It's the question I've been asked most over the past few weeks.
AI stocks are down. Some a little, some a lot, and a handful have been absolutely obliterated. So, is the AI trade in the toilet?
My honest answer: yes and no.
No, I don't believe the AI trade is over. Could I be wrong? Of course—markets have a funny way of humbling everyone eventually. But beneath the surface, I still see record capital spending, explosive revenue growth, multiyear infrastructure commitments, persistent supply shortages, and technology improving at an almost unbelievable pace.
But also, yes—quite literally. To explain, this article takes a trip to East Asia: first to Seoul, where a remarkable portion of the investing public has crowded into one leveraged trade, and then to Japan, where a century-old philosophy of craftsmanship explains exactly what we look for in an investment. And yes, we will eventually end up in a Japanese bathroom.
I promise it will all make sense.
The AI Trade Is a Whip
Picture someone cracking a whip. At the handle, the movement is small and controlled—a flick of the wrist. But that little motion travels down the whip, amplifying as it goes, until the tip snaps through the air faster than the speed of sound. Same whip. Same motion. Wildly different experience depending on where you're standing.
The AI trade works exactly the same way.
At the handle sit the trillion-dollar giants: NVIDIA, Microsoft, Alphabet, TSMC, Amazon, and Meta. When sentiment shifts, they wobble and absorb the impact. Move farther down and the swings get larger—infrastructure, semiconductor, and networking companies can fall 30% or 40% even while their long-term demand outlook remains strong. And at the very tip sit smaller, more speculative names: photonics companies, substrate makers, former Bitcoin miners reinventing themselves as AI data-center providers. The same flick of the wrist that barely moves Nvidia can cut one of those stocks in half.
In many cases, the underlying businesses change far less than their stock prices do. Sentiment cools, positioning unwinds, financing concerns grow, and the energy amplifies as it moves down the line. That's not a flaw in the market. It's what whips do.
But here is the part many investors miss: business quality also determines where a company belongs on the whip. Ownership, leverage, and positioning determine how violently it actually moves. A company can belong near the handle by nearly every fundamental measure and still trade like the tip.
To see how, let me tell you about a train ride.
Years ago, my wife and I arrived in Japan to see my sister-in-law, and we boarded the train from Tokyo to Hiroshima. There is no better feeling than settling into your final seat after a long day of travel. Then came refreshments. Then a warm towel. I'm thinking: Japan is simply the best.
That is, until the conductor appeared and informed us—firmly—that we were sitting in first class. The walk of shame from train car No. 1 back to train car No. 5 is something my wife and I still laugh about today.
I wrote a blog late last year arguing that the AI train keeps on chugging, and I still believe it does. But lately, a lot of investors have been enjoying seats they did not pay for. And in Korea, the conductor just came down the aisle.
By size, profitability, and strategic importance, the great memory manufacturers with trillion dollar market caps—Samsung, SK Hynix, and Micron here at home—belong near the handle of the whip. All three have been posting exceptional results. So why have they sometimes traded like the tip?
Because the whip does not care only about what a company is. It also cares about how the company is held.
Korea's stock market has been the best-performing in the world this year, and much of that performance is one trade: Samsung and SK Hynix have driven roughly 70% of the KOSPI's gains and now represent more than half the index's market capitalization. Korean retail investors did not merely ride the wave—many leveraged it. Margin loans surged to record levels, with investors aged 50 and older—a generation traditionally associated with fixed income and real estate—accounting for more than 60% of the borrowing. Add a proliferation of leveraged single-stock ETFs, and regulators grew concerned enough that Korea's deputy prime minister publicly discussed intervention.
Then the conductor came down the aisle. On what Korean media dubbed "Black Tuesday," Samsung fell 12% and SK Hynix fell 14% in a single day, triggering circuit breakers. The KOSPI slid into a bear market even as the underlying businesses continued producing exceptional results.
The businesses did not fail. The positioning did.
Leveraged investors were not necessarily wrong about the train—they were riding first class on a coach ticket, and a margin call is the market's way of walking you back to car No. 5. When a large portion of the investing public borrows money to hold the same two stocks, the stock price stops telling you about the company and starts telling you about the crowd.
