Artificial intelligence (AI) is a hot topic these days, and many investors expect big profits from the new niche.
Still, we can’t know for sure which companies will be the big AI winners in the future – and which will flame out. (Remember how many businesses imploded in the dot-com bust years ago.)
Fortunately, there’s a better way to invest in the top AI stocks than simply trying to pick winners at this early stage: exchange-traded funds (ETF).
ETFs offer easy diversification.
As with a mutual fund, you can own multiple stocks through a single ETF. Among indexes that track the top AI stocks, one worth considering is the Nasdaq-100.
It contains the 100 largest stocks on the Nasdaq Composite, with most of its value coming from the tech sector.
The “Magnificent Seven” stocks – Apple, Microsoft, Google parent Alphabet, Amazon, Nvidia, Tesla and Facebook parent Meta Platforms – recently made up almost half of the index’s value.
All of those stocks are significantly involved in AI and are leading innovators in the sector.
The Nasdaq-100 has been outperforming the S&P 500 this year, as it’s heavily weighted to innovative technology companies such as those above.
It also looks like a better investment than ETFs focused more exclusively on AI. Consider investing long-term dollars in it via the Invesco Nasdaq-100 ETF (QQQM).
Ask the Fool
Q. Is a company’s “float” the same as its outstanding shares? – R.T., Erie, Colorado
A. Not quite. The float, or floating stock, refers to just those shares that are available in the open market – not those held by insiders and controlling investors.
A company’s outstanding shares are all of those now owned by investors and others, such as company executives. (Any shares held in the company’s treasury, such as ones that have been repurchased, are not counted.)
Many outstanding shares are traded frequently between buyers and sellers on the open market. Others may be held by insiders or others who don’t plan to sell anytime soon.
Outstanding shares figure in many calculations, such as earnings per share (EPS) and market capitalization.
Note that a company may report both basic and diluted shares as outstanding. The “diluted” figure includes securities that could become shares, such as stock options, warrants and more, but that’s an area that gets complicated fast.
Q. I bought shares of a company a few years ago for around $90 each. They’re now trading below $10 per share.
I don’t want to sell them for such a big loss, but I’m not sure what to do. Help? – D.L., Baton Rouge, Louisiana
A. Look forward, not backward.
Don’t focus on the difference between the price you bought at and the current price.
Instead, compare the current price to what you think the stock is really worth.
If it seems worth more due to your expectations of growth, consider hanging on.
If you think the current price is fair or generous, sell. Remember that you can always try to make up what you lost in another, more promising stock.
My Dumbest Investment
Warren Buffett’s business partner, Charlie Munger, is reported to have said: “If you think your IQ is 160 but it’s 150, you’re a disaster. It’s much better to have a 130 IQ and think it’s 120.”
I wish I’d heard this wisdom earlier.
Back in 1999, dot-com mania was in full swing. I was in high school and had been investing in stocks for a while with money earned from mowing lawns and other activities.
Believing I was on the cusp of making the next great internet fortune, I started buying shares of Xoom, a provider of free websites and clip art (not the digital money transfer business acquired by PayPal).
I studied its financial reports. Revenue was modest, but I somehow convinced myself that the money-losing business would grow enough to warrant a market value 60 times as high.
It didn’t. I lost nearly 50% of my investment.
I learned many valuable lessons from this experience: Don’t let overconfidence take over your portfolio or any aspect of your life.
I let favorable results in an extreme bull market fool me into thinking I was a better investor than I was.
Also, diversification is a safety mechanism worth implementing in a portfolio. – D.B., online
The Fool responds: Periods of stock market mania have led many to jump into overvalued stocks with great – and unfounded – confidence.
You’re lucky to have learned these lessons early.
