Dear Clients,
Over the past several weeks, technology stocks have experienced considerable volatility as investors have begun questioning the sustainability of the enormous investments being made in artificial intelligence. Some of the companies most closely associated with AI have experienced sharp declines, even as their underlying businesses continue to report strong earnings and substantial demand for their products and services.
For many investors, this volatility is unsettling. For me, it is also familiar.
I have been investing through major technological changes for more than three decades, including the extraordinary development of the internet during the 1990s. That experience has shaped how I evaluate today’s artificial intelligence revolution. I believe AI represents one of the most consequential technological developments of our lifetimes, and I expect the companies that successfully develop, enable, and commercialize this technology to create substantial long-term wealth for shareholders.
But I also believe the road to those returns will be anything but smooth.
One of the most important lessons I learned during the 1990s is that a company can be participating in an extraordinary technological revolution while its stock experiences periods of disappointing—even terrible—performance.
Consider what happened during the internet revolution.
Microsoft was already becoming one of the world’s most important technology companies, yet its stock declined approximately 6% in 1993. Oracle, whose database technology became essential to the expanding digital economy, lost approximately 66% of its value in 1990 and experienced another decline of roughly 20% in 1997. Adobe declined approximately 52% in 1992 and another 40% in 1996.
These were not insignificant companies operating on the fringes of a speculative industry. They were businesses developing products and services that would become foundational to the modern economy.
Their stocks nevertheless experienced substantial periods of underperformance.
Apple provides another remarkable example. Its stock declined approximately 18% in 1995, 35% in 1996, and 37% in 1997. Those three consecutive negative years resulted in a cumulative loss of roughly two-thirds of its market value. Investors who looked only at the stock’s performance could reasonably have questioned whether the company had a future.
Yet Apple subsequently appreciated approximately 212% in 1998 and another 151% in 1999.
Of course, Apple’s eventual success was not inevitable. The company faced genuine business difficulties and needed substantial changes to restore its competitive position. But that is precisely the point: investors must distinguish between temporary changes in market sentiment and lasting changes in a company’s economic prospects.
Perhaps the most instructive example is Amazon.
Amazon’s stock appreciated approximately 966% in 1998 as enthusiasm for the internet reached extraordinary levels. Yet in 2000, its shares declined approximately 80%, followed by another 30% decline in 2001. From its peak in 1999 to its low in 2001, Amazon lost more than 90% of its market value.
Imagine being an investor in Amazon during that period. The internet was still growing. More consumers were shopping online. The company’s business was expanding. Yet its stock price suggested that investors had dramatically reduced their expectations for the future.
Amazon eventually became one of the most successful businesses in history.
I often think about the distinction Benjamin Graham made between the market as a voting machine in the short run and a weighing machine in the long run. Amazon’s experience illustrates that principle exceptionally well. In the short term, investors voted overwhelmingly against the company’s stock. Over the long term, the market eventually recognized the enormous economic value the business was creating.
This is not to suggest that every internet company ultimately succeeded. Far from it. Many disappeared, and others never recovered the valuations they achieved during the speculative excesses of the late 1990s. Cisco, for example, remained an important technology company, but investors who purchased its shares at the height of the internet bubble endured an extraordinarily difficult experience.
The lesson I took from that period was not simply to buy technology stocks and hold them regardless of circumstances. It was to identify businesses with durable competitive advantages, substantial opportunities for growth, strong financial characteristics, and valuations that offered reasonable prospects for attractive long-term returns.
I believe those same principles apply directly to artificial intelligence today.
We are witnessing enormous investments in semiconductor manufacturing, data centers, electrical infrastructure, networking equipment, software, and computing capabilities. These investments are creating the infrastructure upon which future AI applications will operate.
Just as the internet required years of investment in telecommunications networks, servers, software, and computing equipment before many of its most valuable commercial applications emerged, artificial intelligence is requiring an extraordinary infrastructure build-out before its full economic potential can be realized.
And just as happened during the 1990s, I expect investors to periodically become too enthusiastic about the opportunities and then too pessimistic about the challenges.
