The AI bubble is here—and it's getting serious attention. Goldman Sachs CEO David Solomon warns it poses greater systemic risks than both the dot.com crash and the 2008 subprime crisis, calling it "one of the major speculative frenzies in market history."

Here's why this matters for your portfolio: the S&P 500 has a concentration problem. In 2025, the "Magnificent 7" (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, Tesla) account for roughly 34% of the total S&P 500 value.

So when you invest $1 in an S&P 500 index fund, 34 cents goes to just 7 companies, while the remaining 66 cents is split among the other 493 companies.

The best way to illustrate this problem? With some help from my favorite reformed supervillain, Gru (of Despicable Me fame).

As Gru illustrates, an index fund doesn't quite give us the diversification we're looking for these days.

Traditional investing wisdom says index funds spread your risk across hundreds of companies. But when 7 companies control a third of the index, you're not diversified—you're concentrated. And concentrated portfolios amplify both gains and losses.

Most of the Magnificent 7 are betting big on AI adoption growing at an unprecedented pace. Consider OpenAI's trajectory as a proxy:

The market expects OpenAI to grow from approximately $3.7 billion in 2024 revenue to $300 billion by 2030. That's roughly 8,000% growth in 6 years.

To put that in perspective:

The market is pricing in growth that's 20-25x faster than the best companies in history achieved—during their peak growth periods, in winner-take-all markets, with minimal competition.

OpenAI faces intense competition from Google, Microsoft, Anthropic, Meta, and dozens of well-funded startups. Yet the market expects them to outperform historical precedents by an order of magnitude.

The concentration risk is dangerous enough on its own. But these companies are also leveraged to the hilt:

And they're trading at an average P/E ratio of 57—nearly double the S&P 500's historical average of 30.

(I break down P/E ratio in this week's Feynman's Finance.)

Translation: These companies have borrowed aggressively to fund AI infrastructure, acquisitions, and stock buybacks. If revenue growth disappoints, they don't just face declining stock prices—they face a debt burden that amplifies losses. It's financial leverage on top of operational leverage on top of valuation leverage.

When everything goes up, leverage multiplies gains. When things go down, it multiplies losses.

If OpenAI and the broader AI boom fail to hit these impossibly high targets, the Magnificent 7's valuations crumble—as does your diversified portfolio.

This bubble doesn't exist in isolation. Layer on top:

Geopolitical instability: Trade wars (which increase costs for tech companies dependent on global supply chains for chips, components, and manufacturing), Russia/Ukraine/NATO tensions (which create energy price volatility), Israel/Gaza conflicts (which threaten Middle East stability and oil markets)

Unsustainable debt: A $38 trillion national debt growing at $1.5 trillion per year

Federal Reserve pressure: Trump is exerting intense pressure on the Fed to decrease interest rates. While decreased rates stimulate the economy in the short term (and politicians love taking credit for a strong economy—"It's the economy, stupid"), they also create micro and macro bubbles, and can further destabilize the economy if not carefully managed.

IMF warnings: The International Monetary Fund warns that global markets are "getting too comfortable with risks like trade wars, geopolitical tensions and yawning government deficits." Combined with already overpriced assets, these factors increase the chance of a "disorderly" market correction.

The IMF added that central banks should remain alert to tariff-driven inflation risks and take a cautious stance on monetary easing. They called for "urgent fiscal adjustments" to curb deficits and ensure resilient bond markets.

To return to our Gru metaphor: imagine his disproportionate self peering over the edge of a cliff on a particularly windy day. A prolonged or escalated trade war, an escalation of one of the global conflicts, or open AI just slightly missing revenue targets could be enough to tip him over the edge.

We’ll turn to Mr. Buffett once again

“Be fearful when others are greedy, and greedy when others are fearful”

The paradoxical thing about this, is that this type greed is actually driven by fear of loss or missing out.

The fear he advises, is actually a wise and objective caution.

Buffett has famously avoided most tech investing, choosing to remain in his circle of competence, investing in businesses he thoroughly understands.

This bubble/bust pattern occurs in all markets (and in all areas of life). No one can predict exactly when it will occur or to what degree with any reliable accuracy. Only that it will.

Wise investors position themselves accordingly. They hold cash and wait. They'll often miss out on months, maybe even years of profits, but they'd rather invest than gamble. They'd rather miss short-term gains than risk permanent capital loss.

I am not an investment advisor and won't make recommendations about your portfolio. But with a looming—and perhaps unprecedented—crisis, here's what I'm doing:

You can't predict when corrections happen. You can only be ready when they do.

