Get ready for a possible AI growth stock crash

Theyâre calling it a bubble. Theyâre saying valuations in AI growth stocks are getting insane. They might have a point, too.

The S&P 500âs average price-to-earnings ratio has climbed to levels rarely seen in recorded history. Its Shiller P/E ratio (like a 10-year average) has climbed to levels rarely seen in recorded history. Its average price-to-sales ratio has climbed toâ¦ Well, you get the idea.

On many metrics, the most comparable period in the stock market was the dot.com boom. An perfect memory isnât required to recall that little episode didnât end up being a great time for growth stocks.Â

But this time is different, isnât it? Fears of stretched valuations and crazy share prices are overblown, arenât they? Thatâs because artificial intelligence is well on its way to supercharging profits and transforming the economy, isnât it?

Isnât itâ¦?

Alarming news

An MIT study released in recent days revealed an alarming bit of news. Of initiatives across companies to use AI to increase productivity or efficiency, 95% of them failed to make a return on investment. In other words, only one in 20 firms is using AI profitably.Â

Those are crazy numbers, and it seems like the alarm bells are percolating to mainstream news outlets too. Here are a couple of headlines that caught my eye, all from the last four or five days as I write this:

The Guardian: âIs the AI bubble about to burst â and send the stock market into freefall?â

The Telegraph: âThe warning signs the AI bubble is about to burstâ

Forbes: âIs The AI Bubble Bursting? Lessons From The Dot-Com Eraâ

Personally, these worrying details have caused me to reallocate a portion of my portfolio into a 4%-returning Cash ISA. Not too much of my holdings in percentage terms, mind. If AI does end up bringing home the bacon, then Iâm still well placed to benefit.Â

But a risk-free 4% sounds attractive for the next year or two. And if the AI bubble does pop? Then Iâll have a chunk of dry powder to snap up stocks on the cheap.

A different approach

Iâm not the only investor keeping a tranche of their portfolio in cash either. Warren Buffettâs Berkshire Hathaway (NASDAQ: BRKA) has built up a $354bn cash position while whittling equities down to $272bn. The worldâs most famous investor has taken a look at the markets and chosen to have more in cash than in stocks!

Berkshire has long been famous for its above-market returns, going back to the 1960s.Â Will this unprecedented building up of cash be yet another prescient move? Will Buffett and I come out laughing? No one can say for sure. And for potential investors of the $1trn market-cap conglomerate, the recent announcement that Buffett will leave his post by the end of the year is another risk to bear in mind.Â

But for anyone looking to swerve the AI mania and take a value investing approach, all while outsourcing the nuts and bolts of portfolio selection, Berkshire Hathaway stock is one to consider.

The post Get ready for a possible AI growth stock crash appeared first on The Motley Fool UK.

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John Fieldsend has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned.Â Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.