AI market: Is it an investment "bubble" or "bust"?

The AI market has experienced a significant boom in recent years, driving massive stock gains for key companies, but analysts are divided on whether it is an investment "bubble" similar to the 1990s dot-com era. The current run is characterized by substantial profits from leading AI companies, a key difference from the largely unprofitable companies of the dot-com bubble, but also by extreme capital concentration and high valuations. 

Growth of the AI Market in Recent Years

Since approximately 2022, the AI sector has seen exponential growth fueled by advancements in generative AI and the critical need for advanced computing infrastructure, particularly high-powered chips. This has led to massive investment in key technology companies, especially the "Magnificent Seven" stocks.

• Nvidia (NVDA): As the primary supplier of AI chips (GPUs), Nvidia's stock has seen a massive surge, with a price change of over 970% from December 2022 to December 2025. Its market capitalization briefly surpassed $4 trillion in mid-2025, making it one of the world's most valuable companies.
• Microsoft (MSFT) and Alphabet (GOOG): These giants have also integrated AI deeply into their services and made substantial investments, reflected in significant stock performance. Microsoft's stock price has increased by over 96% and Alphabet's by over 246% in the past three years.
• Startup Funding & Revenue: Private AI companies have also seen explosive growth. For instance, OpenAI's annualized revenue surged to $13 billion by August 2025, up from $200 million in early 2023. 

Discussion: Bubble or Boom?

Financial analysts and experts have mixed opinions on whether the current AI boom constitutes a "bubble". 

Arguments for a "Bubble":

• Extreme Capital Inflows: Over half of all global venture capital funding went to AI startups in Q1 2025, an extraordinarily skewed allocation of capital.
• High Valuations: While not as extreme as the dot-com era's P/E ratios, current valuations are high by historical standards, and some AI startups command "surreal" valuations per employee, sometimes exceeding $1 billion.
• Circular Investments: Some investments are circular, with major AI companies investing in startups that then become their customers for computing power, raising concerns about the sustainability of revenue models. 

Arguments against a "Bubble" (for a "Boom"):

• Profitability and Fundamentals: Unlike the dot-com era, where many companies were unprofitable, today's leading AI firms (Nvidia, Microsoft, Alphabet) are highly profitable with strong, established business models.
• Real-World Utility and Demand: AI technology is already integrated into many industries and delivering tangible productivity gains, with massive, quantifiable demand for computing infrastructure currently outpacing supply.
• Physical Infrastructure: The current investment is heavily directed towards tangible capital assets like data centers and hardware, rather than just marketing and abstract ideas. 

Comment on the Phenomenon

The current AI market is less a speculative mania built on promises (like the dot-com bubble) and more a rapid "boom" or "supercycle" underpinned by significant technological advancements and real-world demand. The core difference lies in the profitability and existing market position of the major players driving the boom.

However, risks persist, particularly for smaller, less-established AI startups with unproven business models, many of which may fail if the market consolidates or interest rates rise. Investors face the challenge of balancing optimism about AI's transformative potential with caution regarding specific company valuations and the potential for increased market volatility. The ultimate outcome will depend on whether continued innovation and adoption can justify the extraordinary capital investment and meet sky-high earnings expectations. 

Revisiting the Dot-Com bubble of the 2000

The dot-com bubble was a period of intense speculation in internet-based companies during the late 1990s, which led to a massive stock market crash starting in March 2000. 

The Few Years Before the Bubble Burst (c. 1995-2000) 

Rapid Internet Adoption: The widespread public adoption of the World Wide Web from the mid-1990s created immense excitement about the potential for new business models and services.

• Influx of Capital: Fueled by low interest rates and a "fear of missing out" (FOMO) among investors, venture capital poured into nearly any company with a ".com" in its name, regardless of a viable path to profitability.
• Speculative Investing: A belief emerged that traditional valuation metrics (like earnings and cash flow) were obsolete in the "new economy". Companies were often valued based on unconventional metrics like "eyeballs" (website traffic) and projected future growth.
• Soaring Valuations: The result was a stock market frenzy, with the tech-heavy NASDAQ Composite index rising from under 1,000 in 1995 to a peak of 5,048 on March 10, 2000. Many startups went public via Initial Public Offerings (IPOs) and saw their stock prices triple or quadruple on the first day of trading.
• High Spending: Many dot-com companies spent lavishly on advertising and marketing to build brand awareness quickly, burning through cash reserves without generating revenue.

