How to Play a Stock Slide
Monday, 27 January:
Most stock market crashes are, in reality, usually several cascading crashes. This is for the simple reason that exuberant investors, like exuberant drunks, need to be told obvious things three to eight times for it to sink in. Most people don’t understand this. The really great investors do.
Sam Walton, founder of Walmart, famously told a reporter who’d asked about losing some colossal heap of money when Walmart stock dropped: “I haven’t lost any money. I own exactly what I owned yesterday. The only thing that’s changed is your opinion of it.”
The man didn’t get that rich being an imbecile.
That’s probably the best approach to take to the wicked slide in US tech stocks. The “Mag 7” were overvalued, everyone knew it, a correction was always going to happen. Chinese start-up DeepSeek may have handed Beijing its “sputnik moment” in AI, but some context: All that has happened is that someone found a workaround to a perceived technological monopoly with Nvidia chips. It is still making the cutting edge chips that are, for good or for ill, is being with held from rival markets. Nvidia's position - and valuation - will take a hit but doesn’t necessarily spell doom for the tech sector. It may well be an opportunity.
The same overwrought American firms are still gunning for AI hell for leather, but DeepSeek’s R1 model has simply showed them how to do it cheaper and with more focused and flexible purpose built models. What this means is that AI will become broader, cheaper and more widely adoptable.
DeepSeek’s R1 cost about $5mm to train - to the $100mm or $1bn it cost American firms to train - and about 25% the cost to run. And it’s built on an open system, so how to do it is already out of the bag. Admittedly it won’t do Nvidia stock any favors, but firms like Alphabet, Meta and Amazon have just been shown how to reach the holy grail at a 90% discount.
That’s bound to shorten the pesky ROI for investors and customers.
Wednesday, 29 January: A Post-Mortem Update
Now that the markets have regained their composure somewhat from the DeepSeek scare, the 4717 feels compelled to help reframe the thinking on the matter. In a day, the Nasdaq regained 2% on the 3% it dropped. Nvidia, the eye of the storm, surged 8.8% after tumbling 17% to wipe out a half billion in market cap. Yet, as we wrote yesterday, this AI sputnik moment was just that, a moment. Or more prudently, a single red flag fluttering at a wild party.
Nvidia had a temporary, unofficial monopoly on the cutting edge hardware required to create AI models that has turned out to be more temporary than investors perceived. It still has the lead, and it still makes the sort of chips that has allowed DeepSeek to do its thing. If anything, in the middle term, Nvidia, and all the top chipmakers will sell more chips as lower entry barriers draw more players into the game. In short, we aren’t really talking about a sector crash, we’re talking about a company.
Think of it like Boeing - the aviation giant had a lousy year, the stock is soft and their reputation isn’t much better. The company, however, is in business, planes are still in the air and with World War III trying to wind itself into a fury, Boeing’s defense arm will keep its detachable body panel arm flying, just at a more modest attitude.
Then there is GM; its stock slumped 8.9% on Tuesday, after reporting a $2.9bn quarterly loss. Unlike the shock waves in Big Tech, GM’s woes point to larger, sector-wide problems. Union victories have added an estimated $1,000 to the cost of a car, and interest rates aren’t going anywhere fast. People are holding onto cars for longer.
Donald Trump has famously offered international companies “among the lowest taxes of any nation” to manufacturing their goods state-side, and threatened tariff’s if they don’t. Yet lower taxes for foreign companies won’t off-set America’s sky-high labor costs, which will be passed onto consumers who are already tightening their belts. That should be more troubling to the economy than lowering entry barriers to an expensive, if promising, moon shot.
