GMO Q3 2025 Quarterly Letter (Mutual Fund:GMODX)

Core Insights - The current AI market is perceived as a classic investment bubble characterized by high valuations and speculative behavior, reminiscent of past bubbles like the 2000 Internet Bubble [2][3] - Despite concerns about the AI bubble, there are still reasonable investment opportunities in non-U.S. equities, deep value stocks, and liquid alternatives that can provide good returns regardless of the AI market's status [2][26] Investment Environment - The S&P 500 is trading at valuation levels comparable to those seen during the Internet Bubble, with some metrics indicating even higher valuations [3][42] - Venture capitalists are investing heavily in AI startups at inflated valuations, often without clear business plans, indicating rampant speculation [3][43] - AI-related stocks have seen significant price increases, with some companies like Nvidia experiencing massive earnings growth, while others like Tesla are driven by speculative hopes [22][55] Historical Context - The current AI bubble is likened to the 2000 Internet Bubble, where investors could build portfolios that performed well regardless of whether the market was in a bubble or not [4][25] - Previous bubbles, such as the 2007-8 Everything Bubble and the 2021 Duration Bubble, presented different challenges for investors, often requiring more drastic portfolio adjustments [11][20] Portfolio Strategy - Investors are encouraged to tilt their portfolios away from AI stocks towards undervalued assets, which can mitigate potential losses if the AI bubble bursts [2][26] - A diversified portfolio that includes international small caps, REITs, and emerging market equities can provide strong expected returns even in a bubble scenario [9][10] - The current investment landscape allows for the construction of portfolios that are less dependent on the AI trade, with many risk assets trading at fair or compelling valuations [26][27]