When the Bubble Burst (March 2000 - c. 2001)

• Peak and Initial Decline: The bubble peaked on March 10, 2000, and began to deflate as investors started to question the sustainability and profitability of these new companies.
• Interest Rate Hikes: The U.S. Federal Reserve began raising interest rates to combat potential inflation, making it more expensive for companies to borrow money and dampening investment sentiment.
• Panic Selling: As high-profile companies began to miss earnings expectations or go bankrupt (e.g., Pets.com in November 2000), a wave of panic selling ensued.
• Market Collapse: The NASDAQ index fell by 9% in a single day on April 14, 2000, and the decline accelerated throughout 2001.

The Post-Bubble Burst Period (c. 2001-2002+)

• Massive Losses: By its trough in October 2002, the NASDAQ Composite had fallen nearly 77% from its peak, wiping out trillions of dollars in market capitalization. Even established tech companies like Cisco and Intel lost substantial portions of their value.
• Bankruptcies and Layoffs: A majority of the publicly traded dot-com companies folded after running out of capital, leading to mass layoffs in the tech sector.
• Shift in Investor Behavior: Investors became significantly more cautious, shifting funds to more established companies with proven, profitable business models and demanding greater financial discipline and transparency.
• Survival and Consolidation: Companies with sound business plans that survived the crash, such as Amazon and eBay, eventually emerged stronger and became dominant players in the internet economy.
• Regulatory Changes: The crash, combined with subsequent accounting scandals (like Enron and WorldCom), led to increased regulatory scrutiny and stricter reporting requirements to protect investors. 

During the dot-com bubble, Warren Buffett avoided internet stocks entirely, sticking to his value investing principles and accumulating large cash reserves. He warned that most of the new internet startups would fail. 

Buffett's Actions Before and During the Bubble

• Adherence to Value Investing: Buffett's core philosophy is to invest in businesses he can easily understand and which have durable competitive advantages, or "economic moats". He believed most tech companies lacked these characteristics due to their fast-changing nature and unproven business models, making their future performance difficult to project reliably.
• Public Warnings: In a 1999 Fortune article and in his letters to shareholders, Buffett explicitly warned against the "irrational exuberance" of the market, stating that expectations for future returns were unrealistic. He famously used the example that while the automobile industry revolutionized society, most car manufacturers eventually went bankrupt, predicting the same fate for the majority of internet startups.
• Underperformance and Criticism: As the tech-heavy NASDAQ index soared in 1999 (up nearly 86%), Berkshire Hathaway significantly underperformed the broader market, with its stock price falling nearly 50% from its June 1998 peak of $84,000 to a low of $41,000 in early 2000. For this, Buffett was widely criticized by analysts and the media as being "passe".
• Hoarding Cash: Rather than chasing the fad, Buffett built up significant cash reserves, which positioned him to buy assets at attractive prices when the market eventually corrected.
• Focus on 'Old Economy' Stocks: He continued to invest in proven, cash-generating businesses with stable operating margins, such as Coca-Cola and American Express.

The Outcome

• Vindication: When the bubble burst in March 2000, Buffett's strategy was vindicated. As the NASDAQ crashed by nearly 77% over the next two years, Berkshire Hathaway's stock rebounded, and its net profits rose 113% to $3.3 billion in 2000.
• Opportunistic Buying: He was able to make opportunistic purchases of corporate debt and private companies in the post-crash period when others were paralyzed by fear and lack of capital.

The collapse of LTCM. Debt and Leverage: Financial weapon of mass destruction.

 

https://myinvestingnotes.blogspot.com/2009/12/debt-and-leverage-financial-weapon-of.html

LTCM lost its money through a combination of three critical, interconnected factors:

1. Extreme Financial Leverage (The Amplifier)

This was the core mechanism of their downfall. The firm took its $4 billion in investor capital and, through borrowing and derivatives, controlled a staggering $1.2 trillion in financial positions. This meant that even very small market moves were amplified into enormous gains or losses. As the text states, "with this kind of financial leverage even the most minute market move against you can wipe you out several times over."

