For those of you who pay attention to more than just insurance, you are likely aware it was a bad week for tech stocks. Software stocks have been crushed due to fears that AI will make them irrelevant while large tech also sold off over fears they are investing too much in AI and they won’t earn an adequate return.
The Conundrum?
Many market observers have observed this is counterintuitive. Either AI CAPX will be bad and software companies will thrive or CAPX will be good and you should buy Amazon, Google, etc. because they will dominate the AI future.
Fun fact: they’re both wrong!
The Missing Link
The above perspective is level one analysis and ignores what’s really going on. In my view, the market is clearly stating that AI will be successful. This is why software stocks have been decimated.
So why are the big AI spenders also selling off? Because the wisdom of crowds has correctly deduced that just because there will be a lot of AI revenue doesn’t mean there will be a lot of AI profit.
This is what the so-called “experts” are missing.
If AI does generate a lot of revenue, then software companies will likely lose market share to AI. This is bad for markets in total because software requires very little investment to generate revenue. This is what makes it such a wonderful business. It’s the equivalent of an insurance broker without the people costs.
On the other hand, AI revenue requires massive investment. Even if it isn’t being wasteful (which is a low probability – the debate is more over how much is wasteful), it requires trillions of dollars of upfront capital.
Worse, it is not a one time buildout like say the highway system or Hoover Dam. Every few years, there will be technological improvements which make the current infrastructure outdated and trillions more will have to be invested to keep up with the new state of the art.
This is a worse model than being a reinsurer! Sure, there’s a ton of revenue but it’s like if every time there was a large cat, your cat models and claims organization became obsolete and you had to build completely new ones *and* you also had to raise new capital because S&P decided cats require twice as much capital to write as the day before.
Listen To The Market
So what the market has been trying to tell us over the last week or so is that it hates that tech is transitioning from a low capital intensive, high margin model to a highly capital intensive and more volatile model.
One of the lessons you learn as an investor (at least if you want to be a successful one) is that, most of the time, when the market is trying to tell you something and you think you know better, the market is usually the one that’s right (at least in the short term).
Investors who aren’t listening and keep insisting that software and large tech being down at the same time is a paradox are not paying close enough attention.
Now, as noted, the market can change its mood quickly, especially as new data points arrive, so it’s very possible that AI will disappoint and software will recover.
But if AI meets its expectations, it’s still unlikely to be good for those spending trillions on its buildout. The real winner in that case is likely to be Corporate America (and World) who generate large productivity improvements without having incurred the CAPX burden.
New Format
That’s it. That’s the note for today. I’m trying something a little different. I have more to say on this topic and how it affects insurers in the future but rather than take longer to get out a longer piece and not be as timely, I wanted to experiment with getting out quick thoughts that are more immediately relevant.
Not sure if this will be an ongoing effort or not, but I suspect that I might try to do quick notes like this more often, especially when it is in response to something timely.
The quick thoughts, hopefully means a little more frequently, is brilliant. Your insights are very meaningful and getting them out in a timely fashion, with follow-up’s as warranted, benefits your readers. My vote, for whatever it is worth – as they say, is more like today’s commentary.
Thank you,
Dino
Thanks Dino, appreciate the feedback!
Always enjoy your insights Ian.
FWIW, I think short and timely is better than long and late.
“One of the lessons you learn as an investor (at least if you want to be a successful one) is that, most of the time, when the market is trying to tell you something and you think you know better, the market is usually the one that’s right (at least in the short term).”
Timeless rebuttal from a wise old fellow: https://www.berkshirehathaway.com/letters/1987.html
Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.
Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.
But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”
Yes, I’m obviously familiar with the Graham commentary. Note, I did reference short term, which is one of the key differences. If you are focused on what is happening in markets today, the voting machine tends to know better than individuals so it is important to understand what it is saying. If your focus is only long term, then you can look for times when the voting machine elects bad candidates and take the other side if you have the staying power. I did also note the market may be wrong about the ultimate outcome of software stocks. I was merely explaining how to reconcile two seemingly contradictory opinions of Mr. Market.
