Why Investors Need to Stay Wary of Sure-Shot Multi-Year Themes, The ESG Cautionary Tale and the AI Hype
When talking of investments and the ideal portfolio, I speak about asset allocation, diversification across countries, sectors and so on. But that sounds too boring and everyone wants the lowdown on multi-year investment themes to play. Many seem convinced I am hiding it from them and probably sharing it only with a chosen few.
The all-time favourite question from professional interviewers as well as common investors is: Which is the theme you can recommend that will do well for the next few years, one that you can buy and forget?
Most experts on television can and will give you a confident, definitive answer to this and their analysis of these themes, which are more or less guaranteed to do well. While the current hype is about artificial intelligence, go back a few years and everyone seemed to think you could not go wrong buying the environment, sustainability and governance (ESG) theme.
The ESG Story: A Cautionary Tale
The proposition was crystal clear: Human beings had no option but to take climate change seriously. All companies were giving targets on how they would reduce their carbon footprint. Huge sums of money would need to go into the ESG space to make change happen. This was an area that would see more and more investment and made for an obviously great opportunity.
A large number of ESG funds were launched around the world (including in India), both in listed spaces and unlisted (venture capital and private equity), with talking heads on TV and social media hyping this to the skies. In the fourth quarter of 2020 alone, over $150 billion was pumped into these funds.
And then? Suddenly the engine for this ‘multi-year’ story began to sputter and splutter. Mind you, all this happened well before US President Donald Trump came back to office and threw out all data on climate change.
In 2023 and 2024 alone, literally thousands of sustainable or ESG funds were closed or renamed across the world, according to Morningstar data. This trend has continued. With energy-hungry AI becoming the latest theme in town, many corporations including Microsoft have simply stopped giving data on their carbon emission reduction commitments.
This is the reality of multi-year stories.
The Hindsight Bias
By now, you will hardly find an expert who will admit to having hyped ESG as a long-term theme not so long ago. They might genuinely have forgotten this. The human mind has a great capacity to rewrite history to make itself look good. This is called ‘the hindsight bias’.
From election results to stock prices, once the move happens or results are declared, we genuinely believe that we had predicted the right outcome all along! The moral of the story? Nobody knows what happens in the long-term because there are just too many variables and uncertainties involved.
Nevertheless, the lure of the pied piper remains strong.
Dotcoms and Pipes
Towards the end of the last century, the story was about ‘dotcoms,’ as they were called. The world was moving online and those that grabbed eyeballs (which was the metric of the year) could later harvest that attention for money—at least that was the theory. Yes, that era did throw up an Amazon or eBay, but over 95% of those companies didn’t live to see the monetization of the net or the ubiquity of online shopping.
Then in the next phase, we said that we did not know which of these end businesses would succeed. But since the internet was going to take over the world, at least those literally laying the pipes for it were a sure-shot bet (yes, that phrase again).
The pipes, or rather undersea cables, laid in the early part of the century still carry the internet, but one of the major companies that laid them, Global Crossing, went bankrupt over two decades ago.
The AI Capex Frenzy
The four mega listed AI-oriented companies—Amazon, Microsoft, Meta and Google—are projecting a capital expenditure of $650-700 billion in 2026. For context, their combined capex was about $150 million in 2023. Actual investments may be even higher as some of them are getting smaller companies to set up data centres and are merely leasing capacity from them.
There is basically a crazy amount of money going into setting up AI infrastructure. The question is whether this capital will ever make an economic return on capital. Will users ever pay enough to justify these investments?
The Railroad Mania
Nor is this craze for an investment story a recent phenomenon. Pick up any economic history book on bubbles and you can read about many, like the railroad mania. Remember that half truths are surprisingly more dangerous than complete lies.
So most of what are sold as multi-year investment themes could well be transformational technologies—that held for railroads, just as it did for the internet. The question is whether they make for the best investments.
The Unknown Unknowns
In the case of new technologies and themes, we do not know if something will succeed, how long it will take to succeed even if it does, which players would succeed, and even if these players make a mark in that field, if they will ever make adequate returns for investors.
This is the fundamental problem with theme investing. It confuses a good story with a good investment. It assumes that because a technology will change the world, it will make money for investors. History shows that is not always true.
Conclusion: Stories Are for Mental Health, Not Portfolios
Stories are good for your mental health, making your body secrete good hormones and chemicals, but not for your portfolio. Don’t ask experts for crystal balls and magic wands. Because they exist only in the realm of fairy tales.
The prudent investor diversifies, stays humble about their ability to predict the future, and focuses on valuation rather than narrative. The next time an expert offers you a “sure-shot multi-year theme,” remember ESG, remember dotcoms, remember railroads. And then ask yourself: if it’s so sure, why are they telling me?
Q&A: Unpacking the Investment Theme Critique
Q1: What happened to the ESG investment theme?
ESG funds attracted massive inflows—over $150 billion in Q4 2020 alone—based on the seemingly unassailable logic that climate change would force massive investment. Yet by 2023-24, thousands of sustainable funds were closed or renamed. Many corporations, including Microsoft, have stopped reporting carbon emission data. The “sure-shot” theme fizzled despite its logical foundations.
Q2: What is the “hindsight bias” and how does it affect investment advice?
Hindsight bias is the human tendency to rewrite history to make ourselves look good. After an event occurs, we genuinely believe we predicted it all along. This leads experts to forget they hyped failed themes and investors to overestimate their predictive abilities. It’s a cognitive trap that makes us vulnerable to future theme-based pitches.
Q3: What happened during the dotcom era that parallels today’s AI hype?
Over 95% of dotcom companies failed, though the era produced enduring successes like Amazon and eBay. Later, investors pivoted to “pipes”—companies laying internet infrastructure—but Global Crossing, a major undersea cable company, went bankrupt. Transformational technologies don’t necessarily translate into profitable investments for all players.
Q4: What is the scale of AI-related capital expenditure and what is the concern?
Amazon, Microsoft, Meta, and Google are projecting $650-700 billion in capex for 2026, up from about $150 million in 2023. The concern is whether this massive investment will ever generate adequate economic returns. Will users pay enough to justify the spending? History suggests not every infrastructure build-out pays off.
Q5: What should investors learn from these cautionary tales?
Good stories are not the same as good investments. Transformational technologies may succeed, but we don’t know which players will win, how long it will take, or whether winners will generate adequate returns for investors. Prudent investing requires diversification, humility about predictive ability, and focus on valuation rather than narrative. Crystal balls exist only in fairy tales.
