PREPARE WORKFORCE

“Mean reversion bubbles, in which markets soar on the basis of some new financial miracle and then collapse, destroy wealth. On the other hand, inflection bubbles, based on revolutionary developments, accelerate technological progress and create the foundation for a more prosperous future, and they destroy wealth. The key is to not be one of the investors whose wealth is destroyed in the process of bringing on progress.”

“A million dollars is a dollar a second for eleven point six days. A billion dollars is a dollar a second for thirty one point seven years. We get that. But a trillion dollars is a dollar a second for thirty one thousand seven hundred years. Who can get their head around the significance of thirty one thousand seven hundred years?”

“AI is likely to replace large numbers of entry level workers, people who process paper without applying judgment, and junior lawyers who scour the law books for precedence, maybe even junior investment analysts who create spreadsheets and compile presentation materials. It's said that AI can read an MRI better than the average doctor. Driving is one of the most populous professions in America, and driverless vehicles are already arriving. Where will all the people who currently drive taxis, limos, buses, and trucks find jobs?”

“Most technological advances develop into winner takes all or winner takes most competitions. The right way to play this dynamic is through equity, not debt. Assuming you can diversify your equity exposures so as to include the eventual winner, the massive gain from the winner will more than compensate for the capital impairment on the losers. That's the venture capitalist's time honored formula for success. The precise opposite is true of a diversified pool of debt exposures. You'll only make your coupon on the winner, and that will be grossly insufficient to compensate for the impairments you'll experience on the debt of the losers.”

“As Warren Buffett pointed out in 1999, the automobile was the most important invention probably of the first half of the twentieth century. If you had seen at the time of the first cars how this country would develop in connection with autos, you would have said, this is the place I must be. But of the 2,000 companies, as of a few years ago, only three car companies survived. So autos had an enormous impact on America, but the opposite direction on investors.”

“One of the most interesting aspects of bubbles is their regularity, not in terms of timing, but rather the progression they follow. Something new and seemingly revolutionary appears and worms its way into people's minds. It captures their imagination, and the excitement is overwhelming. The early participants enjoy huge gains. Those who merely look on feel incredible envy and regret and, motivated by the fear of continuing to miss out, pile in.”

“In the telecom boom of the late nineteen nineties, in which optical fiber became overbuilt, fiber owning companies engaged in transactions with each other that permitted them to report profits. If two companies own fiber, they just have an asset on their books. But if each buys capacity from the other, they can both report profits, so they did. In other cases, manufacturers loaned network operators money to buy equipment from them before the operators had customers to justify the build out. All this resulted in profits that were illusory.”

“And there are three things we know for sure about the use of debt. It magnifies losses if there are losses, just as it magnifies the hoped for gains if they materialize. It increases the probability of a venture failing if it encounters a difficult moment, and despite the layer of equity beneath it, it puts lenders' capital at risk if the difficult moment is bad enough.”

“There is no doubt that investors are applying exuberance with regard to AI. The question is whether it's irrational. Given the vast potential of AI but also the large number of enormous unknowns, I think virtually no one can say for sure. We can theorize about whether the current enthusiasm is excessive, but we won't know until years from now whether it was. Bubbles are best identified in retrospect.”