The Viewpoint: An optimistic view of AI

As has often been repeated in this blog, if you want to be a successful investor, be an optimist; if you want to be a successful journalist, be a pessimist. Despite this, many investors remain resolutely pessimistic about the future.

A good example of this is economic recessions. Since 1935, the US economy has been in recession approximately 15% of the time, making betting on a recession poor odds. Despite this, each year there are material concerns about the health of the economy and a recession that go way beyond the odds of one occurring. 

Part of this is to do with human behaviour. Humans weigh a loss twice as heavily as a gain[1]. With this inherent behaviour it becomes easier to understand the bias towards pessimism amongst investors. This has now transferred to investor sentiment as perhaps the biggest change in the investment environment since the internet: Artificial Intelligence (AI).

Humans weigh a loss twice as heavily as a gain. With this inherent behaviour it becomes easier to understand the bias towards pessimism amongst investors.

Slow to the fast

It's becoming increasingly clear we are moving from a time of slow technological change to a rapid one. After the internet entered our lives, change has been more incremental than transformative, finding new uses for an existing technology rather than creating a new one. As an example, since the first transformational one was launched in 2007, iPhones have become increasingly incremental when upgraded. This can be seen in productivity statistics, which measure for each unit of labour how much output is created. In the last decade productivity has been well below long-term averages.

There have been benefits to this. Since the financial crisis ended in 2009 it has been a relatively stable environment for investors, certainly up until 2022 when interest rate increases and the war in Ukraine came along. It has been an environment in the corporate world where the big have got bigger, and the strong have got stronger. Big technology companies in the US have been the primary example of this, with the ability to challenge the competitive advantages of many companies impossible. AI is changing that.

AI: the creation of knowledge from sand

At its simplest and most profound level, AI is the creation of knowledge from sand. Sand is the base ingredient for silicon, which in turn is the base ingredient for semiconductors powering AI. As others have noted, it is the transfer of something in abundance (sand) into something which is scarce (knowledge). If knowledge truly is power, then individual, corporates, and institutions will become much more powerful in the future.

Despite the potential to accelerate knowledge and understanding, equity markets and broader society have started to develop a deep sense of unease. This is understandable, as another human bias is to prefer certainty over change. The certainty of a dull today can seem more attractive than the promise of a brighter but changing tomorrow.

Investors can see this in the share price movements of a certain groups or sectors of companies. Those businesses which operate in the knowledge economy – such as software, data and analytics – have seen their share prices fall as investors contemplate knowledge which has been scarce becoming abundant. The companies at the centre of transforming sand into knowledge, such as semiconductor businesses, have fared much better. Best of all, however, have been the shares of companies not seen to be impacted at all, such as Tesco and Unilever.

While I too share the same unsettled feelings of many investors, it does seem very pessimistic to think the most attractive thing to invest in, in an AI-led world, is food. The only logical explanation is that investors are trying to protect their capital due to fear and pessimism towards change. I would be very happy to take the other side of that debate.

We are in a time of significant under and overestimation, to an extent I’ve not seen in my 27-year investment career. The underestimation stems from a lack of optimism as to how much AI will transform all our lives, both professionally and personally. The overestimation comes from too much pessimism about how it will impact companies in industries where new AI-led business will be created.

Looking at individuals, AI will raise the bar for all who adopt it. If you are average at something, it will make you better.

In my view, looking at individuals, AI will raise the bar for all who adopt it. If you are average at something, it will make you better. If you are good at something, it will make you exceptional. Bolting on computer derived knowledge and intelligence onto our own human-based equivalent can benefit us all. It will require a reskilling of labour forces, in the same way the creation of the personal computer did, with more rewarding and value-add careers the likely result. 

For companies, they will be able to innovate and create new valuable products and services for their clients at a rate previously impossible. A good example of this is how data is used. Interaction with data has been human led and restricted by the amount of computing power and software intelligence to extract value. As computers become the primary way of deriving value from data, it will likely lead to an explosion in data usage and sophistication of outputs. The value creation in this for users and investors is significantly underestimated, in my view.

If this narrative is correct, there will be fewer than expected ‘AI losers’ at both an individual and corporate level. Those who do lose are more likely to be the non-adopters of AI and may only have themselves to blame. It also means that investors should be targeting wealth creation rather than trying to avoid wealth destruction. From where markets have moved year-to-date, this could be a big change, with some of the ‘AI losers’ performing best, and the ‘AI resilient’ the worst.

Investors, with their tendency for pessimism and desire for certainty will need to reprogram themselves as AI unfolds over the coming years.

Of course, there are many other scenarios which can play out too. No one has privileged access to the future. We are in a time where history suggests it is much better to enter with a mentality of ‘better to be an optimist and wrong’, than ‘be a pessimist and right’. Investors, with their tendency for pessimism and desire for certainty will need to reprogram themselves as AI unfolds over the coming years.

1. https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/loss-aversion/

For professional investors only.  This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. Reference to any security is for information purposes only and should not be considered a recommendation to buy or sell.

The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change. Forward looking statements are subject to certain risks and uncertainties, Actual outcomes may be materially different from those expressed or implied.