Last week I wrote about skill versus luck in investing. You don’t want to be guided by rookies who got lucky on one risky trade that happened to work out.

HOWEVER, that doesn’t mean luck can’t play a role in fattening up your retirement account!

Case in point…

One of my family members (let's call her Sandra) recently doubled her money on a stock in less than a month.

The hilarious part is that Sandra thought she bought stock in OpenAI, the hottest AI company in the world, when in fact she bought the stock of a totally unrelated company called C3 AI 😂

This was a fluke, but it highlights how stock market hype cycles are powerful return generators. Learning to ride hype cycles is a great way to benefit from the stock market’s tendency to excessively reward stocks in the spotlight.

Let’s return to Sandra’s big score for some insight:

OpenAI’s launch of their groundbreaking chatGPT chatbot in 2022 kicked off a frenzy of excitement in AI. ChatGPT captivated consumers and the media so intensely that it allegedly became the fastest growing consumer app in history.

C3 AI on the other hand, sells artificial intelligence software to large enterprises, but the company is not viewed as a leader within the AI tech community. It lost 65% of its value in 2022 as operating losses mounted.

However, C3 made a brilliant marketing move at its IPO in 2020: it nabbed the coveted “AI” ticker symbol for its stock.

You can probably guess how Sandra ended up buying C3 by mistake…

Sandra wanted exposure to OpenAI, and a stock trading under the symbol “AI” confused her into thinking it had already gone public (OpenAI remains private despite Microsoft recently investing).

C3 stock was in the right place at the right time to start 2023, riding a wave of hype surrounding other next gen AI companies. It exploded from $11 per share to almost $30 by early February.

And it’s not the only stock benefitting from the current AI hype cycle. I recently shared my own watchlist of stocks that have an AI angle on Twitter, and most of them have posted strong gains to start the year.

Hype cycles are common in the stock market. They usually lead to a group of stocks skyrocketing higher for at least a few months.

It’s a tide that lifts many boats, even weaker ones that are poorly positioned for the long term.

Major hype cycles over the past few years including electric vehicles, blockchains, cannabis, alternative energy, 5G, cloud software & infrastructure, 3D printing, gene editing, and more.

Some hype cycles lead to industry disruption, new public companies, and massive stock gains. Examples that come to mind are cloud software, social networking, and smartphone apps.

Other hype cycles fade out as the reality of business performance doesn’t live up to the promises (example: 3D printing so far).

So how do we harness hype cycles to our advantage?

Here is my framework for investing in hype cycles:

1. Identify the trend early
2. Dive deep into the subject area to understand the opportunity size & timeline
3. Find healthy publicly traded companies that can benefit financially
4. Lock in capital gains before the hype cycle fades

I’m going to dive deeper into these steps here in the newsletter in the coming week. I'll also point out a few potential areas where I think a hype cycle could emerge in the coming years.

Until then have a great start to your week!

Cheers,

Travis

P.S. - If you know anyone who would find this series helpful, send them over to travisdevitt.com where they can get on this newsletter list