2. A Key Triggering Event (The Catalyst)

The specific market shock that moved against LTCM was Russia's default on its bonds in 1998. LTCM owned many of these bonds. This was not just a loss on those specific bonds; it triggered a global "flight to quality." Investors abandoned riskier assets (like the ones LTCM was heavily invested in) and rushed into ultra-safe U.S. Treasuries. This caused the price gaps between different securities—which LTCM's models bet would narrow—to widen dramatically instead.

3. The Failure of Their Models (The Blind Spot)

LTCM's sophisticated mathematical models, designed by Nobel laureates, were based on historical data. These models failed to account for two critical realities:

• "Black Swan" Events: The models could not foresee an event as extreme and unprecedented (in their historical dataset) as a major sovereign default like Russia's.

• Liquidity Risk and Crowded Trades: The models advised "waiting out the storm," assuming they could hold positions until prices returned to "normal." However, when the crisis hit, everyone was trying to exit similar trades at the same time. This created a liquidity crisis—there were no buyers for LTCM's enormous, complex positions. Their attempt to sell only pushed prices further against them, creating a death spiral.

The Sequence of Collapse:

1. Leverage set the stage for catastrophic loss from a small market move.

2. Russia's default provided the unexpected shock that moved global markets against LTCM's concentrated bets.

3. Model failure led them to hold on as losses mounted, assuming normality would return.

4. Liquidity vanished when they finally tried to exit, locking in massive, irreversible losses that burned through their $4 billion capital in months.

In essence, LTCM lost its money because it used extreme leverage to make enormous, model-driven bets on market behavior, and those models catastrophically failed when a real-world crisis caused markets to behave in an "improbable" way while simultaneously eliminating their ability to escape their positions.

Why are manipulated stocks so risky?

Questions: Why are manipulated stocks so risky?

https://myinvestingnotes.blogspot.com/search?q=manipulators

14.1.2010

Here are the main points why manipulated stocks are so risky.

List of Main Points

1. Market Structure Facilitates Manipulation: Bursa Malaysia has an abnormally high number of listed companies for its small market size and economy, creating a pool of low-value, illiquid stocks that are easy targets.

2. Shifted Motivation for Manipulation: After the 1997-98 crisis, banks became wary of accepting inflated stocks as loan collateral. The primary goal of manipulation is now to directly profit from pumping and dumping shares on retail investors.

3. The Manipulation Playbook ("Pump and Dump"):

   • Accumulation & Cornering: Manipulators buy up large stakes at very low prices.

   • Artificial Inflation: They use tactics like wash trading (fake accounts), ambitious announcements, and large fake buy orders to create false volume and demand, driving the price up.

   • Enticing Punters: The rising price and fabricated activity lure in speculative retail investors ("punters").

   • The Dump: While maintaining the illusion of demand, manipulators secretly sell their holdings at inflated prices. Eventually, they dump all remaining shares, causing a crash.

4. Extreme Risk for Investors:

   • Predictability: It's nearly impossible for outsiders to know when the dump will happen.

   • Crash, Not Correction: The decline is typically sudden and severe ("crashes").

   • Asymmetrical Outcome: Investors risk losing everything ("lose a bomb") on a single failed exit, while gains from timely exits are speculative and risky.

5. Fundamental Worthlessness of Targets: In Malaysia, many manipulated stocks are from fundamentally weak companies on the "brink of bankruptcy" with little chance of a real turnaround, making them pure gambling vehicles.

6. Author's Advice & Disclaimer:

   • Strong Warning: Trading such stocks is compared unfavorably to casino gambling.

   • Alternative Suggestion: For those drawn to speculation, exploring speculative stocks on the ASX (Australian Securities Exchange) is presented as a potentially better option, as many are exploration companies with genuine, if slim, prospects.

   • Recommended Approach: The only safe way in Malaysia is fundamental, long-term investing.

   • Legal Disclaimer: The author states they are not a licensed adviser and shifts responsibility to the reader and their licensed remisier (broker).

Discussion

The text provides a coherent and critical analysis of stock manipulation in the Malaysian context. It effectively traces the evolution from collateral-based fraud in the 1990s to the modern retail-focused "pump and dump" scheme. The core argument is that the risk is systemic and exacerbated by local market conditions.

