The big tech investment web, an economic information vacuum and discipline through imperfection.
I never got a detention in school. Not even close. But I remember wanting to so I could be like one of the kids in “The Breakfast Club.” A John Hughes masterpiece, it was the story of five teenagers—a jock, geek, princess, basket case and criminal—brought together by Saturday morning detention under the angry eye of Principal Vernon. My crush—the criminal John Bender played by a young Judd Nelson—removes the screws from the library door where they are sitting in detention to avoid the prying eyes of the principal. Vernon confronts Bender, and he delivers the iconic line, “screws fall out all the time, the world is an imperfect place.” From the mouths of babes or in this case, cynical young adults…
Bender’s words of wisdom have always stuck with me when speaking with clients about risk, both in terms of anticipating and living with it.
As markets continue to relentlessly climb, even amid a government shutdown, with valuations peaking and no economic data releases to consider, we must remain composed and not throw away our discipline, our plan or our sense of balance. This is true of allocations in portfolios but also your pattern of spending and saving.
Screws do fall out all the time, and the world is an imperfect place. Resist the urge to pile in with the herd, stay focused on your plan and avoid being distracted by the latest meme stocks and glittering commodities, or being over-indexed to AI boom names.
On the latter point, there were rumblings of unease this week as investors digested announcements that tech companies are investing in each other. To catch you up, Nvidia is investing in OpenAI, which is buying cloud computing from Oracle, which is buying chips from Nvidia, which has a stake in Coreweave, which is providing artificial intelligence infrastructure to OpenAI, which just announced it will buy chips from Advanced Micro Devices (AMD). Those partnerships are worth hundreds of billions of dollars, enormously increasing the companies’ values and making some market-watchers question whether it is all a mirage. There is also the risk that another kind of screw falls out—what if one of these companies has a weak link that ends up threatening the viability of the whole industry? I have less fond memories of my time in 2008 than in 1985 when “The Breakfast Club” first debuted.
Please do not read into this that I am warning of a global financial crisis. Hardly. While it is true the government is shut down, inflation is higher than target and growth may be peaking, the economy is still solidly average with all the markers of steady consumer and business investment, given the fairly pristine balance sheets of both. The government’s balance sheet is the biggest problem, hence why the dollar has tumbled this year and why Washington struggles to pass a budget even with full Republican control of Congress and the White House.
That said, we must remember that screws do fall out all the time, and the world is imperfect. But that does not mean it is a good strategy to wait until perfect conditions to invest or to put your plans in jeopardy by losing your composure even when there is an onslaught of imperfect or even downright worrying news. We invest in diversified portfolios and broad pools of stocks and other assets. While individual stocks can and do go to zero, the diversified stock market is highly unlikely to and never has. That would be an event of economic extinction, not just screws falling out.
By the end of “The Breakfast Club,” you realize that the five teenagers are not defined by their stereotypical labels—brain, athlete, basket case, princess or criminal—but are multifaceted and complex people with all those types within them. Financial markets are not dissimilar in that they contain all kinds, too. As the song “Don’t You (Forget About Me)” by Simple Minds plays out to the credits, and life goes on for those high school kids in Shermer, Illinois, we remember that it is the complexity and multifaceted nature of everything that is the opportunity.
Written by a human.