Lessons for investors in an AI future

Lessons for investors in an AI future

Investing in the share market can often feel like a rollercoaster ride, especially when new transformative technologies emerge, and artificial intelligence (AI), which recently exploded into the mainstream domain, is no exception. In the year to date, share market returns for companies with significant investments in AI have been stellar. Nvidia, which specialises in AI hardware and software, is up over 200%. Microsoft, who purchased ChatGPT, is up over 30%, and Meta (Facebook) is up over 150%.

While AI feels like nothing we’ve seen before, over the years, the share market has witnessed the rise of various technological innovations, from the advent of electricity to the internet revolution. These innovations have reshaped industries, created new opportunities, and, in turn, impacted share market performance. They also provide instructive data to investors to see the dangers and opportunities of investing in this technology type.

In this article, we delve into historical share market reactions to transformative technologies, examine the current landscape with AI and reinforce the importance of disciplined investment principles.

The Historical Perspective

To understand how the share market responds to transformative technology, it’s essential to take a historical perspective. Throughout history, new technologies have disrupted existing industries, leading to winners and losers in the share market. Let’s look at a few examples:

  • The Industrial Revolution: The late 18th and early 19th centuries saw the advent of the Industrial Revolution. Companies that embraced new manufacturing processes and machinery flourished, while those clinging to outdated methods faced obsolescence.
  • The Internet Boom: In the late 20th century, the emergence of the Internet kickstarted a wave of innovation, giving rise to companies like Amazon and Microsoft. These technology giants became share market darlings, with their shares experiencing meteoric rises. Yet even these companies experienced some excruciating price drops. Amazon lost 80% of its share value in 2000 and another 30% in 2002, and it was considered one of the winners.
  • The Dot-com Bubble: Unfortunately, not all companies in the internet sector fared well in the long term. Many startups that couldn’t translate their ideas or potential into profits went out of business.

The Current Landscape with AI

Artificial Intelligence is the latest technological frontier with the potential to transform nearly every industry. But how is the share market responding to AI-focused businesses?

Based on history, what we should expect is increased volatility. AI will contribute to greater business efficiencies in the future, but it’s tough to price. What sort of profits will these businesses make? Which companies will be the winners, and which will fail to achieve their potential? Uncertainty means prices will move as investors absorb new information and adjust their expectations.

Like the dot-com craze, most AI companies will likely fail to outperform the market. Academic research has shed light on this topic, and the results are instructive.

One widely cited study by Hendrik Bessembinder, titled ‘Do Stocks Outperform Treasury Bills?’ (2018) found that most individual shares (about 58%) underperformed one-month Treasury bills over their lifetime. This means the odds of picking an individual share that outperforms a risk-free investment like the US Government’s short-term Treasury bills is less than 50%.

Like many other technological revolutions, the key to investing in AI is diversification. By owning thousands of companies in your portfolio, you will be exposed to individual firms such as Nvidia and Meta making big moves into AI. If they succeed, some of the investment funds in your portfolio will continue to appreciate what they have done so far this year. However, if any of these companies underperform, and it’s inevitable some will, you have spread your investment out broadly enough that it shouldn’t affect achieving your long-term goals.

The share market’s response to transformative technologies like AI can be exhilarating and nerve-wracking. Historical patterns show that these technologies can lead to greater market volatility but also create opportunities for disciplined investors. In the long run, investors who adhere to disciplined investment principles, maintain a diversified portfolio, and exercise patience are more likely to achieve their financial goals.

As we continue to witness the AI revolution and its impact on the share market, staying focused on your investment strategy and remaining committed to your long-term objectives is crucial. By doing so, you can ride the waves of transformative technology with confidence and resilience.

24 October 2023

Article provided by Consilium.

Disclaimer: Information as of 23 October 2023. This article is general information, does not consider your financial situation or goals, and does not constitute personalised advice. Please get in touch with your financial adviser for advice specific to your situation. There are no warranties, expressed or implied, regarding the accuracy or completeness of any information included in this article.

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