Perhaps to put some real examples to help illustrate, there are times where I think the market is short term wrong and will take the other side but that is only in stocks where I have a clear information and understanding advantage, i.e. insurance stocks. I wouldn’t claim to think I know better than Mr. Market about the near term direction of energy prices or a biotech Phase III study.
However, I am fairly cautious on equities over the medium term (which I will write about at some point) because I believe the voting machine is too euphoric and ultimately there will be a better time to buy stocks so I will exercise patience and wait for that day to come (this requires what Buffett calls the proper temperament). That assessment is much easier to make, in my opinion, than one on “the market is wrong about current events and I know better even though I don’t have the requisite domain experience to make that call” as we know markets can remain dislocated for long periods of time before ultimately correcting, as Graham astutely observed.
Does that make it more clear?
The market is bipolar and in more recent times almost schizophrenic and hallucinogenic. It is less about trying to understand its daily behavior and more about trying to understand what is responsible for the underlying condition. In the case of psychiatry, the causes of these mental conditions, even after over a century of study, are still highly debatable and not fully understood. And in many ways, the market is the biggest psychology study and experiment in the world.
As for market behavior, fundamentals in many ways have become second order effects to narratives and storytelling. The narrative storytelling dynamic is most prominent in tech, and that is where the majority of investment capital lives, particularly in U.S. markets. Unfortunately, because tech as an asset class houses breakthrough innovation which is a segue to massive returns and without a static historical reference point like insurance, it will always be subject to and held hostage by the narrative storytelling agenda. Part of these founders’ impressive set of abilities in the space is retelling the story in a new way to maintain and attract excitement, patience, and capital. They are doing a great job because we are all talking about it constantly, including now. It is also an asset class with such fascination due to infinite unknown unknowns, understanding it is at the forefront of change that impacts all other industries derivatively downstream, including our own.
In the case of AI there is clearly substance, but like Musk’s storytelling, the full economic realization of the technology, while here, has not entirely arrived as fast as these AI lab founders state.
I agree with Ian that tech is seemingly transforming from an asset light API business to a capital intensive infrastructure utility type business. There are unique outlier companies like Microsoft and especially Google who own the full stack and are plugged into almost every ecosystem: Google Cloud, Google TPUs, Gmail, Android devices including cell phones, Android Auto, Waymo, YouTube, Google Search, and more. CMT, as it moves beyond mobile telematics, will likely try to partner with or be purchased by them in my view as a driver risk score and risk layer within Google’s own automotive tech stack, given the interplay in our own industry.
I think we are entering a paradigm with AI where tech will finally become a scale game like all other industries, and especially driven by its innate connection to national security and defense as well. Tech will become a scale game like all other industries.
They will use their scale and moat the same way large carriers do in the world of insurance. However, unlike insurance and without a static historical reference point like insurance, it remains at the forefront of innovative change, so I do not know if that necessarily means compressed margins.
I do however think diffusion is the biggest hurdle to realizing economic impact. The companies that will benefit need to have the pipes in place to ingest the utility of the technology. There are also slow regulatory constraints in many industries that would otherwise realize quick benefits like biotech. AI cannot testify in court or repair a broken pipe, or update a legacy corporate database that has not been touched since the mid 90s. Even if the AI is perfect, the world is complicated and jobs are complicated. Integrating AI into the economy is harder than just building the model.
Using insurance as an analogy, when loss trends spike for a quarter you do not assume the entire book is permanently impaired. You analyze whether it is cyclical noise, reserving conservatism, or true structural deterioration. The current tech sell off to me feels more like volatility in sentiment than a true structural reset in underwriting appetite.
Question — what are your thoughts on the recent sell off in broker stocks?
Looks like you were out ahead of my question already.
Reinforcing the national security as well as too big to fail narrative of these companies. Get in line and play ball or be consequentially targeted.
https://www.cnbc.com/2026/02/24/anthropic-ai-hegseth-spying-defense.html
One of the very few writings worth the read in the AI slop era. Attention tax is the externality of Ai slop….