In this Newsletter, I will share my approach to investing in AI, its risks, its rewards and what history teaches us about innovation and more importantly how not to lose money at it.
AI is pretty cool, it might change everything or at least some things for sure. Its already happening, every time I google something I get a value added Gemini response that is impressive, at least most of the time. I am sure that in many industries the effect will be a game changer, either by cutting costs or by discovering new products.
For the small investor, these kind of changes are pretty exciting, a bit scary but also an investment opportunity. From an economics point of view, innovation is all part of the building and destruction of capital markets. Old industries die, new ones replace them. Its a normal process except that from time to time new technologies do come sweeping in and accelerate the process. Historically we have seen this with the railroads, the automobile, and more recently with computers and the internet. Following these changes, there is usually an expansion of GDP in the following years and everyone wins. This is good for investors generally but you must also take into account the destruction. The horse buggy companies can attest to that.
Back To The Future
Its early yet for AI, yet everyone is making bets on the future. The future for the most part will be different than what is being dreamed up now, always is. Some things will be disrupted for sure, but most of the future is still unknown. So investing is tricky. Try to think back to the early days of the internet, which company made the money? Hard to answer because in reality, everyone did. Change is constant given enough time. Of the top ten companies in 1999 at the apex of the internet age, only Microsoft remains today. Every other company has fallen back, remember Nokia? In 25 years from now the top ten will be mostly composed of different companies again. That is the way of capital markets, destruction and creation.
At the moment there are allot of bad assumptions being made in the market. Google is a perfect example, early in the year it was suggested that AI would kill Google’s search revenue and that it would be in big trouble, so they said. I bought google at this point knowing that no one knew for sure how this would play out. Google was an affordable and strong business with increasing revenues and profits. In addition, it had other revenue streams and was building its own AI. Google is up over 90% since those summer lows as its now a leader in AI. Did i know for sure that this would happen? No. But i have seen this before, irrational fear based on little information creating mis-pricing.
Software Companies Are Done
Similarly the market has been really hard on software stocks in general, as again, these are going to be replaced by AI or are they? AI can code, so why buy accounting software when you can make your own. The problem with that idea is that companies are already busy doing what they do best. Is it really reasonable to think that they will be creating their own programs to do their accounting? Making updates, integration, making sure its right, doing year end reports? Likely not. My guess is that accounting companies will still be needed but will likely need less programmers as one person will be able to do the work of 4. Geez maybe the accounting company will make more money now that they have less people on the payroll. So you see, its tricky when it comes to predicting the future.
All my software companies in the hobby portfolio have been under pressure. There could be opportunity here and as a result I have been buying more on new lows.
Show Me The Money!
Big companies are pretty convinced that investing all their resources into AI is worth the risk. Those big heads running those companies (you know who they are) are betting big, so there is surely something to be said here.
Will these first companies in AI all be winners? What about after AI is built, who makes the money then? More importantly will all that investment provide an outsize return for those shareholders? Or will some other company just step in after its all developed and do it better? Will AI cure cancer allowing for biotechs to be the big winner? Or like the internet, will we all be winners? This is the problem when it comes to innovation, no one knows for sure what the future will look like. Apple did not invent the smart phone, but yet it makes the majority of world’s smart phone profits, who knew?
How Am I Playing AI?
I normally do not like to chase the latest shinny thing as prices tend to be expensive and any fumble causes massive repricing to the negative. I have successfully followed the herd and made lots of money in the past, but I have also lost lots of money. So you have to be careful especially if you are getting in later in the momentum cycle. Some examples of things not playing out on momentum are dot.com stocks in year 2000, Cannabis in Canada, 3D printing, housing in 2008. Nevertheless, momentum investing can work until of course it no longer works. That being said, although I have not explicitly invested in AI, I am still a player, and so likely are you. In my portfolio, which is a heavily diversified, i just happened to own Google, ASML, TSM and Amazon, most of these I have owned for years.
Amazon for example is building and integrating AI and robotics directly into operations to become even more efficient/profitable. On the picks and shovel level (supporting AIs need for power and other things) I also happen to own oversized positions in the Energy sector like Cameco, Fortis and Tourmalene. These were strong positions even before the discovery of AIs thirst for energy. AI spans many sectors one way or the other so, a well diversified portfolio should benefit.
Should You Invest Directly In AI?
As mentioned, you may already be invested indirectly. I have no issues with holding small positions of NVDIA or other big players as long as you understand that their values are constantly being repriced as their futures keep being redefined. So go ahead and chase the shiny thing with the rest of the lemmings. But if you and everyone else are wrong and you pay too much, you might fall off the cliff (as lemmings tend to do). But it could also be an extraordinary bet. So having some measured exposure in a well diversified portfolio is quite fine.
But What About The AI Bubble?
My experience with bubbles is that if the market as a whole is scared of a bubble and everyone keeps talking about it, its risk are likely already priced into the stocks. I would worry more about the things no one is talking about like a confidence run on the US dollar, US debt, runaway inflation or Aliens? We can also at any point fall into a recession (unlikely but possible) or have a 50% market drawdown for little reason other than sentiment. But how are those risks different than any other day. I am not too worried about a specific AI bubble at this time. I think the risk in tech as a whole is increasing and one day there could be trouble but not for the next little while.
Marc’s Market Outlook
As you recall last months Newsletter, I have been lowering my risk by shaving or selling big winners so as to buy more stable boring positions. The strategy here is to slow the boat down, keep my huge over performance gains relative to the market. I have deviated quite considerably from the SP500 index. I have 3x the Energy Sector weighting, almost 3x the utilities weighting, almost 2x the Consumer Staples weighting and about 40% more than the Health sector weighting. Most importantly I have about half of the Information Technology weighting which is by far the biggest and most influential Sector of the index.
My view is that US market especially Information Technology is really priced for perfection, read expensive. On top of that, this sector is being influenced by the AI theme, so any changes in that narrative can lead to allot of volatility which can reach well beyond just the Tech sector.
Everything else in the market is relatively cheap, especially foreign stocks, any quality boring company, small caps, everything but US tech. My strategy is to stick to quality boring companies but still participate in AI with just one direct and a few indirect positions. If AI companies keep growing, I participate, if they create something incredible but never make money, well it does not hurt too much.
Marc’s Monthly Moves
- Sold
- Nada..nothing
- Bought
- Fiserv Inc (FISV)
Marc’s Portfolio YTD Performance
- Portfolio return: +23.3% (including currency loss)
- Portfolio return: +25.2% (without currency loss)
- S&P 500 return: +16.45 %
- RSP ETF S&P equal weight +9.3%
- TSX: +26.91%
The portfolio is over performing the sp500 by 8.75% points.
Money with Marc 