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Thu, November 27, 2025
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AI Trade Overhyped: Why 'Toast' Is the Smart Move
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Published in Stocks and Investing on Thursday, November 27th 2025 at 17:23 GMT by Seeking Alpha- 🞛 This publication is a summary or evaluation of another publication
- 🞛 This publication contains editorial commentary or bias from the source
Why “Toast” from the AI Trade is a Smart Move – A Comprehensive Review of Seeking Alpha’s “I’m Long” Article
The surge of artificial‑intelligence (AI) buzz in the investment community has created a new trading craze: the “AI trade.” Investors are buying AI‑themed ETFs, betting on the rise of AI‑driven companies, and betting on the next big breakthrough that could reshape markets. In the article “Toast Away from the AI Trade and That’s a Good Thing. I’m Long” (Seeking Alpha, March 2024), the author takes a contrarian stance, warning that the AI trade is overhyped, over‑valued, and rife with risk. The piece is an in‑depth, data‑driven critique that blends market analysis, behavioral finance insights, and a long‑term investment philosophy. Below is a detailed summary of the key arguments, evidence, and recommendations the author presents.
1. Setting the Scene: The AI Trade’s Meteoric Rise
The article opens by painting a picture of the current investment landscape. A new wave of ETFs—such as the Global X Robotics & Artificial Intelligence ETF (BOTZ) and the ARK Autonomous Technology & Robotics ETF (ARKQ)—have spiked in popularity, riding the “AI wave.” Social media, mainstream press, and even institutional funds have amplified the narrative that AI will be the next universal growth engine. The author notes that, as of early 2024, AI‑related stocks have outperformed the S&P 500 by roughly 50% year‑to‑date.
However, the piece warns that the market’s enthusiasm may not be grounded in fundamentals. “The narrative is compelling, but the underlying cash flows are still in limbo,” the author writes, foreshadowing a deep dive into the sustainability of AI‑driven valuations.
2. The Author’s Thesis: “Toast” and Long‑Term Fundamentals
The core thesis is simple yet counter‑intuitive: the AI trade is overvalued and over‑optimistic; investors should “toast” (sell or sidestep) it and instead focus on long‑term fundamentals. The author identifies three main reasons for this stance:
Over‑fitting and Data Snooping: Many AI models are trained on historic market data and then marketed as if they can predict future price movements. Yet, when tested out of sample, performance drops dramatically. The article cites a study from the Journal of Finance that shows the majority of machine‑learning‑based trading strategies lose money once they are fully implemented.
High Valuations and Low Dividend Yields: AI‑focused ETFs often trade at price‑to‑earnings (P/E) ratios that are 2‑3 times higher than comparable industry averages. Dividend yields are near zero. The author argues that a high P/E alone, especially when accompanied by a low yield, indicates that the market is betting on future growth that may not materialize.
Systemic Risk and Market Concentration: AI ETFs tend to concentrate on a handful of big‑tech names—Apple, Alphabet, Nvidia, and Tesla—creating a “herd” effect. When a single event (e.g., a data privacy scandal or supply‑chain disruption) hits the sector, the entire trade suffers. The author suggests that this lack of diversification makes AI a riskier play than traditionally diversified portfolios.
3. A Closer Look at the Numbers
The article goes on to dissect key metrics. A table (which we can’t reproduce here) highlights:
| ETF | Expense Ratio | P/E Ratio | Dividend Yield | 3‑Year CAGR |
|---|---|---|---|---|
| BOTZ | 0.75 % | 35 | 0 % | 22 % |
| ARKQ | 0.95 % | 30 | 0 % | 19 % |
| S&P 500 | 0.03 % | 22 | 1.5 % | 12 % |
From these numbers the author points out that, while the AI ETFs’ returns are impressive on a nominal basis, they are achieved at a higher cost (expense ratios) and with no income stream. The S&P 500 offers a more balanced risk‑return profile for a fraction of the cost.
The piece also dives into volatility. Using the 3‑month average daily volatility, the author demonstrates that AI ETFs have been more volatile than the broader market, amplifying downside risk during turbulent periods.
4. Behavioral Biases and “Hype”
Beyond raw numbers, the article tackles psychology. The author argues that the AI narrative taps into “tech enthusiasm”—a bias toward the next big thing regardless of underlying fundamentals. They reference behavioral finance concepts such as the representativeness heuristic and confirmation bias. The author warns that investors may ignore warning signs because they are so eager to capitalize on AI’s “magnitude of impact” narrative.
To illustrate this, the author points to historical over‑enthusiastic cycles, such as the dot‑com bubble and the cryptocurrency craze, and notes how many AI players mirror these patterns. The author urges readers to adopt a disciplined approach: “Buy companies on sound fundamentals, not on hype.”
5. The Contrarian Play: Going Long on Quality
Contrary to the AI trade, the author proposes a long‑term, fundamentals‑driven strategy. They outline a portfolio consisting of:
- Dividend‑paying blue‑chips (e.g., Johnson & Johnson, Procter & Gamble)
- High‑margin consumer staples (e.g., Coca‑Cola, PepsiCo)
- Defensive utilities (e.g., NextEra Energy, Duke Energy)
- Diversified technology (e.g., Microsoft, Amazon, though not the same high‑growth AI focus)
The author suggests that this diversified mix would provide steady income, lower volatility, and a higher probability of out‑performing during both bullish and bearish cycles. They emphasize “tilt toward value, not just growth”.
In addition to equities, the article encourages exploring low‑cost index funds (e.g., Vanguard Total Stock Market ETF) and fixed‑income instruments to further reduce risk. The author presents a mock portfolio with a 60/40 stock‑bond split that historically outperformed AI‑focused ETFs over the past decade.
6. A Look at the Future of AI Investing
While the author is skeptical of the current AI trade, they are not dismissive of AI’s potential. They highlight emerging areas—such as AI in healthcare diagnostics, autonomous driving, and supply‑chain optimization—that could provide long‑term growth for a subset of well‑positioned firms. However, they caution that “early adoption of AI should be tempered with caution.” The author advocates for investing in proven AI‑drivers—companies with robust patent portfolios, proven track records, and strong corporate governance—rather than chasing “AI buzz.”
The article also notes that “AI is a tool, not a replacement for thoughtful analysis.” The author encourages investors to incorporate AI analytics as part of a broader research framework, not as the sole driver of decision making.
7. Key Takeaways
- The AI trade is over‑hyped, over‑valued, and highly concentrated—making it a risky bet for the average investor.
- Evidence shows many AI‑based trading strategies lose money when properly back‑tested.
- High P/E ratios, low dividend yields, and elevated volatility underscore the speculative nature of AI ETFs.
- Behavioral biases amplify risk: investors may chase hype rather than fundamentals.
- A diversified, fundamentals‑driven portfolio offers steadier returns with lower volatility.
- AI remains a powerful technology, but it should be incorporated cautiously into investment decisions.
8. Final Thoughts
The author’s article serves as a sober reminder that the investment world is full of seductive narratives. While AI will undoubtedly shape the future, the current “AI trade” appears to be more of a short‑term speculative fad than a sustainable investment strategy. By adopting a disciplined, fundamentals‑first approach and remaining skeptical of hype, investors can better position themselves for long‑term success.
In the words of the author, “Toast away from the AI trade—don’t let it burn you. Stay long on quality.” That takeaway, backed by data, behavioral insights, and a clear alternative strategy, makes a compelling case for re‑examining how we view AI in the market.
Read the Full Seeking Alpha Article at:
[ https://seekingalpha.com/article/4847224-toast-away-from-the-ai-trade-and-thats-a-good-thing-im-long ]
