Why Investors Still Lose Money Even as AI Changes Everything

In the mid-80s, when valuing companies, simple modeling was prevalent due to limitations in data and tools.

Today, AI and powerful analytical tools have emerged, but the essence of valuation still comes down to the first finance lesson: the present value of expected cash flows from assets.

The process of encapsulating a company's story has become more important than number-driven modeling, and people should not forget that the essence of valuation is telling a company's story.

Professor Damodaran realized that calculating the discount rate is only part of the analysis; the main reason for errors in valuation is incorrect assumptions about revenue growth, margins, and reinvestment.

Devoting excessive time to estimating the discount rate misses the core of the valuation.

More time should be spent understanding the core business of the company being valued and grasping its business model.

In a spreadsheet, growth rates can be arbitrarily increased, allowing for unsubstantiated number manipulation.

Assumptions about revenue growth rates and margins are merely numbers if they are not connected to what kind of company it is, what it does, and what market it targets.

The story acts as a constraint to prevent Excel figures from becoming detached from reality, and looking beyond the numbers is crucial.

Management's way of telling its story can be biased, so critical acceptance is essential.

Investors should listen to management's story, but since their own money is invested, it is their duty to listen and challenge that story.

One reason investors get into trouble is by blindly believing others' stories, and they should not blame external factors for investment failures.

In five years, there will be a correction in the AI sector, and people who picked what they thought were winners might lose money because they weren't.

Nevertheless, AI will change our lives in the grand scheme, and humanity has evolved this way throughout history.

The investor's role is not to blindly follow management but to question, challenge, and check them when necessary.

Even when opinions on value differ, it's usually due to the underlying company story rather than just growth rates, margins, or reinvestment itself.

Discussing unit economics and limits to scaling, which are intrinsic to the business, is far healthier than simple EPS growth rate debates, like on CNBC.

Investors can make much healthier investments when they address the company, unit economics, limits to scaling, and why opinions differ at those points; valuation is a realistic process of making decisions with future uncertainty.

The financial industry's phrase 'value should be seen as a range' is a way to evade responsibility.

Investors are realistic decision-makers who must choose between buying and selling, just as they must decide whether to buy SpaceX for $1.8 billion.

Instead of lacking data, one must accept that the future is beyond control, and investing is a thoroughly realistic process, not about finding perfect answers.

Hedge funds, private equity, and venture capital have underperformed passive investments over the past 20 years.

'Smart money' is an illusion; often, cases of temporary luck at a specific time are overestimated.

Investors should be humble, acknowledging luck and market conditions, rather than arrogant investors who blame external factors for losses.

The attitude of mistakenly believing one knows something others don't is dangerous.

One must be wary of executives who are overconfident and use excessive leverage.

There isn't a stable number that one can always return to; price and value are fluid with market changes.

Investors should act based on the price and value at that moment, not blindly trust a fixed intrinsic value.

Absolute certainty is impossible outside of legitimate insider information or arbitrage.

If certainty is blurred, diversification is the principle; investing in passive products and returning to daily life is wise.

False certainty, believing one knows what one doesn't, is the cause of ruin, and arrogant money is much riskier.

AI is the fourth major change, following personal computers in the 1980s, the dot-com internet in the 1990s, and social media and smartphones in the early 2000s.

Companies that have just entered this field have great potential, but with little immediate confirmed substance, psychology and momentum drive stock prices more than fundamentals.

Most people who call themselves investors are, in reality, closer to traders.

The 'Bar Mitzvah Moment' refers to the adult coming-of-age for a company, moving beyond valuation solely by user numbers or revenue growth, to being questioned about its profit model.

The AI sector is currently at this stage, undergoing a validation process, distinguishing between hype and actual business, coinciding with hyperscalers' earnings announcements.

With nearly $2.5 trillion already invested in AI CapEx, the market is strongly demanding answers regarding business models.

The income loss from the highest-paid people in the economy losing their jobs is likely to lead to a decrease in purchasing power in the domestic market.

Now, people with leverage and means to exert pressure will move on job issues, leading to increased demands for AI regulation and strong political influence.

AI will take over the highly mechanical, linear, and predictable tasks currently performed by analysts and do them better.

AI will find it difficult to replace human insight needed to judge the limitations of business models or to broadly look at a story and determine what makes sense and what doesn't.

As AI replaces mechanical analysis, active investors who rely on simple rule-based investing risk being completely replaced.

Active investing's struggle for funds is evident in passive investing's market share surpassing 50% of total investment capital.

AI, rather than preventing investment errors, can amplify them at high speed, making them larger in scale.

While some active investors believe AI will save them, the adoption of AI, coupled with the expansion of passive investing's share, will increasingly narrow the footing for human investors.