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    Forward Guidance

    Citrini: The Next Phase of Stock Market's AI-Obsession

    Tue Feb 06 2024
    AI StocksInvesting StrategiesAdvancements in AI TechnologyRisks and Opportunities in TradingEconomic IndicatorsInvestment ThemesInfrastructure InvestmentGaining KnowledgeRisk ManagementThesis in TradingInvestment Opportunities in ChinaAI Industry Trends

    Description

    This episode covers the rise of AI stocks, investing strategies, advancements in AI technology, risks and opportunities in trading, economic indicators and investment themes, investing in infrastructure, gaining knowledge and making informed decisions, risk management and trading strategies, thesis in trading and market insights, investment opportunities and risks in China, AI industry trends and investing strategies.

    Insights

    AI Stocks Surge

    Stocks mentioned in the previous interview have surged since June 2023: Super Micro up 138%, Fabronet up 85%, Elf Beauty up 51%, and The Video up 56%.

    Selective Investing in AI

    Investors need to be selective and consider the fundamentals before investing in AI stocks.

    Advancements in AI Technology

    Training and inference on large language models are becoming more affordable, and major tech companies are investing in AI technology.

    Risks in Trading

    The AI basket in trading is heavily tilted towards cyclicals like semiconductors, posing a risk from recession or inflation spikes.

    Investment Themes

    Fiscal spending and infrastructure development are key investment themes, regardless of the election outcome.

    Gaining Knowledge for Informed Decisions

    Research, elimination, and seeking opinions from experts are important for making informed investment decisions.

    Risk Management in Trading

    Risk management, concentration limits, and taking profits on successful trades are crucial in trading strategies.

    Thesis in Trading

    Having a thesis and creating baskets to track specific themes can impact portfolio performance.

    Investing in China

    Investing in China carries risks due to potential government regulations, but there are still opportunities for high returns.

    AI Industry Trends

    The AI industry is still on an upswing, with memory and object go being promising areas for investment.

    Chapters

    1. AI Stocks and Market Trends
    2. Investing in AI Stocks
    3. Advancements in AI Technology
    4. Risks and Opportunities in Trading
    5. Economic Indicators and Investment Themes
    6. Investing in Infrastructure
    7. Gaining Knowledge and Making Informed Decisions
    8. Risk Management and Trading Strategies
    9. Thesis in Trading and Market Insights
    10. Investing in China and AI Stocks
    11. Investment Opportunities and Risks in China
    12. AI Industry Trends and Investing Strategies
    Summary
    Transcript

    AI Stocks and Market Trends

    00:00 - 06:43

    • Sertrini, an active trader and Twitter user, made successful predictions on the bull market and specific stocks such as Super Micro.
    • Stocks mentioned in the previous interview have surged since June 2023: Super Micro up 138%, Fabronet up 85%, Elf Beauty up 51%, and The Video up 56%.
    • Sertrini bought Super Micro shares at $56, and it is currently trading around $500.
    • Despite the success, there is a possibility that the market for AI stocks may be overheated.
    • The approach to trading involves considering the Gartner hype cycle and identifying opportunities during different stages of a bubble.
    • Loyalties lie with personal profit rather than being a true believer in any particular trend or technology.
    • Mega trends like AI change rapidly, so it's important to anticipate how they will evolve and identify new winners in the market.
    • In the previous interview, focus was on companies benefiting from AI as picks and shovels. Now, attention shifts to who will adopt AI technology and become winners in its democratization process.
    • There is a fundamental shift happening with artificial intelligence despite past speculative experiences with IPOs.
    • Real revenue growth and monetization are occurring in some companies related to AI, such as Super Micro.

    Investing in AI Stocks

    06:27 - 13:19

    • The rise in AI stocks has been significant due to the implicit short position of many investors who were underweight in these stocks.
    • The positioning aspect of being underweight in AI stocks is no longer prevalent as more investors have come around on the potential of AI.
    • UBS predicts that AI industry revenue will grow to $420 billion, a 40% increase from its previous view, and a 72% Kager from 2022 over the next five years.
    • There is potential for an AI bubble, but it may not be obvious when the fundamentals become disconnected.
    • Analysts tend to be optimistic about AI companies, while investors need to be more selective and consider the fundamentals before investing.
    • Super Micro is trading at a forward P.E. ratio of around 26, which is cheaper than Chipotle. However, not all semiconductor companies have strong fundamentals.
    • The current estimates for AI growth are achievable, but investors need to be more selective and consider how the technology will progress in the future.