The discussion highlights the asymmetry of information and control. Manipulators control the supply, information flow (via announcements), and even the appearance of demand. Retail investors are at a severe disadvantage, participating in a rigged game where the exit doors are controlled by the manipulators.

The comparison to a casino is apt but with a crucial distinction: in a casino, the odds are mathematically known and regulated. In a manipulated stock, the "house" (the manipulator) not only controls the odds but can also change the rules of the game mid-play.

The author's perspective is notably cynical about the quality of speculative Malaysian companies and suggests a geographical arbitrage—speculating in Australian resource explorers is framed as having more merit due to the nature of their business (seeking a genuine discovery) compared to the "worthless" Malaysian counterparts.

Summary

Manipulated stocks are exceptionally risky because they represent a controlled deception rather than a genuine investment. In markets like Malaysia, where many small, low-quality companies are listed, manipulators can easily corner a stock. They artificially inflate its price through fake volume and misleading news, creating a false narrative of success to lure speculative retail investors. Once enough outsiders buy in, the manipulators dump their shares, collapsing the price. The retail investor faces a near-impossible task of timing their exit before this crash, often leading to catastrophic losses. The entire process is characterized by a fundamental disconnect between the stock's price and its underlying value, making it a form of financial gambling where the odds are deliberately and opaquely stacked against the public participant. The only advised antidote is to avoid such schemes entirely and stick to fundamental investing.

How to avoid PUMP and DUMP scams?

 

Pump and Dump Scams

A "pump and dump" scam is a fraudulent scheme where criminals artificially inflate ("pump") the price of a cheap, often obscure stock through false or misleading promotion, then sell ("dump") their own shares at the peak, causing the price to collapse and leaving other investors with significant losses.

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Main Points: How the Scam Works

1. Initial Accumulation: Scammers quietly buy a large number of shares in an extremely cheap stock, avoiding attention.

2. The "Pump" Phase: They launch a aggressive promotional campaign using:

   • Spam emails with stock recommendations and promises of huge, quick returns.

   • False stories about the company's future profitability.

   • Fabricated press releases or analyst commentaries to create fake credibility.

3. Price Inflation: As persuaded victims buy the stock, the price rises. Scammers use this rise to validate their predictions and attract more buyers.

4. The "Dump" Phase: Once the price hits a desired peak, the scammers sell all their shares for a large profit.

5. The Collapse: The massive sell-off causes the stock price to plummet. Remaining shareholders panic and sell, incurring losses. The company's reputation can also be unfairly damaged.

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Main Points: How to Avoid the Scams

1. Verify the Source: Be extremely cautious of unsolicited stock tips, especially from unknown or uncredentialed individuals.

2. Beware of "Too Good to Be True" Promises: Be skeptical of promises for guaranteed, quick, and enormous profits.

3. Investigate Sudden Hype: Treat sudden promotional campaigns around a little-known stock—especially those tied to new product announcements or big news—as a major red flag.

4. Do Your Own Research (DYOR): Rely on credible sources and fundamental analysis, not promotional material, before making any investment.

LCTH Case Study (Sept - Dec 2010) of the "Pump and Dump" phenomenon for penny stocks

Penny Stocks: Pump and Dump (SELL TO SUCKERS)

3.4.2011

https://myinvestingnotes.blogspot.com/2011/04/penny-stocks-pump-and-dump-sell-to.html

Based on the detailed data and observations you provided about LCTH and the linked forum discussions, here is a summary and discussion of the "Pump and Dump" phenomenon for penny stocks.

Summary of the LCTH Case Study (Sept - Dec 2010)

The provided data for LCTH is a classic textbook example of a "Pump and Dump" scheme. Here's how the pattern unfolded:

1. The Setup (Pre-Pump): For months (from at least May 2010), the stock traded quietly at low volumes, with prices hovering consistently between RM 0.26 and RM 0.31. This was the period when promoters/manipulators were likely accumulating shares at these low prices.

2. The Priming & Promotion: As noted, the stock was promoted in internet forums. This created subconscious awareness among retail investors, putting the stock on their "radar screens."

3. The Ignition (Late Oct - Early Nov 2010):

   • Volume and price activity began to increase noticeably from late October.

