Mailbag: Is Passive Investing Fracturing Traditional Investing Methods?

[The Bleeding Edge]( Colin’s Note: Folks, it’s time for another mailbag Q&A update from The Bleeding Edge… You and your fellow readers have been writing in your questions to the Brownstone mailbag… And today, I’ll address a few. In response to Monday’s issue on Microsoft’s Goodyear, Arizona, artificial intelligence (AI) data center that’s burning through nearly 60 million gallons of water a year to keep the servers cool… One reader wants to know: Why not submerge the servers to cool them down? Another wonders if passive investing is putting a sizeable dent in how much traditional investing folks are doing… And what exactly does that mean for active stock-pickers? And finally, what would the impact be if folks and companies suddenly started pulling all their money out of stocks… and pouring it into crypto? I get into these questions in today’s video. Just click below to access it… And if you have a question of your own you’d like answered, write us at feedback@brownstoneresearch.com. We might feature it in the next Q&A video… --------------------------------------------------------------- Bleeding Edge subscribers, welcome back to the newsletter. Today, we're going to jump into the question-and-answer mailbag and answer a couple of questions that have come in. You can always contact me with your questions at feedback@brownstoneresearch.com. And we might answer them here in the newsletter. Let's not waste any time. Jump right into the first one… Can you explain why you don't believe that submerging servers in a dielectric liquid is not a good application for large data centers? – Matt F. Now, this relates to a newsletter we sent out [at the beginning of this week](. We talked about how Microsoft has this Goodyear, Arizona, artificial intelligence (AI) data center. The Atlantic reported that in this single data center alone, Microsoft is burning through nearly 60 million gallons of water a year to keep the facility cool enough to be operational and running at peak capacity. That’s just in one single facility. And Microsoft operates dozens if not hundreds of data centers around the world. One alternative to using water and a traditional air conditioner to keep the inside of a data center cold involves submerging the entire server in a bath of dielectric liquid. It’s simply the liquid form of an insulative material that is a poor conductor of electricity. It's a tremendous way to keep something cool and it works extremely well in a server environment. Now, I had to clarify and I wanted to make sure I give you the best advice possible… So I have a buddy who works at one of the three largest cloud service providers. He did not want me to say which company it was, but it is one of the three largest – Microsoft, Google, or Amazon. He just doesn't want it to come across as an official company statement. I talked to him about this and he said it would be difficult for his company to convert its existing data centers to a submersible liquid environment. So, the architecture has to change. Obviously, they have to bring in large amounts of liquid. That could create an environment in the existing data centers that might be difficult for these companies to adapt to. He said it would be easier for some of this on-device technology to essentially put air conditioning much closer to the heat source – these large AI chips – instead of having these fans and water vapor across an entire room. He says it'd be far easier to retrofit the existing large data centers in that fashion. Now, what he did say is newer data centers – data centers that are currently being constructed and certainly smaller data centers as well – could use this submersible liquid. So both are great alternatives to the current system. But in terms of the existing data centers, it would be a little bit easier from an architecture perspective to use some of the AC and thermal devices that are out there on the market. As I noted, for our Exponential Tech subscribers, we identified this trend last year. Through all the research that we were doing, we realized this was going to be probably a major trend. And we recommended a stock in this space – one of the market leaders, if you will, from a small-cap perspective. We recommended those shares last year and Wall Street has taken notice. Shares of that company are up, I believe about 90%. So, this is something, going forward, that we're going to continue to monitor. It'll probably be maybe a fluid situation in terms of the technology that is used. And it is something that I am looking at every single day and trying to read and research as much as possible. And when I find out any new information, certainly bring it to you here in the newsletter. Now, the next question that we got was from a reader concerning statements from David Einhorn – hedge fund manager and Wall Street titan… Colin, I would be interested in your opinion on a published article [on Einhorn] promoting the idea that the increasing volume of passive investing & AI/algorithmic trading is fracturing the normal method of investing [and that active stock-picking is shrinking]… – Bart M. And I certainly agree with that. I think all the stats back this up, and I think there are a couple of reasons for it. First of all, you have a lot of people who correctly realize that growing their wealth in the stock market is fantastic… But the vast majority of people out there simply can't do anything other than passive investing. They have a nine-to-five job, they come home and they're tired, they probably have a family and kids. If you're like me, you're picking up the kids, you've got to make dinner. Maybe at the end of the day, you might