    Advancements in AI Technology

    13:02 - 19:38

    • The technology in the AI industry is expected to progress rapidly.
    • Training and inference on large language models are becoming more affordable.
    • Microsoft, Amazon, and Google are motivated by competitive threats and are investing in AI technology.
    • Sam Altman is raising money to start a semiconductor company, indicating the growing interest in custom silicon.
    • Nvidia is trying to defend against competitors by ensuring their biggest customers remain loyal.
    • Meta (formerly Facebook) aims to build its own GPUs for specific AI applications.
    • Stocks related to picks and shovels for AI, such as meta, super micro, and Nvidia, have become more expensive but still offer investment opportunities.
    • Custom silicon, memory, optics, and other sectors related to AI technology can experience significant growth due to increasing demand.
    • The macroeconomic environment is uncertain with debates about a potential recession.

    Risks and Opportunities in Trading

    19:19 - 26:09

    • Gustin Lebron's book, "The Laws of Trading," emphasizes the importance of taking calculated risks and hedging the rest.
    • The AI basket in trading is heavily tilted towards cyclicals like semiconductors, which poses a risk from recession or inflation spikes.
    • The decision to hedge against re-acceleration and inflation or other economic weaknesses was crucial.
    • Betting on lower rates seemed more favorable due to the potential impact of artificial intelligence on companies' earnings.
    • Bonds were predicted to have bottomed for the year, leading to investments in bond calls.
    • Credit risk is scarier than interest rate risk because the Fed can control interest rates and has liquidity facilities for government obligations.
    • Banks faced challenges with loan repricing risk and increasing loan loss provisions, particularly in multi-family properties.
    • While concerns about commercial real estate were prevalent, risks in multi-family properties were overlooked but are now becoming apparent.
    • Banks entering charge-off and increasing loan loss provision cycles are worrisome, but there is still room for hedging with bonds.

    Economic Indicators and Investment Themes

    25:45 - 32:26

    • Loan loss reserves for commercial risk are finally starting to happen after being talked about for three years.
    • There are different views on the current state of the economy, including a soft landing, inflationary acceleration, and a slowing economy.
    • Credit risk is starting to materialize, even though employers are still hoarding labor.
    • The probability of a soft landing is higher now compared to previous years due to improved economic indicators.
    • The upcoming election will be an interesting theme that drives volatility in the market.
    • Historically, geopolitical events and elections have had little impact on the stock market.
    • Fiscal spending is expected to continue regardless of which candidate wins the election, but the focus may shift depending on party preferences.
    • Companies that benefit from fiscal spending, particularly in infrastructure and electrification, are worth considering for investment opportunities.

    Investing in Infrastructure

    31:59 - 38:46

    • The electric grid and infrastructure in the country need significant investment regardless of who is in office.
    • Taxes should be spent on improving the infrastructure.
    • Contractors, design companies, and industrials will likely benefit from increased spending.
    • It is important to focus on wider themes of fiscal spending rather than specific political affiliations.
    • Research is necessary to identify companies that will benefit from government spending.
    • Being a generalist allows for gaining knowledge across various industries but requires extensive research.
    • To evaluate companies, one can start by looking at their presentations and competitors.
    • Seeking out opinions from knowledgeable individuals helps in making informed decisions.
    • Solar-related stocks like Flex and NextTracker are considered quality companies with potential benefits.
    • Identifying companies with a track record of recognizing tailwinds and taking advantage of them is crucial.
    • The research process involves elimination and speaking with experts in specific fields.

    Gaining Knowledge and Making Informed Decisions

    38:22 - 45:07

    • Expert networks can give people a false sense of knowledge and understanding after just a short conversation.
    • It is important to have multiple conversations and gather more knowledge before claiming expertise on a topic.
    • Traders and central bankers have different ways of thinking due to their training, creating a disconnect between them.
    • The upcoming election may lead to new opportunities in companies that cater to the aging population.
    • Demographics play an important role in trends, but they are complex and can have long lags.
    • A theme needs a favorable macro backdrop for it to work in the stock market.
    • Timing is crucial when putting on trades related to specific themes or trends.
    • Med tech companies are sensitive to long rates, so timing plays a role in investing in them as well.
    • Skilled nursing facilities and assisted living may perform well during disinflationary growth and an election year focused on demographic issues.

