Oct 5, 2026 · 47 min
Why transformational AI may still make a poor investment
Steve Johnson: What the market is missing about the AI boom
The episode separates AI’s economic promise from the harder question of whether today’s AI-related stocks can deliver attractive returns.
- 1AI can reshape businesses while rising capital intensity, leverage and uncertain returns undermine AI-stock valuations.
- 2Forager’s mistakes, including EML, reinforce the value of transparency, drawdown control and a written investment strategy.
- 3Overlooked Australian businesses and shares may offer better long-term value than property, despite small-cap volatility and housing optimism.
Don't miss
Steve Johnson acknowledges that his earlier forecast of a major Australian property correction was wrong, then explains why housing sentiment could still eventually break.
The brief
Steve Johnson of Forager explains why he warned clients to expect underperformance while the AI trade runs, arguing that countercyclical investing should offer exposure distinct from large-cap indexes.
Johnson uses AI extensively for research and operations but separates practical usefulness from investment appeal, pointing to capital intensity, leverage, interest rates and uncertain returns as warning signs.
The conversation turns candid as Johnson discusses Forager’s mistakes, including EML, and why transparent communication and limiting drawdowns matter more than defending every investment decision.
He finds opportunity in software and overlooked Australian small caps, including Catapult and Motorcycle Holdings, while arguing that pessimism about Australia may be excessive.
The closing argument extends beyond stock selection: shares may build wealth more effectively than property, but only when investors write a simple strategy and stick to it.
What was said on this episode
50 statements · 23 positive · 19 negative · 2 mixed · 6 neutral
AI is a genuinely transformational technology.
“I think this is a genuinely transformational technology.”
Listen at 3:43
Each new AI model is better than its predecessor.
“Every model that comes out is better than the one before it.”
Listen at 4:25
AI is currently mainly a probabilistic content-generation tool.
“I think that's a really important thing to recognize about it. It's a probabilistic, I think at the moment mostly a content type tool.”
Listen at 5:44
AI is often wrong when researching poorly documented small-cap companies.
“If it is, I wanna know what's happened with the CEO of this company yesterday, or, you know, in our world, small cap companies where there's not a lot of information about them, it's probably wrong 30 or 40% of the time”
Listen at 6:00
AI capability does not imply AI is the economical tool for an activity.
“there's actually going to be a lot of activities where you go, well, it can do it, doesn't mean it should.”
Listen at 6:42
AI-related asset prices exceed his expectations for underlying business profits.
“the prices for almost anything that's associated with the space have become so disconnected from what I think those businesses are going to earn in profits that we just don't want to own them.”
Listen at 7:31
AI is capital-intensive, with uncertain returns on invested capital.
“it is a very, very capital-intensive business. Are the returns going to be great on that capital? We don't know the answer to that yet.”
Listen at 8:41
Firmus exhibits bubble-like investment behavior.
“this is for me, this is the epitome of bubble-like behaviour.”
Listen at 9:31
Firmus faces high risks of cost overruns, delays, and disappointing returns.
“the baseline probability here for CapEx overruns and late delivery and the returns here not being what they've put in those slide decks is very, very, very high.”
Listen at 9:43
Firmus may cost twice its estimate and take longer within 12 months.
“in 12 months' time it's this thing's going to cost us twice what we thought it was going to cost and it's going to take longer”
Listen at 9:55
AI investment profitability will become clearer within a few years.
“within a couple of years, we're going to start seeing whether the returns stack up in terms of profitability on this.”
Listen at 10:54
AI investors will be disappointed by five-year returns.
“I think people are gonna be disappointed over a 5-year period about what sort of returns they earn.”
Listen at 12:29
Limiting portfolio drawdowns contributes importantly to long-term returns.
“for us being defensive and making sure that the drawdowns are limited is a really important contributor to long-term returns.”
Listen at 14:48
EML has been a disastrous investment over an extended period.
“EML in the Aussie fund, which has been an absolute disaster over a fairly long period of time.”
Listen at 14:58
The global payments sector is unusually difficult and competitive.
“Globally, payments has been a very, very difficult sector. It's been more competitive than we had anticipated”
Listen at 15:36
Investors should exit positions when evidence invalidates the investment thesis.
“when you lay out your thesis and if you start getting evidence that you're wrong, I think moving on from those things and starting with a clean sheet of paper is really, really important.”
Listen at 16:39
Pessimism toward software businesses was excessive.
“I think the pessimism that came in was way, way overdone.”
Listen at 17:42
Xero is probably the most important software in his business.
“it's probably the most important piece of software in my business.”
Listen at 18:20
Accounting software such as Xero is highly sticky.
“I think it's such, it's such a sticky software that that's, that's the characteristic that we're looking for there.”
Listen at 18:45
Australian super funds are withdrawing money from small-cap stocks.
“we've got some structural things going on here in Australia in terms of super funds taking money out of small caps.”