have an hour to yourself where you can watch a TV show or a movie. Or if you're like me, you're totally geeked out in these stock markets, you're waking up, looking at the stock charts, you're doing it. I mean, it's essentially my job. This is what I do every single day. But most people don't fall into my category, so they have a 401(k) or an IRA, and money is just passively being dumped into that. Now, what we've seen in the stock market is that has created a concentration, around really the largest companies – Apple, Microsoft, Google, Amazon, etc. They have seen a huge inflow from these passive investing funds because, let's face it, you look at the financials of these companies and the fundamentals of these companies. They're producing some of the highest amount of cash flow, the highest amount of free cash flow, the highest amount of profits and revenues, and those are great things for shareholders. Now, what I think David Einhorn may be correctly identifying is this is fracturing the markets as a lot of people are getting their exposure through passive investing. But I think this creates a great opportunity for active stock pickers to prove that they are worth it. Because you have passive investing options where you can just dump your money into a fund and let the fund managers at Fidelity or Schwab do all the work after that. You also have AI and algorithmic computer trading often being run by the largest hedge funds and often being sold as an option to investors as well. Active stock pickers have to do a better job at proving and providing value to our clients. And I think we do that here at Brownstone Research. If you look at our Near Future Report advisory, out of all of the stock selections that we have recommended since I took over in June last year, one is hovering around unchanged, and the rest are higher – 40% and 50% gains in some cases. You have to prove yourself time and time again if you're an active stock-picker. It's not an easy thing, as I know firsthand. But every single day I wake up wanting to prove myself and get better at it. And while I think passive investing and algo trading certainly have their place in the stock market, active stock-picking, active research, and fundamental boots-on-the-ground research will always also have its place in the stock market. And I think if you find somebody who is good at it, it's worth paying for. Now, the last question that we have, this is a great question… I know that billions of dollars have been poured into the Bitcoin ETFs since they have been approved. My concern is that in the future, people and companies will pull money out of stocks to fund their crypto investments. What are your thoughts and advice on this topic? – Alessio D. Now, Bitcoin and cryptocurrency in general are absolutely on fire. I think Bitcoin even today hit a fresh all-time high. Now, certainly, we've seen probably some people pull their money out of stocks and pour it into crypto. But there's going to be some reverse effects to this as well. As somebody who certainly appreciates crypto but has more of my assets invested in the stock market, I never worry if people are avoiding stocks, because when I am buying a stock, what am I buying? I'm buying the future cash flows of that business. I'm buying the future profits of that business. If people don't want to invest in that, if people don't want to appreciate that, chances are I'm going to get those profits and that free cash flow at a better price. And then, what is that company going to do? They're going to take that cash flow, they're going to reinvest it into the business and create a larger business. The other thing that they might do is they might buy back the shares, so my equity stake is increasing by the profits of the company buying back the shares. The other thing that they can do, and we've seen this recently with two tech companies – Meta and Salesforce. Just over the past two months, they announced new dividends. I would have never guessed at the start of the year – Salesforce in particular but Meta as well – that they would introduce a quarterly dividend. So, they're taking their profits and they're going to give you a share of that every three months in the form of a dividend. Another thing companies can do with excess free cash flow is they can go out and acquire other companies and create a larger business in that sense. You look at a company like Broadcom, they're constantly doing this, particularly in the software space. So, if crypto is the flavor of the week or if it's a long-term thing – and it is a long-term catalyst to pull money out of the equity markets and into the cryptocurrency markets – I really don't mind. Because that means the shares of the companies that I want to purchase and that I want to be a part of might come at a lower cost. Folks, that was The Bleeding Edge question-and-answer mailbag issue for today. If you want to get to hold of me, you can write me at feedback@brownstoneresearch.com. Love to hear your comments, I read them all. And any questions, I'll try to bring here for a future video. Thanks for tuning in. Have a safe weekend. I'll see you again next week. --------------------------------------------------------------- Like what you’re reading? Send your thoughts to feedback@brownstoneresearch.com. [Brownstone Research]( Brownstone Research 55 NE 5th Avenue, Delray Beach, FL 33483 [www.brownstoneresearch.com]( To ensure our emails continue reaching your inbox, please [add our email address]( to your address book. This editorial email containing advertisements was sent to {EMAIL} because you subscribed to this service. To stop receiving these emails, click [here](. 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