You can be right about the business and still get cracked. Seoul just proved it.
We Build the Core Near the Handle
For our clients, we generally build the core of the AI portion of the portfolio closer to the handle. And I want to be precise about what puts a company there, because—as Korea demonstrated—it is not simply size.
The handle is where a business can remain durable and profitable even if the AI spending cycle pauses. Microsoft would still operate software that much of the business world cannot function without. Alphabet would still control one of the primary gateways to the internet. Amazon would still deliver your paper towels. Their AI upside may be enormous, but it is an accelerant poured onto an already-burning fire. At the tip of the whip, AI is not the accelerant—it is often the entire investment case.
The handle is also where the money already shows up. These companies typically fund their AI ambitions through enormous operating cash flows rather than debt, dilution, or repeated capital raises. When a tip-of-the-whip company hits an air pocket, it may be forced to raise money at the worst possible moment. When a handle company hits one, it can keep investing—or buy back its own stock.
Finally, the handle is where ownership tends to be calmer. These companies are held broadly by index funds, pensions, and millions of Americans investing every payday through their 401(k)s. That does not make them immune to volatility—nothing is. But ownership is an underrated asset: a shareholder base that does not stampede at the first flick of the wrist gives a strong business time to keep executing.
So What About That Toilet?
Because my favorite story in the entire AI ecosystem is genuinely about a toilet company.
Japan has a word that does not translate cleanly into English: shokunin. It is usually rendered as "craftsman," but it means something deeper—a person who has devoted a lifetime to mastering one thing, refining it endlessly, generation after generation, whether or not anyone is watching. The sushi master who spends years learning only rice. The swordsmith whose family has folded steel for centuries.
Which brings me back to that same trip to Japan, because the trains were not the only thing that humbled me. The toilets there ruined American toilets for me forever. When we built our house, I had exactly one request: "I want a Japanese toilet."
Then I learned what Japanese toilets cost. Let's just say I funded a Roth IRA instead.
Here is the part I never expected: Toto—the company behind those legendary toilets—is also a world leader in advanced ceramics used throughout semiconductor manufacturing. This is shokunin economics in action. A century spent obsessively perfecting ceramics created expertise so deep that when the semiconductor industry needed extraordinarily precise components, one of the world's leading sources turned out to be a toilet company.
Toto never chased the AI trade. The AI trade came to Toto.
I am not pitching you the stock. I simply love what the story represents. The AI economy is larger, more complicated, and much stranger than the headlines suggest, and some of its most essential participants are not chasing the trend at all—they spent a century becoming exceptionally good at something, and the future arrived at their door. In a market where investors are borrowing money to chase the crack of the whip, there is something clarifying about the shokunin, who perfects his craft and lets the world discover him.
That spirit—patience, durability, and excellence that does not depend on the story of the moment—is what we try to bring to our clients' portfolios.
What This Means for Your Portfolio
- Build the core near the handle. We favor established, cash-generating businesses that can participate in AI's growth without requiring the theme to unfold perfectly.
- Know where you are on the whip. There is nothing inherently wrong with owning a speculative name—but the position size should reflect the possibility that it falls 50% even while the long-term thesis remains intact.
- Watch how a stock is held, not only what the business does. Korea's lesson: leverage, concentration, and herd behavior can make even an excellent business trade like a speculative stock.
- Do not confuse leverage with conviction. Borrowing more money does not make a thesis more correct. It merely reduces the amount of time you have to wait for the market to agree with you.
- Look for the shokunin. Some of the best long-term investments are companies whose expertise mattered before AI, matters during AI, and will remain valuable after the excitement fades.
So, is the AI trade in the toilet? The trade itself? No.
But one of the best stories in it? Quite literally, yes.
Disclosures
This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, investment, accounting, or other financial advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. Asset allocation and diversification do not guarantee a profit or protect against a loss. All references to potential future developments or outcomes are strictly the views and opinions of Richard W. Paul & Associates and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets. Past performance is not necessarily indicative of future performance.