Artificial Christmas trees are facing shortages due to tariffs.

Not live trees. Artificial ones.

So for those of you who created a detailed spreadsheet comparing the lifetime cost of real trees versus artificial ones, factored in storage space and aesthetic depreciation, and concluded that 2025 was finally the year to pull the trigger on that artificial tree investment— I’m so sorry.

But never fear, the administration is on it.

"This is why we are having conversations with the [Trump] administration so we can potentially save Christmas going forward and give American consumers the low prices that we think they deserve."

I don't know about you, but the fact that they may potentially save Christmas gives me a lot of potential confidence.

To help contextualize the severity of this crisis, I've created a simple framework:

Crisis Severity Scale:

Glad to see we've got our priorities straight.

If this is a legitimate concern for you, Amazon has plenty of artificial Christmas trees in stock, with 2-day delivery. I guess I just saved Christmas.

If someone could alert the administration, that would be great—you know, just in case there are other matters requiring attention.

I’m sure everything is fine though…

Robert Shiller—renowned economist and Nobel Laureate—coined the term "irrational exuberance" in 2000, right before the dot.com crash. He literally wrote the book on market bubbles (it's called "Irrational Exuberance"), and the timing of its publication remains one of the most prescient calls in economic history.

Here's his definition:

"A speculative bubble is a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors, who, despite doubts, are drawn to it partly through envy of others' successes and partly through a gambler's excitement."

In simpler terms: the price increase itself becomes the news that creates more price increases. It's circular. The asset doesn't need to be producing more value—just more believers.

Nowhere in this cycle does fundamental value matter. It's pure mania feeding on itself.

This is the famous "shoeshine boy" indicator from 1929. Joe Kennedy (JFK's father) sold all his stocks before the crash when his shoeshine boy started giving him stock tips. His reasoning: "When even shoeshine boys are giving stock tips, it's time to get out."

The principle: when people with no expertise in an asset class suddenly become experts, you're at the top.

Now consider AI in 2025:

Your neighbor says:

Stories emerge to justify it:

The justifications always sound different:

But the psychology is identical.

Will AI transform the world? Highly Likely.

Will these companies generate enormous value? Many will.

Does that justify current valuations?

Earlier I mentioned the Magnificent 7 are trading at an average P/E ratio of 57—nearly double the historical average.

But what does that actually mean? And why should you care?

I break down everything you need to know about Price-to-Earnings ratios, what they tell us about market valuations, and why a P/E of 57 should make you nervous.

[Understanding P/E Ratios: A Complete Guide to Value and Risk]

Charlie Munger's famous 1986 Harvard commencement speech used the principle of inversion—solving problems by reversing them—to share unconventional advice on how to live a miserable life, inspired by Johnny Carson's Tonight Show monologue.

Johnny Carson's "Recipe for Misery"

Carson, uncertain how to prescribe happiness, instead warned against three behaviors guaranteed to create misery:

Carson stated he had personally tried all three and found they invariably led to unhappiness.

Munger expanded on Carson's list:

Munger emphasized that avoiding these behaviors is more effective for happiness than searching for elusive positive prescriptions. By illustrating guaranteed ways to cultivate misery, he taught graduates the wisdom of inversion: determine what to avoid, so you don't end up where you don't want to be.

Humans are psychologically more predisposed to avoid negatives than pursue positives due to a well-established "negativity bias"—we give greater attention and weight to negative experiences, outcomes, or risks than to positive ones.

This explains why "lose 20 pounds" motivates less than "avoid diabetes." Why "save for retirement" feels vague but "don't end up broke at 70" creates urgency. Why highlighting what NOT to do often works better than prescribing what TO do.

The Science:

This explains why advice like Munger's—focused on what to avoid—feels more urgent and actionable than chasing abstract positive outcomes.

I recently applied this approach to an area of my life I wanted to improve: the quality of my attention and focus.

Historically, I've tried visualizing positive future outcomes—the prevailing self-help prescription. It never worked for me, and now I understand why. We're hardwired with a negativity bias. This is usually leveraged against us (fear-based information dominates our screens), but we can use it to our advantage.

Rather than projecting what deep work blocks would yield in future income, I realized I had no idea where increased focus would lead me, but I knew there was significant untapped potential.

That was all I needed, then I created this list…

Things to Do to Ensure I Never Realize That Untapped Potential:

Pick one area where you want to grow. Write out your own "recipe for failure" in that domain. Be specific. Be honest.

The inverse actions will become immediately clear.

That's the power of inversion—sometimes the best way forward is to identify all the ways to go backward, then simply... don't do those things.

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