Listen at 20:39
Australian small caps need strong results to regain investor interest.
“We're gonna need some good results I think for people to get excited about things again.”
Listen at 21:27
Annual predictions of a small-cap revival are wishful thinking.
“I think that's wishful thinking to be honest with you from fund managers that like where your livelihood depends on it.”
Listen at 21:37
Small-cap purchases will not reliably produce sustained market re-ratings.
“this whole, we're going to buy this thing and the market's going to re-rate it, it's just not going to happen over a sustained period of time.”
Listen at 21:44
Investors should buy businesses capable of growing into index-level companies.
“you need to be buying businesses that can either migrate into index level.”
Listen at 21:52
Algorithmic trading has become widespread in markets.
“there's a lot of algorithmic money in the market now.”
Listen at 23:36
Algorithms can drive share prices down after results miss expectations.
“the magnitude is almost irrelevant. If this result is worse, the algorithm has been taught that that is bad and share prices go down.”
Listen at 23:46
Reduced market liquidity increases the cost of exiting investments.
“the cost of doing that is higher than it used to be because the liquidity's just not there.”
Listen at 24:54
Catapult will soon reach margins supporting a four-times-revenue valuation.
“it is very soon going to be at margins that would justify 4 times revenue for a mature business.”
Listen at 26:54
Catapult’s sporting-team customer base will keep growing for a long time.
“the number of sporting teams that are using the product is just going to keep growing for a very long time.”
Listen at 27:21
Catapult remains in a customer-acquisition land-grab phase.
“I think we're still in the land grab phase here.”
Listen at 28:11
Catapult has future pricing power.
“everyone understands that there is more pricing here at some point in time.”
Listen at 28:31
Motorcycle Holdings has 20% of Australian motorcycle retailing.
“they are 20% of motorbike retailing in Australia.”
Listen at 30:40
CFMoto import distribution generates 80% of Motorcycle Holdings’ profitability.
“it's become 80% of Motorcycle Holdings' profitability is that import distribution business.”
Listen at 31:52
Motorcycle Holdings trades at 6.5 times earnings with approximately a 7% franked yield.
“It trades at 6.5 times earnings. You're getting half of those earnings as a dividend. So it's a 7 fully franked dividend yield”
Listen at 32:19
Investors are excessively pessimistic about Australia relative to global markets.
“people are a bit— well, maybe running a global fund, I think relatively people are too pessimistic about Australia.”
Listen at 33:30
Australia’s government debt-to-GDP ratio is approximately 40%, versus 120% in comparison markets.
“We are 40% government debt to GDP. They're 120%, right?”
Listen at 34:15
Australia’s household savings rate is approximately 8%, historically high.
“The savings rate's at 8%. That's historically high levels.”
Listen at 34:46
Australia is better positioned than many countries to handle economic headwinds.
“I think the country is better placed to handle this than a lot of other places.”
Listen at 35:01
Australian investors should maintain meaningful Australian-dollar exposure.
“if you're an Australian-based investor, you're gonna need Australian dollars. It should be an important part of your asset allocation.”
Listen at 35:51
Australian equities may return approximately 8% annually over the next 30–40 years.
“Equities have done 8% per annum here over 120 years. And I think they'll do something similar over the next 30 or 40 years.”
Listen at 36:19
Australian equity returns include a substantial fully franked dividend component.
“some of that return is in the form of fully franked dividends.”
Listen at 36:55
Buying his house was a poor financial decision.
“It was a terrible financial decision, I've gotta tell you.”
Listen at 38:58
Residential property may deliver approximately 2% net rental returns.
“If you look at the actual return, it's maybe 2% net or something that you get if you buy a house and you rent it out.”
Listen at 39:31
The financial case for buying rather than renting has been weak for 15–20 years.
“That too has not stacked up for probably 15 or 20 years.”
Listen at 39:47
If property appreciation stops, residential property becomes a very low-yield asset.
“if the capital gain stops working, then you're left owning an asset that's a very, very low yield asset.”
Listen at 39:57
Higher mortgage rates did not reduce Australian property prices as expected.
“it did not smash property prices the way I thought it would have.”
Listen at 42:28
A breakdown in property-appreciation psychology would seriously harm Australian property.
“If that breaks, that is the huge problem for Australian property.”
Listen at 43:12
If Australians stop expecting appreciation, property downside becomes more significant.
“If it stretches out and if it actually breaks people's psychology and they start saying, well, this is not something that's going to appreciate, then it makes, for me, it makes the downside more significant”
Listen at 43:47
Investors should follow a written long-term investment strategy.
“Have a long-term strategy and stick to it.”
Listen at 45:49
Staying invested tends to produce better outcomes than constant market timing.
“And my experience has been Just stick at it to do better.”
Listen at 46:08
Statements are attributed to the speaker as said on the episode and reflect their view at the time, not PodLume's. They are not advice.