The Tulip Trade, the AI Boom and the Price of Believing
Artificial intelligence may prove to be one of the defining technologies of our generation. But technological importance and investment value are not the same thing. This article considers what previous investment booms can teach investors about valuation, concentration and maintaining discipline when a compelling story captures the market.
I was sitting with some friends recently, when the conversation turned to artificial intelligence.
Somewhere along the way, I brought up something that happened almost 400 years ago: the Dutch tulip mania of the 1630s (I mistakenly said sunflowers at first).
At first glance, it is an unusual comparison.Rare tulip bulbs on one hand. Artificial intelligence on the other.
One was a flower. The other has the potential to reshape productivity, business models, employment, investment markets and perhaps entire industries.
But the comparison is not really about the underlying asset or technology.
It is about what happens when enthusiasm, expectation and price begin to reinforce one another.
Because the important question is not whether AI will change the world.
It almost certainly will.
The harder question is whether the excitement surrounding it is causing investors to lose sight of something more fundamental: What is it worth, and how much should we be prepared to pay for it? History does not repeat exactly, but investor behaviour has a habit of looking familiar.
When belief starts driving price
During the Dutch tulip episode of the 1630s, rare varieties became highly sought after among wealthy merchants and collectors.
As interest increased, trading developed around bulbs that had not even been lifted from the ground. Buyers were increasingly willing to pay higher prices because they believed someone else would ultimately be prepared to pay more again.
When confidence weakened in 1637, prices fell sharply. The popular retelling of tulip mania - where an entire country was supposedly financially ruined by flowers - has become exaggerated over time.
But the story remains useful because the underlying behaviour is recognisable.
At some point, the investment case can shift.
Price becomes less connected to what an asset can reasonably produce and more connected to what investors believe the next buyer might pay.
The dot-com boom provides a more recent and arguably more relevant example.
The internet was not a fad.
It fundamentally changed commerce, communication, media, information and productivity.
Those who believed in the broad technological trend were correct.
But that did not mean every internet business was a good investment.
Many investors lost substantial amounts of money because they backed companies whose valuations assumed extraordinary future outcomes that those businesses could never deliver. The technology succeeded. Many of the investments did not. That distinction matters.
A technological revolution does not make every investment attractive
Artificial intelligence may prove to be one of the most important technological developments of our time.
But investors still need to separate several different questions.
First, will AI materially change the way businesses and economies operate?
Second, which companies will genuinely capture the economic value created by that change?
Third, how much of that value has already been anticipated by investors and incorporated into today's prices?
These questions are related, but they are not interchangeable.
A company can possess extraordinary technology, strong management and an enormous addressable market and still be a poor investment if the price paid already assumes years of near-perfect execution.
Equally, some of the largest beneficiaries of AI may ultimately be businesses that barely feature in today's discussion. They may not develop the underlying models or produce the chips.
Instead, they may use AI to reduce labour intensity, improve decision-making, lower costs, increase margins, improve customer service or fundamentally redesign their operating model.
The largest economic beneficiaries of a technological revolution are not always the companies that initially attract the most investor attention.
The danger of being right for the wrong reason
There is another lesson from previous investment cycles.
Being correct about the broad direction of change does not guarantee a good financial outcome.
An investor could have correctly identified the importance of the internet in the late 1990s and still lost money.
An investor could have correctly identified the long-term importance of railroads, telecommunications, renewable energy or biotechnology and still overpaid for individual assets along the way.
Investment returns depend not just on what happens.
They depend on what was already expected to happen when the investment was made.
That is why valuation remains important even when the underlying opportunity appears extraordinary.
The more exciting the story, the easier it can become to justify increasingly optimistic assumptions. And once those assumptions become embedded in the price, the margin for disappointment becomes much smaller.
Why this matters differently for significant wealth
For a family office, this issue is broader than simply deciding whether to buy or sell a technology stock.
Families often hold wealth across multiple structures and asset classes: operating businesses, property, direct equities, external investment managers, private equity, venture investments, credit, cash and other private assets. That creates an important challenge.
Exposure can accumulate in places that are not immediately obvious.
A family may own large technology positions directly. It may then own many of the same companies again through index funds. External managers may add further exposure.
Private equity and venture portfolios may increasingly be linked to AI-related themes.
And the family's own operating businesses may also become economically dependent on the success of the same technology ecosystem.
Individually, each investment may be entirely defensible.
But when viewed together, the family may have a much larger exposure to one theme than anyone intended.
This is why wealth should increasingly be viewed from the investor’s total portfolio (globally).
The relevant question is not simply whether an individual manager, fund or investment is attractive. It is how that investment changes the risk profile of the family's entire balance sheet.
Concentration is not always obvious
Traditional portfolio reporting can sometimes obscure this.
An equity portfolio may appear diversified because it owns 30+ securities.
Yet if a relatively small number of large companies drive a significant portion of the index, the underlying economic exposure may be more concentrated than the number of holdings suggests.
The same can occur across investment managers. A family may employ several different managers believing this creates diversification, only to discover that many of them own similar businesses for similar reasons.
The names of the funds are different.
The underlying exposures may not be.
For family wealth, understanding this matters because the consequences of concentration extend beyond portfolio volatility.
Liquidity requirements, debt obligations, business commitments, tax liabilities and future family distributions all sit alongside the investment portfolio.
A loss occurring at the wrong time can have very different consequences for a family with large future commitments than for an investor considering a portfolio in isolation.
Participation without prediction
None of this means investors should avoid AI.
Nor does it require predicting when enthusiasm has gone too far. Trying to identify the exact top of a market is rarely a sensible investment strategy.
A better approach is to understand the exposure being taken and determine whether it remains appropriate in the context of the family's broader objectives.
For one family, that may mean continuing to participate because the exposure remains modest.
For another, it may mean rebalancing because technology exposure has grown significantly through market appreciation.
For another, the decision may simply be to avoid adding to an already substantial position.
There is no universal answer.
The discipline lies in understanding what is owned, why it is owned, what assumptions justify its valuation and how much risk the family is actually taking. Sometimes good investment management involves taking action.
Sometimes it involves resisting the pressure to take action simply because everyone else appears to be doing so.
The lesson has not changed
Tulips were not worthless because investors once speculated on them. The internet was not a failure because the dot-com bubble burst. And artificial intelligence will not somehow become less transformative if some of today's most highly valued AI investments ultimately disappoint.
The opportunity and the speculation can exist at the same time.
That is the part investors need to remember.
The objective is not to avoid every expensive investment or identify every future winner.
It is to maintain enough discipline to distinguish between a compelling technology, a compelling company and a compelling investment.
They are not necessarily the same thing.
For families managing wealth across generations, that distinction matters even more.
You do not need to own every winner to preserve and grow wealth.
But you do need to understand the risks you are taking, the assumptions you are paying for and how each investment fits into the broader family balance sheet.
The next big thing may well change the world.
The question is whether the price you pay today leaves enough of the future return for you.
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