   • November 4, 2010, was the climax. The stock gapped up, with the price hitting a high of RM 0.41 on an astronomical volume of 11.5 million shares—many times higher than any previous volume. This was the frenzy phase where hype peaked.

4. The Dump: The key question is answered here: Who sold on November 4th? The manipulators and "smart money" who had accumulated earlier sold their holdings (dumped) into the massive retail buying frenzy. The price closed at RM 0.38, already off the day's high.

5. The Aftermath & Trap (Post-Nov 4):

   • The party was essentially over, but more "suckers" entered over the next few days (Nov 8-12), buying at elevated prices (RM 0.37-0.40), providing an exit for remaining promoters.

   • With no new buyers left and the manipulators gone, the price began a precipitous fall. By late November, it was back to ~RM 0.28.

   • The following months (Dec 2010 - Jan 2011) saw the price drift listlessly between RM 0.25 and RM 0.30, leaving latecomers holding significant losses.

Key Lessons from This Event

1. Volume is a Tell-Tale Sign: A sudden, massive, and unsustainable spike in volume (like on Nov 4) is often the hallmark of a dump. It represents a transfer of shares from manipulators to the public.

2. The "Talk of the Town" is a Red Flag: When a previously unknown penny stock becomes wildly popular in forums and chat rooms, it's often near the end of the pump cycle, not the beginning.

3. The Greater Fool Theory Fails: Investors who buy during the hype are betting they can sell to a "greater fool" at a higher price. When the music stops, they find they are the greatest fools left holding the bag.

4. Low Price ≠ Value or Opportunity: A stock trading below RM 1.00 is not inherently cheap. Its low price often reflects higher risk, lower liquidity, and makes it easier to manipulate.

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Summary of the Linked Forum Discussions

The forum posts you linked discuss other suspected penny stock schemes, reinforcing the same lessons.

1. "Penny Stocks: Pump and Dump" (General Thread):

   • This thread serves as a warning and educational resource. It defines the "Pump and Dump" scheme.

   • It describes the cycle: Accumulation → Promotion/Hype (Pump) → Distribution (Dump) → Price Collapse.

   • It warns investors to be skeptical of anonymous tips, "hot news," and coordinated hype on forums and social media, especially for stocks with thin trading histories.

2. "GSB: 'Hidden Gem' or 'Pump and Dump Penny Stock'" (Specific Case):

   • This thread shows the debate in real-time that occurs around a suspected stock.

   • Proponents ("The Pump"): Argue GSB is a "hidden gem" with fantastic future prospects (e.g., ventures into high-tech fields, great management), urging others to buy before it "rockets."

   • Skeptics ("The Warning"): Point out red flags: consistent poor financial results, frequent changes in business direction, a history of private placements that dilute shareholders, and a share price pattern that looks manipulated. They accuse the promoters of creating a narrative to justify a pump.

   • This thread perfectly illustrates the conflict between hype and fundamentals. It shows how forums can be used to prime an audience with a compelling story, setting the stage for a potential pump.

Overall Discussion & Conclusion

The LCTH data and the forum threads collectively paint a clear picture of a persistent market manipulation tactic:

• Target: Low-priced, low-liquidity penny stocks.

• Method: A combination of secretive accumulation and public hype generation via modern communication channels (forums, chat groups).

• Psychology: It exploits greed, fear of missing out (FOMO), and social proof. Seeing others talk about gains validates the hype and pushes cautious investors to finally participate—almost always at the wrong time.

• Outcome: A wealth transfer from late-coming retail investors ("dumb money") to the scheming promoters ("smart money").

Final Advice for Investors:

• Extreme Skepticism: Treat unsolicited penny stock tips, especially those accompanied by hyperbolic language and promises of quick riches, with extreme skepticism.

• Do Your Own Research (DYOR): Look at years of financial statements, not just the future story. Check for profitability, debt, and cash flow.

• Volume Analysis is Crucial: Learn to read volume spikes. Ask yourself, "Who is selling into this huge volume, and why?"

• Understand the Motivation: Forum posters have no fiduciary duty to you. Ask what their motive might be for urging you to buy.

The most important lesson is that in the world of penny stocks, if something seems too good to be true and is being shouted about by strangers online, it almost certainly is a trap. True long-term investment opportunities are rarely discovered through forum hype and do not require a frantic rush to buy.