As expected, the early reports of the death of the current AI business model at the hands of the Chinese hedge-fund-backed DeepSeek model were greatly exaggerated.
Turns out, there is no Chinese AI application built at a cost of $5 million that competes with Google Microsoft, and OpenAI.
The real story is just about what you’d expect out of China. They stole important parts of OpenAI’s ChatGPT and “trained” it on $500 million worth of Nvidia chips…
Which means the initial reports that DeepSeek took just 2 months and $5 million dollars to build was just another attempt at oneupmanship from China, which continues to have a childish desire to sow chaos instead of coming to the trade table and negotiating like an adult.
And I continue to hear rumors that the hedge fund behind DeepSeek, and perhaps even the Chinese government, had taken downside positions in American AI stocks before releasing the white paper detailing the “miraculous” creation of DeepSeek…
So it seems pretty likely that in addition to sowing a little chaos, there was profiteering going on as well!
Ok. I know all’s fair in love and trading. If you panic sell your stock because of a headline that is intended to get you to panic sell your stock, well, things like that happen. Some would say that’s the very definition of weak hands vs strong hands…
But that’s not entirely accurate.
Because in this current era of algorithmic trading, there doesn’t have to be panic-selling and weak hands to drive stock prices down 10% and 20%, like what we saw on Monday. All that has to happen to create a big air pocket for stock prices is for investors to hold off on buying…
When you see the Nasdaq sell-off over 700 points, the decline has a lot to do with how the algorithms work. More than 70% of trading on the New York Stock Exchange (NYSE) is done by computers. And so most of the action on any given trading day consists of these trading machines selling back and forth to each other, scalping small percentage moves.
And so the stock market mostly goes up. Until some kind of headline news event rocks the narrative. It can be something like an unexpected move higher for inflation or unemployment, or it could be Fed Chair Powell saying something negative. Or it could be a surprise press release about a new Chinese AI model like we got last week…
When some market-shaking news comes out, the algorithms will cancel all their buy orders. That creates an air pocket for stock prices. Then the algorithms’ sell orders start probing lower prices to see if there are buyers among the other algorithms. Eventually, buy orders will be found at lower prices. But even then, those “buys” will turn to “sells” quickly to scalp a small gain, and thereby drive prices even lower.
It doesn’t matter if individual investors are panic-selling or not. The market action makes it look like investors are panic-selling. It feels like panic-selling. And that can be hard to resist…
What is a Strong Hand?
Fidelity founder Peter Lynch once famously said: invest in what you know. Because some businesses are just easy to understand. And it’s also pretty easy to add some accounting basics like market share, profit margin, and growth rates to really round out your grasp of an easy-to-understand business.
I think it’s pretty safe to say that AI is not an easy business to understand. And days like Monday – with Nvidia down 17% – have a way of calling a lot of attention to what the average investor doesn’t know about AI.
It’s also safe to say many investors have done a lot of reading over the last coupe of days – I know I have!
I have a couple thoughts that might help – and don’t worry, I am absolutely not going to get into some tutorial on AI! It’s not necessary…
U.S. companies are the best in the world for a reason. If you ever have doubts about America’s top companies ability to drive innovation and grow revenue and earnings, remember this chart:
That is sales per share for the companies of the S&P 500. It goes up. The only time revenue falls for America’s best companies is during recessions.
Some Players Want You To Panic In the same way that the Chinese hedge fund likely made money by shaking up the markets on Monday, there are plenty of traders and hedge funds that will do the same thing. I’m reminded of the time hedge fund manager Bill Ackman went on CNBC in the early days of the pandemic and said “hell is coming” and turned his fear-mongering into a $2.6 billion profit.
No doubt there was some fear-mongering going on Monday, when stocks were in freefall.
Diversify There are plenty of great stocks out there. Yes, the AI stocks get all the press. But on Monday, while the AI stocks were getting crushed, most stocks (around 65%) on the S&P 500 were up for the day.
Spread your investments out and it will take some of the sting out of a day like Monday.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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