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Stock market crashes are impossible to predict accurately, but investors are always interested in when the next one is coming. And the last two nights may have brought us closer to the brink.
But I think there is something wrong with this. Let me explain.
The problem of AI
There are many things that can cause prices to drop significantly. However the biggest one at the moment is Artificial Intelligence (AI) and I think this looks like a real problem.
Meta, Microsoft, Alphabetsagain Amazon all announced plans to continue capital spending for 2026. In other words, they are growing more and more in their use of AI.
There were already doubts about whether this would bear fruit. And the stock market’s general reaction to the news suggests there are still concerns about an AI bubble.
Even if they’re right, the rise of AI still spells trouble elsewhere. Both the US and UK economies rely on high employment to drive strong consumer spending.
If AI really takes off, it looks like it will threaten a large number of jobs. And if that’s the case, some stock markets could be in serious trouble if activity slows down and costs fall.
History lessons
When it comes to stock market crashes, the lessons of history are clear. Investors who own – and continue to own – stocks in high-quality companies tend to do well over time.
The so-called ‘Nify Fifty’ was a collection of US stocks that investors thought were infallible. But they fell sharply during the stock market crash of 1973-74.
Some never recovered, but those who did did more than set you free. According to estimates, a $1,000 investment Philip Morris from 1972 would be worth about $43,000,000 today.
Even if everyone else had gone to zero, the person who bought all 50 before the crash would have done very well, in the long run. And that’s what I think investors need to remember in today’s market.
What to do
The Nifty Fifty lesson resonates with me. So I’m trying to build my own collection of high quality stocks that I intend to hold on to no matter what happens with the broader stock market.
One of the stocks I was buying Brown & Brown (NYSE:BRO). The company is a business insurance broker that is too large for its local broker, but too small to be of interest to global operators.
Its biggest advantage is its scale. This allows it to attract better rates from carriers and offer its customers the kind of value they can’t get anywhere else.
It also works the other way around – having more potential customers encourages carriers to offer Brown & Brown better rates. And I think that’s like a very strong long-term benefit.
Planting risks
Even with the best companies, investing in the stock market always comes with risks. The Nifty 50 is a good example of this – many strong businesses have not recovered from relative crashes.
With Brown & Brown, my main concern is the possibility of clients merging or going out of business. And AI automation can make that a real possibility.
I cannot guarantee that everything I have invested will work. But what I can do is build a diversified portfolio to give myself the best chance of having the ones that don’t.
