have to sell the boring quality over here, and they tend to lag, and that's where the opportunities get thrown up.\n\nAre there any stocks that you would actually want to point out?\n\nI would say at the moment, both recently reported at the top of our list, big weightings in the fund, both at reasonable valuations - would be Visa (NASDAQ: V) and Alphabet (NASDAQ: GOOGL). \nIt's actually interesting. With something like Alphabet, people go on about the Mag 7. It's actually trading at a 10% discount to the market as a whole. It just reported very, very strong results. Now, obviously, the concern is around the DOJ [US Department of Justice] inquiry there. We think that will be bogged down in the courts for a very long time. And regulatory risk is not something that's new on Alphabet. So, it's still reporting good earnings. The valuation is very attractive. The cloud business is starting to scale. Search is still growing double-digit. So, that's one that we have a good weight in the fund, and we've owned that for seven years now. Consistently, it's been 8-9% of the fund. We still own it and still like it, but obviously, there's risk there and that's why it's attractively priced because of the DOJ inquiry.\nThe second one that has also reported this week is Visa. Again, this is another long-term holding in the fund. We've held for a long period of time. It just reported very solid results. 8% payment volume growth, double-digit revenue growth, forecasting the same next year. Lots of growth in the new value-added services and new flows. Now, up to 30% of the business growing above 20%. And that's trading at just over 10-15% premium to the market. It normally trades around a 50% premium to the market. \nAnd again, you've got a DOJ inquiry there and legislative risk. But again, most of the people we speak to and the legal experts say that's going to be bogged down for a long period of time and very, very hard to prove consumer harm. So, those are probably two. They've been long-term stalwarts; they're great businesses and are very attractively priced. \nA global portfolio of 10-15 quality growth businesses for the long term\nClaremont Global is a high conviction portfolio of value-creating businesses at reasonable prices. For further information, visit their website or fund profiles below.\n\n\n\n\nETF\nClaremont Global Fund (Managed Fund) (CGUN)\nGlobal Shares\n\n\nView\n\n\n\n\n\n\n\n\n\nETF\nClaremont Global Fund (Hedged) (Managed Fund) (CGHE)\nGlobal Shares\n\n\nView\n\n\n\n\n\n\n \n\n\nNever miss an update\n\n    Enjoy this wire? 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