Up the (Deep)Seek Without a Paddle? Not Necessarily

Gloom makes me glad …

There … I said it.

And before you start worrying about “Ole’ Bill” … ring up my wife RK or son Joey … or send the cops to my house or office for a “welfare check” … let me explain.

I’m talking about “gloomy markets.” And the opportunities they create.

Gloomy markets like the one yesterday — when Chinese tech firm DeepSeek unveiled an artificial intelligence model that (apparently) offers incredibly high performance at a stunningly low cost.

The revelation slammed into U.S. tech stocks harder than the Barnes Wallis-designed “bouncing bombs” hammered German dams during World War II: It eradicated an estimated $589 billion in shareholder wealth — including a record $108 billion in Nvidia Inc. (NVDA) alone.

That Great Tech Wipeout has investors writing epitaphs for Nvidia and OpenAI — and ordering body bags for most of the Magnificent 7 and its posse. And it has extremist “experts” predicting the demise of U.S. competitiveness.

When you take those “instant” analyses (just add water … and emotion) … and mix in knee-jerk reactions … you’ve got a market-math equation that equals only one thing: a gloomy market.

Gloomy … and volatile.

Let’s use today’s Stock Picker’s Corner (SPC) issue to talk about what happened … what I think it means … some moves you can make … and others you shouldn’t.

And let me be candid: Nobody really understands precisely what’s happening — or how this will all play out.

And anyone who says that they do is fooling themselves.

Don’t let them fool you.

The Best Surprise Is No Surprise?

Let’s start with what happened. And (as always) I’m (intentionally) oversimplifying this.

DeepSeek — formerly known as DeepSeek Artificial Intelligence Basic Technology Research Co. Ltd. — was founded in Hangzhou, China, back in May 2023. The creator: A man named Liang Wenfeng, co-founder of the Ningbo High-Flyer Quantitative Investment Management Partnership — a $7 billion (assets) hedge fund that specializes in AI-driven trading.

Yesterday’s tremors were set off by the release of DeepSeek’s newest AI model — R1. That release — coupled with revelations about its power, open-source nature and claim it was developed for $6 million — was enough to trigger fears of a paradigm shift in the … well … ongoing AI paradigm shift. And it has big-money investors worrying that Western Big Tech is massively overvalued.

Let me first tell you folks that while I was as surprised as anyone by the DeepSeek revelation, I wasn’t at all surprised that something came along to shake things up.

Indeed, I expected it.

Just two weeks ago — in a two-part Quarterly Roundtable report we did for our SPC Premium members — I said the development of AI would likely follow the paths we saw with the PC Boom and the Internet Revolution.

And that meant we could expect stretches of technological disruption, emotional responses and tremendous volatility. With AI — indeed, with any new invention-driven wealth window — I told SPC Premium members there were three lessons to remember:

• New Leaders Get Crowned: New industries are born from new needs — and new inventions (“innovation” in corporate parlance). Some stalwarts adapt. Others get leapfrogged. New companies emerge — some with “real” prospects, others based on “air.” Find the true leaders, steer clear of the laggards and avoid the phony stories completely.

• It’s Rarely a Straight Line: Paradigm shifts, by nature, are dramatic. In the early going, emotion often outraces reality. That can lead to speculative frenzies, actual bubbles that can burst and big losses. There are ebbs and flows — good times and tough ones. And you may see that cycle several times. Don’t let the “downtimes” deter you. “Accumulate” as you go. Because …

• The “Long Game” Delivers the Payoff: This follows from my previous point: Even powerful paradigm shifts experience ebb-and-flow patterns — with some good stretches followed by tougher ones. Investors who ride that wave — who take the long view — have the best shot at building real wealth. They’re Wealth Builders.

AI is a true “disruptive” technology, meaning we’re in for a whole lot of change — some good and some bad, depending on how it affects you. To be sure, new job roles and new career paths will emerge. And some ways of making a living — and even some industries — will be pared back or eliminated outright.

With that preamble … the obvious next question is: What comes next?

I’m glad you asked …

Sputtering Sputnik … No Escape for Netscape

One of the big questions — and big debates — is this: Did DeepSeek really pull off what it claims?

Engineer, venture-capitalist and entrepreneur Marc Andreessen believes it did, calling it “AI’s Sputnik Moment” — a metaphorical reference to the Oct. 4, 1957 launch of Sputnik I, humankind’s first “artificial satellite,” and the Russia-leapfrogs-America event that launched the so-called “Space Race.”

The United States was stunned by the launch — and Americans were gripped by fears that our No. 1 enemy, the Soviet Union, would soon have nukes pointed at all our cities.

Andreesen understands the whole “leapfrogging” concept as well as anyone. He created the first widely known web browser — a user-friendly one called Mosaic. He soon co-founded a company called Netscape Communications and a browser called Netscape Navigator.

Netscape was one of the first hot dot-com IPOs and Navigator was the dominant browser in the middle 1990s. But Internet Explorer, bundled with the Microsoft Corp. (MSFT) Windows operating system, was too tough a competitor. And Netscape was subsequently bought out by America Online (AOL) — another early Internet Revolution leader that was swept to the side by innovation and competition.

