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The Truly Ingenious Method for Investing in AI

 The Truly Ingenious Method for Investing in AI

Indeed, the societal impact of AI is a complex and long-term process that will unfold over many years. In contrast, financial markets typically focus on shorter-term trends that can affect corporate earnings within a range of three to 30 months, as they have historically done. It is important to note that while there are immediate risks associated with current AI scams, the reality of scams is not exclusive to AI and has existed in various forms throughout history. Scams have always existed, and AI is not fundamentally unique in its susceptibility to such fraudulent activities. When we look beyond the flashy window-dressing of AI, these scams often have structural similarities to scams seen in other domains.


The immediate likelihood of AI turbocharging the economy and stocks is relatively low. While it is true that the hype surrounding AI has contributed to the impressive 39.4 percent gains in global tech stocks in 2023, it is important to note that the rally in the tech sector is primarily driven by the rebound of quality large-cap growth stocks from the significant market decline they experienced in 2022. Semiconductors, which play a crucial role in AI development, have particularly thrived, witnessing a remarkable surge of 64.5 percent. However, it is crucial to distinguish the current tech rally from a direct, immediate impact of AI on the overall economy and stocks.


Despite RBA governor Philip Lowe's assertion that Australia's economy is on a "narrow path," neither a global nor Australian recession has occurred thus far. It is advisable to disregard the statements of central bankers, as I previously explained in May. Contrary to expectations, value stocks did not suffer significant losses that would pave the way for a substantial recovery. Nevertheless, concerns about an impending recession persist, even as the current slow growth is causing unease. Consequently, the market places a higher value on companies that can consistently generate revenue growth in a sluggish economy. These companies are referred to as genuine growth stocks, and they are few and far between.


As a result, the dominant players in the current market are large growth stocks located outside of Australia. While AI, particularly in the field of semiconductors, plays a significant role in this trend, it is not the sole contributor. However, it is important to note that we are not currently experiencing the transformative phase of AI. After surveying numerous companies, it is evident that the practical applications of AI at present are primarily mundane in nature, largely centered around automating repetitive tasks, back-office operations, and superficial marketing endeavors.


It is worth noting that AI is not a completely novel concept in Australia. The country has been involved in artificial intelligence research since the 1980s. Tech start-ups dedicated to AI have been attracting venture capital funding for many years prior to the emergence of ChatGPT. Larger technology companies have utilized profitable divisions to finance their AI research and development endeavors, giving them an advantage over smaller start-ups. This is primarily due to the substantial computing power required to train these AI systems, which comes with a significant cost. Consequently, major players in the fields of chips, software, data analytics, and search currently dominate the AI landscape.


Attempting to identify distant, long-term winners in the AI industry can be a futile exercise. Despite the rigorous shakeout experienced by Silicon Valley's start-ups, there is still an excessive amount of enthusiasm surrounding small AI-focused companies. Investing in such companies at this stage often means buying into inflated hype. With numerous ChatGPT clones already in existence, it becomes challenging to determine which start-up will successfully build profit margins substantial enough to validate their premium valuations. Ultimately, the uncertainty surrounding these outcomes makes it impossible to predict with certainty.


It is essential to maintain a clearheaded approach and avoid letting emotions dictate investment decisions, regardless of one's opinion on AI. While having some exposure to AI can be advantageous, it should not be the sole determining factor in choosing whether to invest in a particular stock or sector. Instead, the focus should be on seeking high-quality growth opportunities and then assessing whether AI plays a role in fueling that growth. It is worth noting that these insights are shared by Ken Fisher, the executive chairman of Fisher Investments.




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