    Risk Management and Trading Strategies

    44:40 - 51:07

    • Traders should focus on executing trades based on identified themes in the market.
    • Risk management is crucial when trading, and traders should assess their risk-reward ratio before entering a trade.
    • It is important to stick to the predetermined stop loss or stop gain levels when trading.
    • Constantly reevaluating the risk and adjusting parameters based on price targets is necessary.
    • Changing parameters without valid reasons can lead to negative outcomes in trading.
    • Concentration limits within a portfolio help manage risk and prevent excessive exposure to individual stocks.
    • Traders should aim to cut off fat tails (extreme events) in their portfolio while avoiding truncating potential gains.
    • Taking profits on successful trades can improve psychological state and enable further profitable opportunities.
    • The limiting factor for selling a stock should be its percentage of the overall portfolio, not just its potential return.
    • Having concentration limits protects against relying solely on market beta (general market movement) for gains.

    Thesis in Trading and Market Insights

    50:41 - 57:23

    • The speaker discusses the importance of having a thesis in trading and how it can impact portfolio performance.
    • They mention creating baskets in their portfolio to track specific themes and gauge market sentiment.
    • The speaker emphasizes the balance between risk and potential returns in trading decisions.
    • A story is shared about a missed opportunity to make significant profits from investing in a high-performing stock.
    • The speaker talks about their previous long India, short China trade and how they changed their position based on market conditions.
    • They mention using Twitter as a source of information for making trading decisions.
    • The speaker reflects on their decision to take profit in China and not re-enter the market, hoping to time the bottom for better returns.

    Investing in China and AI Stocks

    57:02 - 1:03:06

    • The speaker initially had a successful trade on India and China but tried to time the bottom and lost out.
    • They got back into China in August but it hasn't worked as expected.
    • The speaker missed out on the India growth story due to being biased towards China.
    • They sympathize with older PMs in China who didn't expect such a drastic market change.
    • The speaker is still invested in China, focusing on beneficiaries of supply-side stimulus.
    • Pin duo duo and net ease were redeeming factors for their Chinese investments.
    • Pindo Duot has surpassed Alibaba as the biggest retailer in online retail.
    • Picking outperforming stocks in China has been challenging recently.
    • There is a lot of risk and uncertainty regarding CCP decisions that could impact Chinese stocks.

    Investment Opportunities and Risks in China

    1:02:37 - 1:08:48

    • There are risks associated with investing in China, such as potential government regulations and economic stimulation.
    • The speaker has a trade involving the Chinese Yuan and is monitoring its performance closely.
    • The trade has resulted in a loss so far, but the speaker is not ready to give up on it yet.
    • The speaker views the risk of investing in China as asymmetric, with the potential for high returns outweighing the possibility of losses.
    • There is currently a lack of interest in being long or short on China, which may limit potential gains.
    • The speaker also had successful trades involving Chinese property bonds.
    • The discussion shifts to AI, with the belief that it is still in an upward trend and not at bubble levels yet.

    AI Industry Trends and Investing Strategies

    1:08:19 - 1:14:05

    • The speaker believes that the AI industry is still on an upswing and not at the level of previous bubbles like the dot com bubble.
    • However, it may become increasingly difficult to generate alpha just by being long AI as the trend shifts towards more specific companies and use cases.
    • The speaker thinks that memory and object go are some of the best areas in AI investment.
    • They suggest that it will be important to look at the actual adopters and democratizers of AI to identify new use cases and beneficiaries.
    • The speaker does not believe that chatbots are the future of AI, but rather expects a broadening out as large language models become more commoditized.
    • They acknowledge that investing in AI stocks may change if a true speculative mania phase occurs, where quality stocks may not perform as well as companies with inflated expectations.
    • The speaker maintains a basket of AI stocks but considers the current market progression reasonable without any insane valuations yet.
    • They mention their substack called Satreany Researcher where they publish their own portfolio called Satrendex, discuss trends, and provide updates on themes and thoughts.
    • There is also a series called "global macro trading for idiots" covering various topics such as FX trading, trading the yield curve, and silver futures.
    • It is emphasized that nothing said during the podcast should be considered investment advice, and individual investors should be aware of their limitations compared to institutional hedge funds.
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