The AI gold rush... am I too late?

The AI gold rush…am I too late?

“Exuberant health is always, as such, sickness also” (Theodor Adorno)

It has been another topsy turvy week in the world’s capital markets. Information Technology stocks continued their incredible surge, fuelled by results from Nvidia (currently front and centre of the AI craze) that not only met the hype but beat it soundly.

They say in a gold rush, you need to buy up the supply of picks and shovels to make the money. Well, recent short-term events appear to be the modern equivalent. Nvidia’s processors are the lynchpin of the emerging generative AI ecosystem. If you want to play this boom/bubble in AI, you almost can’t avoid the company.

While that may be true, caution is needed. The sight of a share (or index) price soaring ever higher lures some investors like moths to a lamp. Multiple biases coalesce the higher the price goes, as the fear of missing out barges valuable long-term perspective to the side. If the shares repeat what they’ve done this month/year, then I will make X! We’ve all heard the siren call, I’m sure.

Bubbles man…

This is not a (buzzkill) message to always ignore these opportunities. Studies of the history of stock market bubbles actually suggest the opposite (albeit history is never a guarantee of future performance).[1] Despite the relative proximity of two of the more famous bubbles seen over the last 350 years – the subprime implosion beginning in 2007 and the TMT bubble that popped in 2000 -they are relatively rare phenomena. Using data from a range of countries going as far back as credibility allows, gives us over 100 years of equity market performance to analyse.

Yale Professor of Finance, William Goetzmann’s analysis of this impressive dataset may help calm some investor nerves in the aftermath of a strong market rally. His work shows that the probability of a market fall, in instances where the market had doubled over the previous year, is only marginal. The same dataset suggests that a large price increase in markets is twice as likely to be followed by another year of high returns compared to a severe market decline.

As well as being rare, it is also notoriously difficult to separate the bubbles from the justifiable booms – at least without the benefit of hindsight. Generally, bubbles occur when investors push prices of an asset beyond what is revealed later to be its fundamental value.

As noted above however, what can at the time appear exuberant to the hard-nosed investor, more often-than-not turns out to be changing reality - a step change in technology or innovation.

During such instances, it important not to make any ‘hot’ stock or index your only investment, and to remember that ‘picks and shovels’ are only one way to benefit from the proverbial gold rush.?To help bring this to life, we could select any past technological break through and plot a similarly winding path, but for the purposes of this article, the electric dynamo will do.

Electric dynamo to the consumer economy

In 1867, the invention of the dynamo allowed for the practical generation of electricity. This in turn allowed a separate power source to be attached to each factory machine, which in a relatively short space of time enabled Henry Ford to mechanise production with a moving assembly line. On came standardised parts and very quickly mass-produced, affordable cars. [2]

The model T and its successors transformed American (and later European) society) They allowed people to move around more quickly and cheaply than ever before. Likewise the progress in manufacturing provided high-paying work to many immigrants who could not easily converse in English. It also helped to create the suburb, the shopping centre, the domestic tourism industry, the motel and so on.

As we’ve pointed out many times before, new technology can transform societies in multiple, unexpected ways. This in turn makes for surprising new industries and investment opportunities, often a long way from the initial breakthrough. The answer (you guessed it) is diversified exposure to the world economy, rather than just some recently popular part of it.

What if it’s rubbish (again)?

It is also important to remember that ChatGPT and its various offshoots could simply end up being a dud - an offramp on the way to something more technologically meaningful.[3] This is where the hype is right now, but such hullabaloo can quickly evaporate as we know.

One of many plausible sceptics has worried; “when humans are not as useless as sometimes presumed, and intelligent machines not as intelligent as typically assumed, we get so-so automation - all the displacement and little of the promised productivity gains.”[4]

This matters beyond the world of investments of course. The last few decades have seen exactly this around much of the developed world - flatlining (measured) productivity combined with massive worker displacement. The link to continuing populist spasms around much of the world is sometimes exaggerated, but there is surely more than correlation here.

Investment conclusion

Investor's’ in-trays remain stacked high - the world still appears to convulse with war, disease, discontent, and poly-crisis. Some of that is a simple artifact of 24/7 newsfeeds hungry for our attention. However, there are real things to worry about in there too. The tightrope walk for Chinese policy makers is getting harder, faced with slowing growth even if they get everything right. Meanwhile, Generative AI could easily do a lot more harm than good, adding fuel to an already raging fire of disinformation and factoids.

However, remember that the world that confronts you now is one that is already priced into your investments (for the most part). The world you must think about instead, is the one that will define the exit price from your investments, hopefully in several years, even decades time. It is that world of the future, and the change from the one that you see (mis)represented in various media today, that will define how much you make from investing.

Staying invested and being diversified are more important than ever.

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*This article is for information purposes only. It is not intended as a product offer or investment advice

[1] Goetzmann, WN (Oct 2015) – Bubble Investing: Learning from History – NBER working paper series

[2] Lipsey, R.G; Carlaw, K.I & Bekar, C.T (2005) – Economic Transformations – General Purpose Technologies and long term economic growth – Oxford University Press pp.4

[3] https://garymarcus.substack.com/p/the-rise-and-fall-of-chatgpt

[4] Acemoglu, D & Johnson S (2023) – Power and Progress; Our thousand year struggle over technology and prosperity – Basic Books UK, pp.320