There will be periods when AI-related stocks appreciate faster than their underlying earnings can reasonably justify. There will also be periods when those same stocks decline substantially despite continued growth in their businesses.
We are seeing some of that today.
Recent weakness in technology stocks has been particularly pronounced, even as other sectors of the market have demonstrated considerable strength. During the week ended October 16, the technology sector declined approximately 7.7%, while seven of the eleven major S&P 500 sectors actually advanced. Healthcare, energy, materials, and consumer staples all recorded meaningful gains.
That is an important distinction. The broader economy and stock market are not necessarily deteriorating simply because investors are reassessing the valuations of technology companies.
At the same time, we should not dismiss the legitimate concerns surrounding AI. The amounts of capital being committed are enormous, and investors are increasingly asking whether those expenditures will generate adequate financial returns. That is an appropriate question, and one we take seriously.
We also recognize that elevated interest rates, persistent inflation, and energy prices can create additional challenges for equity valuations. None of these risks disappears simply because we are enthusiastic about a technology’s future.
Nevertheless, my experience during the internet revolution gives me considerable confidence in the importance of maintaining a long-term perspective.
I do not believe the greatest investment opportunities in artificial intelligence will necessarily come from purchasing whichever stocks are attracting the most attention. They will come from identifying companies that can convert technological innovation into sustainable earnings, cash flow, and attractive returns on invested capital.
Some of those companies will provide the physical infrastructure supporting AI. Others will develop software and services that enable businesses to operate more productively. Still others may emerge in industries such as healthcare, manufacturing, logistics, and energy, where the application of AI could fundamentally improve the economics of existing businesses.
Importantly, we should expect the eventual winners to change as the technology develops. Some companies that appear dominant today may disappoint, while others that receive relatively little attention may become extraordinarily successful.
This is why our investment process remains grounded in fundamental analysis, valuation discipline, and diversification rather than enthusiasm for any particular technology.
I remain optimistic about the stock market through the remainder of this year and into 2027, although I expect periods of volatility along the way. More importantly, I am optimistic about the longer-term investment opportunities being created by artificial intelligence.
I believe a carefully selected portfolio of financially strong AI-related businesses, purchased at reasonable valuations and held with patience, has the potential to generate substantial long-term returns.
That conviction comes not from assuming that history will repeat itself, but from having experienced firsthand how markets respond to transformative technologies.
During the 1990s, investors repeatedly confused temporary stock-price declines with the failure of the internet’s long-term economic promise. Others made the opposite mistake, assuming that because the internet would change the world, any price paid for an internet-related stock was justified.
Both mistakes proved costly.
Our objective is to avoid them.
We do not need every company to succeed, nor do we need every investment to outperform the market every year. In fact, history demonstrates that even successful long-term investment strategies can experience extended periods of relative underperformance.
What matters is that the businesses we own continue building economic value and that we remain disciplined about the prices we pay for that value.
The internet revolution rewarded investors who correctly identified enduring businesses and had the patience to withstand difficult periods. I believe artificial intelligence will create similar opportunities, although the specific winners and the magnitude of their returns remain uncertain.
My experience through the technology cycles of the past three decades informs both my optimism and my caution. I have seen extraordinary innovation create extraordinary wealth. I have also seen excellent companies become poor investments when purchased at excessive valuations.
That experience is one of the most important things I bring to managing your investments today.
I expect the AI revolution to create meaningful long-term investment opportunities. I also expect the journey to include corrections, disappointments, and periods when patience is tested. Our responsibility is to remain focused on the long-term economic value being created rather than allowing short-term market fluctuations to dictate our decisions.
Thank you for the confidence you place in Kessler Investment Group. We take that responsibility seriously and remain committed to building and preserving your wealth through disciplined, long-term investing.
Sincerely,
Kessler Investment Group, LLC
Historical stock returns are approximate, reflect the periods discussed, and are not guarantees of future results. Individual securities and investment strategies involve risk, including possible loss of principal. The outlook expressed represents current expectations and may change as economic and market conditions evolve.