I hated what I was about to do.

“Ah, darn it.” I took a deep breath before I hit send. It was 2016 and I was a research analyst in a private bank. The report I wrote on the computer screen was glaring back at me: "Sell call" on Nam Cheong.

Nam Cheong was one of the market darlings during the oil & gas boom. It built and chartered oil support vessels for big energy companies back then. Nam Cheong bonds sat in many of the private clients' portfolios.

It wasn’t a popular call.

Within days, my inbox filled with emails from bankers. One even stomped down to my floor, started banging on my desk and demanded: “Willie, you sure about this?” Because he had recommended these bonds to his clients earlier when Nam Cheong was raising debt. And now I’m making a Sell call on it.

A year later, Nam Cheong bonds went bust.

Whew, I felt relieved.

Oil prices at $100 a barrel produced a lot of funny things

During the mid-2010s, oil majors accelerated their hunt for the next black gold. Many rig builders wanted to be part of this oil boom. In fact, the two biggest rig builders in the world then were Singapore’s Keppel and Sembmarine. Of course, this can only happen when there’s massive credit lending going into the sector. With oil at $100 a barrel, it led to companies pouring enormous amounts of other people’s money into highly leveraged projects. The most obvious were rig builders like Ezra, Ezion, Swiber, ASL Marine, which took on huge debt to expand.

Most people came to believe oil prices will stay forever at $100 a barrel. Until the clock struck midnight.

Then came fracking. As the US shale boom flooded the market with massive supply, oil prices crashed. Oil fracking became popular, which combined the technique of horizontal drilling with hydraulic fracturing. US drillers first unlocked a flood of natural gas. Soon they were using the same method to pull oil out of shale rock.

The new supply swarmed the market. And the entire Singapore oil & gas industry fell like dominoes.

Oil majors and rig builders got into trouble.

But let me tell you who suffered the most - clients who have worked hard and saved up their money their entire lives, who would normally stay in modest HDB flats (not bungalows) and watched their investments evaporate.

That’s why I know I’ll never invest my mom’s retirement money like that.

You see, history has taught me that excessive lending and borrowing distorts investment decisions. And can result in major downturns during business cycles.

That's what happened during the Singapore oil & gas rush. In the Singapore dollar bond market, no trader on the street was willing to trade these risky oil & gas bonds. I remembered clients had no way out but to accept the fact they had to sit through heart-wrenching bond restructuring exercises. I'll never forget the hundreds of pages of prospectuses I had to pour through every night. I'd be lying to you if I said I'd enjoyed it.

My experience has taught me that bull markets have no clear lines between progress and fantasy. It happens in the bond market. It happens in the stock market.

Think about the time with telecom stocks in the late 1990s. People talked about tech stocks as the next big thing - bandwidth prices would fall, demand for access to telco networks would grow and so on. The internet did change the world. But you know what the problem was? Telcos built far more capacity than anyone really needed. When bandwidth prices fell, demand didn’t soar as expected and all the start-up telcos went broke.

Valuations of some of the biggest tech stocks including Cisco and Intel fell over 70%, dragging the entire Nasdaq down.

The same thing happened when oil prices crashed - demand stopped soaring and all the rig builders went broke.

And as it normally happens in a raging bull market, there will be theories to justify more and more capex investments - almost at any price.

Today, AI is the next black gold

This rush has led to a tsunami of capital flooding into AI. The capital markets have exacerbated this trend - off-balance sheet financing, private credit and even circular deals where chip suppliers invest in their own customers.

There’s no stopping the hyperscalers and AI companies from riding this momentum machine. Investment banks have projected a US$5 trillion capital investment into AI, across data centres and in infrastructure through 2030. This AI build-out is greater than that for building railroads, canals and electric grids combined - becoming the biggest bet globally.

But I'll tell you what’s madness. Everyone believes AI demand will keep growing forever. So the money keeps pouring in: capital, talent, more data centres. Throw politics and governments into the mix, and prices go nuts.

Yet no one has any idea whether these investments will even make a profitable return. I mean, who’s really keeping track?

Credit: Andreessen Horowitz

Well, CoreWeave’s bond yield is now going for 15% for a five year bond. CoreWeave is a cloud computing and AI infrastructure company. That tells me what lenders are thinking of its default risk.

Why I’m not putting my mom’s money into the AI bubble

I'll be clear: I’ve less than 15% of my mom’s portfolio in AI stocks. Yet her retirement portfolio has returned about 15% a year (including dividends). That tells me one thing: I don’t need to chase big trends to make money.

The hardest decision right now is whether to buy AI stocks. But you see, the bulls are now in control. Sure, AI stocks may continue to run higher. But there's no reason why we should chase high prices.

As you know, the stock market has a lot in common with a teenager’s mother: It will do whatever it can to embarrass people, especially at stock market highs. I'm not putting any more of my mom's money into the AI bubble.

Instead, here’s what I’m doing for my mom’s portfolio:

1. First, I avoid hype stocks. That includes AI companies that promise huge gains and show little sign of profits. It also includes businesses that must keep borrowing to grow. When funding dries up, these stocks get into trouble.
2. Second, I buy high-quality value stocks. Personally, I like those that pay dividends. Ultimately, investing isn’t about hoping share prices go up. It’s knowing what a business is worth and paying a substantially lower amount than that.
3. Third, I’m putting some money in gold. I don’t expect gold to move the performance needle for my mom’s portfolio. Instead, it’s like a shock absorber, reducing the impact of stocks when a market drawdown comes.

​Here's how I safely build a retirement portfolio​

- Willie Keng, CFA

Founder, DividendTitan.com