AI is coming.
No, AI is here.
And it’s upending jobs, lives, and industries.
We’re witnessing the demarcation of a new epoch…from the printing press via the smartphone to AI.
There was the world before ChatGPT and the world after.
We’re never going back.
Is this melodramatic or true?
Commence the AI hype cycle
Artificial intelligence technology has been around for decades but it’s just hitting the mainstream now.
It’ll only get more coverage from here.
If AI were a band, then ChatGPT would be its first number-one single. ChatGPT brought AI to the masses.
And now AI is getting the mass culture treatment.
Endless coverage, countless predictions, hot takes, fearmongering, and hype.
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| Source: Google Trends |
AI is rapidly improving, and its tools will disrupt lives.
It’s already doing that.
Last month at the ASU+GSV Summit, Turnitin CEO Chris Caren said his company will need only 20% of its engineers and many of those will be hired out of high school, not college.
Caren predicted a similar shrinkage for the sales and marketing department.
AI is ushering a time of both displacement and opportunity.
Some jobs and industries will change (or disappear), while whole new ones will spring up.
Maybe in a few months, we’ll be hearing about a high school student who turned their GPT-4 subscription into a hot new start-up.
Oh, how the press will have a field day with that story.
The hype is predictably spilling into the investing sector.
A good barometer of a trend’s potency is interest from venture capital.
And VCs are loving AI. One founder told Reutersthat VCs ‘think this is the new internet’.
According to PitchBook, investment in AI start-ups rose to US$5.9 billion since 2022, up from US$1.5 billion in 2020.
Investing in AI: lessons from history
AI will transform much of our lives.
But will it make for a good investment?
It depends.
Investing is multi-disciplinary but in the end, it’s about backing profitable businesses.
As I’ve said before, successful investors make money and that usually means backing companies that make money.
And therein lies the crux of the matter. Technological innovations don’t always make for good investments.
Burton Malkiel made this point referencing the dotcom bubble:
‘Most bubbles have been associated with some new technology (as in the tronics boom) or with some new business opportunity (as when the opening of profitable new trade opportunities spawned the South Sea Bubble). The Internet was associated with both: it represented a new technology, and it offered new business opportunities that promised to revolutionize the way we obtain information and purchase goods and services. The promise of the Internet spawned the largest creation and largest destruction of stock market wealth of all time.’
The key to making good investments — in AI and elsewhere — is identifying businesses with sustainable profits ahead. As Warren Buffett once noted:
‘The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.
‘The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.’
Some AI companies will have competitive advantages and business models geared for profit, others will not.
The business matters more than the overarching technology.
In July 1999, Warren Buffett made a speech about the nuts and bolts of investing to a crowd drunk on the euphoria of the tech stock boom.
Buffett’s was one of the final speeches held at a week-long conference in the Sun Valley dominated by newly minted tech gurus ushering an Internet revolution.
Buffett’s speech went against the prevailing mood.
In her biography of Buffett, Alice Schroeder set the scene of that conference thus:
‘The audience, full of technology gurus who were changing the world while getting rich off the great bull market, sat silent. They were perched atop portfolios that were jam-packed with stocks trading at extravagant valuations. They felt terrific about that. It was a new paradigm, this dawning of the Internet age. Their attitude was that Buffett had no right to call them greedy. Warren—who’d hoarded his money for years and given very little away, who was so cheap his license plate said “Thrifty,” who spent most of his time thinking about how to make money, who had blown the technology boom and missed the boat—was spitting in their champagne.’
Undeterred, Buffett warned the audience about mistaking booming industries for sound investments.
He turned to the automobile industry as an example (emphasis added):
‘At one point in the US, there were two thousand auto companies. The automobile was the most important invention, probably, of the first half of the twentieth century. It had an enormous impact on people’s lives. If you had seen at the time of the first cars how this country would develop in connection with autos, you would have said, “This is the place I must be.”
‘But of the two thousand companies, as of a few years ago [remember, the speech dated from 1999], only three car companies survived. And, at one time or another, all three were selling for less than book value, which is the amount of money that had been put into the companies and left there. So autos had an enormous impact on America, but in the opposite direction on investors.’
Of course, we can approach the matter another way.
Investing is as much about identifying profitable businesses as it is about buying them for a fair price.
A great business at a steep price won’t make for a great investment.
Our editorial director Greg Canavan made this point yesterday to readers of The Insider:
‘Everyone knows that Microsoft is an exceptional company with a hugely dominant position.
‘Everyone knows that artificial intelligence (AI) is going to dominate the future, and Microsoft is in a prime position to exploit that.
‘But when everyone knows something and everyone agrees, you have to be wary.
‘In 1999–2000, everyone knew that Microsoft was going to be one of the best and most dominant tech companies in the world. But if you bought during that bubble/boom, you would have waited a very long time to get your money back.
‘As the chart below shows, it took 16 years for Microsoft’s share price to get back to the tech bubble peak.’
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| Source: Optuma |
That’s something else to keep in mind.
With all that said, our editor Ryan Dinse offered a great counterbalance last week.
Ryan noted that Buffett is a legendary investor but his opinions on investing in tech are ‘almost worthless’:
‘Before you think this is pure arrogance on my part, bear in mind he says this himself.
‘Buffett has long conceded that most technology plays are outside his circle of competence; therefore, he doesn’t invest in them.
‘For example, in 2014, he told Fortune magazine “Bill Gates is a good friend, and I think he may be the smartest guy I’ve ever met. But I don’t know what those little things do.”
‘Those “little things” he’s talking about are smartphones — probably one of the most disruptive trends of the decade.
‘Think about that for a second…
‘Despite having direct access to the likes of Bill Gates and Steve Jobs, Buffett missed most of the fastest-growing tech stocks of the past two decades, including Google, Amazon, Meta, and Apple.
‘Though, to his credit, he did eventually start investing in Apple in 2016 — and it is up around six times over since then.’
For what it’s worth, I do think the points Buffett made at the 1999 conference are important for any investor to keep in mind when dealing with new and trending industries like AI.
AI will only get more powerful and its applications more diverse. And we are yet to hit ‘peak AI’.
So keep Buffett’s point in mind as a prophylactic for any potential AI mania, a precautionary ‘hype’ jab.
As Ryan said, ‘AI will be as ubiquitous and widespread as smartphones are today. It’s a story you can’t afford to ignore.’
Just don’t ignore everything else.
Regards,
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Kiryll Prakapenka,
Editor, Money Morning