In terms of DeepSeek, the debate’s gonna rage for awhile. And it’s not a question I’m qualified to answer.

Long-term — which is the only term that matters to Wealth Builders like us — I’m not sure it matters.

If the claims are overblown, we’ll pick up where we left off — understanding more than ever that additional volatility “shocks” are possible.

The Next Phase

If the claims are real, the AI Era is shifting gears — from Phase I to Phase II.

Think of it like a house. Phase I is the foundation — but instead of bricks and concrete, we’re talking about infrastructure created from silicon and data-center hardware. Phase II is the first floor … the living quarters where software expands AI capabilities and “data” becomes the new gold.

Salesforce Inc. (CRM) CEO Marc Benioff said that “AI’s true gold … what breathes life into AI is the data & metadata that describes the data to the model — just like the oxygen for us.”

And it’s not like the “hyperscaler” investments we’ve seen will go to waste, says fellow Substacker Potential Multibaggers — talking about Nvidia’s H800 and H100 chips. Both were designed for AI applications — but the more-limited H800 are used in the Chinese market to comply with U.S. technology export restrictions.

“If DeepSeek can do this on 50,000 H800 chips, how much more can hyperscalers do with their much-bigger supply of H100 chips and even-more advanced chips like Nvidia’s Blackwell?” Potential Multibaggers said yesterday. “Microsoft bought 450,000 H100 chips in 2024, Meta 350,000, Amazon about 200,000 and Google about 175,000. If they can apply DeepSeek’s efficiency to their higher number of GPUs, the results may be even more breathtaking.”

And while U.S. firms appear to have been caught flat-footed, don’t think they’re not out there still innovating.

Indeed, that “Sputnik Moment” was a great thing for the Space Race — which the U.S. came from behind to win.

There’s plenty of room to run.

Current AI models — like DeepSeek’s RI, or OpenAI’s GPT-4 — are “narrow” or “weak” AI … they can perform focused tasks like processing language or creating that cool image. But they can’t function like the human brain — to learn, understand and apply knowledge in a range of ways. That’s Artificial General Intelligence (AGI) — which is projected to be a decade to a generation away.

In the meantime, these current advances in AI could lead to a phenomenon known as the Jevons Paradox, says Matt Warder, a good friend and former Wall Street analyst who runs The Coal Trader on Substack — and who’s probably the best independent metallurgical-coal analyst on the planet.

In essence, the Jevons Paradox holds that this forward leap (and drop in cost) of AI could lead to higher demand – meaning we’ll see huge growth in demand for data and for energy.

Matt knows what he’s talking about. The paradox was named for English economist William Stanley Jevons, who identified it vis a vis coal consumption way back in 1865. He discovered that more-efficient steam engines — which used less coal (on a per unit basis) than their counterparts — actually boosted overall coal demand across a wide range of industries because the energy source was cheaper to use than before.

That brings us to the key final point: With what we know right now, what should we do?

It’s a great question.

Today’s “To Do List”

You’ve heard me say this a million times here: When someone says: “Hey Bill, what will the market do today … tomorrow … next week … or next month?” my answer is typically … “I don’t care.”

I’m being a bit flippant, of course.

But Wealth Builders like us really care about what happens in three, five, seven, 10 years … or more. Because it’s in the long run that real wealth is built.

That lets us ride the wealth wave known as “compounding.” It lets us overcome the ebbs and flows of the market. It reduces emotion — which reduces mistakes. And it has a “magnifying” effect — because of the “Accumulate Strategy,” where we create foundational positions … and add to them on pullbacks or through regular investments.

There’s no rush to do anything at the moment, but consider what our Substack neighbor Potential Multibaggers said about some of the benefactors.

“This is a great development for Amazon (AMZN) and Apple (AAPL), who don’t have [Big Tech’s AI] models,” he wrote. “Meta (META), which is developing its own [large-language model] with Llama, can say this open-source model shows that it’s following the right approach to AGI.”

Good stuff.

I see an opportunity here to “accumulate” some Hallador Energy Inc. (HNRG), the “utility-in-the-making” stock we grabbed at under $6 during a pullback — then watched it soar as high as $14.

And there’s one other stock I’d definitely consider here — especially as a long-termer investment: CBOE Global Markets Inc. (CBOE), an operator of financial exchanges, which includes the Chicago Board Options Exchange. It provides data analytics, trading tools and the technology for trading options, futures and other financial products. And it’s one of the largest clearinghouses for options trading.

Here we’re going to profit — by taking the “other side of the trade” … well, sort of.

We know that uncertainty breeds volatility … and volatility ignites trading.

Options trading is a horrid trap for retail investors. (And at a recent marketing summit for the financial publishing industry, options marketing was what publishers wanted to talk about).

So we’ll take that “other end of the trade” — and invest in the company that will collect fees as trading soars.

We’ll talk more … when we understand more. For now, we’ll continue playing the “long game” — and build wealth.

And remember to check out that Potential Multibagger story I mentioned: “DeepSeek’s Impact on American Tech.” It’s a balanced, thoughtful and easy-to-understand assessment of the bigger implications from yesterday’s market wipeout.

You’ll dig it.

See you next time;