Dealing with the frustration of missed opportunities is a critical part of investing. While it's important not to let losses or missed gains destroy you, attempting to become a completely unemotional 'robot' can be counterproductive. The process of thinking through these frustrations is what leads to deeper learning and better future performance.
To hedge against the risk of AI disrupting portfolios and professions, consider allocating a small percentage to long-dated call options (LEAPs) on key AI players. A basket of Microsoft, Meta, Amazon, and Google provides exposure to the core infrastructure (Azure, AWS, GCP) and leading model developers (OpenAI, Anthropic).
While pattern recognition helps experienced investors improve, it becomes a liability when used as a lazy crutch. An investor who compares every new situation—from a homebuilder to a SaaS company—to a successful P&G investment from 2001 is no longer learning or evolving, but is instead a 'man with a hammer' seeing only nails.
As AI masters the analysis of financial filings and transcripts, the source of investment alpha may shift to information that is difficult for models to process. Qualitative insights from attending conferences, judging a CEO's character via a handshake, or other forms of scuttlebutt could become increasingly valuable differentiators for human investors.
When a SaaS company's stock falls 90%, its stock-based compensation (stock comp) becomes untenable. A company previously valued at $1B paying $100M in stock comp (10% dilution) is now a $100M company paying the same amount, creating 50%+ annual dilution that is unacceptable to investors and employees alike.
In an era of rapid AI advancement, a SaaS company trading at a lower multiple is not a sufficient investment edge. The terminal value of software can be zero. A true edge comes from a deep, fundamental understanding of why a specific company's product is defensible against AI, not from relative valuation metrics.
AI's strength in pattern recognition could become its weakness in an adaptive market. Companies and human investors may learn to manipulate AI-driven funds by feeding them historical patterns that signal value, such as initiating dividends during distress to trigger buys, ultimately leading the AI to underperform.
The implied volatility for LEAP options on mega-cap tech companies like Meta and Microsoft is in the high 30s. This may be an underestimation of the potential upside, given that AI could create a winner-take-all market. When a company like Meta issues executive options implying a 5x stock increase, 40% vol can feel cheap.