The AI Wave and How It Impacts Your Portfolio | AWM Insights #150
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Episode Summary
AI is today’s buzzword, and for good reason. OpenAI’s release of ChatGPT to the public has started a wave of creativity in applications for the broad tool.
It has started disrupting major fields and industries from education to programming, and we are still in the infancy stage. As promising as any new technology can be, it is important to be diligent and stay true to the fundamentals of investing. Crypto and the Dot Com bubbles are great examples of this.
This technology has a very strong probability of changing our lives and impacting the global economy, and the best way to improve your probabilities of reaping the rewards from AI is to stay diversified, maintain exposure to current players and add new entrants, and stay disciplined.
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Episode Highlights:
0:00 Intro
0:31 AI’s impact on our industry and how we are qualifying this investment theme
1:39 Maintaining diversification is fundamental
2:58 Why it's important to be cautious while new technology is in its infancy phase
4:28 Do globally diversified investors already have AI exposure
6:20 What happens to trailblazer companies and do they have the best chances to succeed?
8:29 Private Markets will also cover the new opportunities in AI
+ Read the Transcript
Brandon Averill (00:00): All right, Justin, well we're back for a little remote session here. We're moving into the new office in Pasadena, so we got to take this gig on the road, but excited to jump in today. At the top here. I just want to mention that phone number again, (602) 704-5574. Great place for anybody listening to shoot us a text. Bring your topics and we'd love to riff on them. But one thing that we're just getting absolutely overloaded with right now, Justin, is AI. So, I'm excited to announce that. AWM's launching our first AI pod... Just kidding. But we're hearing a lot about this and we're seeing a lot of companies, even financial companies like ours, adding AI to the descriptors of their companies.
(00:56): So, we thought it'd be fun to maybe hit on a little bit today, hey, when we have something like this pop up that is very prevalent, how do we start to sort through the noise? It is a super exciting technology, something that we've messed around with a little bit. I know that curiosity has definitely gotten the better of us. So how do we start to think about this maybe as an investment theme? How do we think about it when we look at our private market allocations, et cetera? So, lots to throw at you, but just, yeah, I guess, give me your 2 cents on AI in general, but then I think more importantly, how are we sifting through this as an investment opportunity?
Justin Dyer (01:34): Let me try and take those bit by bit. I would say how do we think about it from an investment theme standpoint is really to maintain diversification in a simple answer. That's kind of skirting the question to extent. But what I mean, to put a little bit more meat on the bones to that, is you never want to go into a specific area all in, right? That is kind of the definition of diversification. So, whether that be a new investment theme or an existing investment theme, you're never going to go chips in on whatever it is, technology, stocks, financial stocks, AI stocks. So, I think that's one kind of real simple, let's say baseline. I always want to say that, really going back to what we repeat time and time again, and it's worth repeating again here, is diversification is an incredible, quote-unquote, free lunch.It is one of the things you have absolute control over that has such an important impact on your long-term outcomes, gives predictability, gives confidence, make sure you don't blow things up. So, I want to hit on that.
(02:38): Then getting a little bit more into the weeds around AI is clearly there's a lot of excitement. It's not necessarily a new topic. There's been quite a lot of discussion around it over the last, I don't know, five plus years in various ways. But it's really taken hold since, if you're not familiar with it, OpenAI, the company that developed what's called ChatGPT, amongst a couple other AI tools, basically released ChatGPT to the public, to get more information, to get more data so they can learn and have a feedback loop. It really is incredible. You're starting to see it in other third-party applications, and we're kind of just, I guess, at the tip of the iceberg on seeing what it can do, and people are getting really excited. It's very natural in times like this to get overexcited and even say, "Well, okay, who's going to be the winner here?" We don't even know exactly what the end application is. Is OpenAI going to be the winner? Google's now coming out with their competitor with what's called Bard. Google has such substantial resources.
(03:47): So, you really have to take a step back and say, "Well, okay, I'm going to go buy an AI-based ETF because there's so much hype" and say, "No, wait, I need to make sure I'm not confusing a good idea or an interesting idea", which AI most certainly is. There's also some questions that are still out there in the community and the world, but let's not confuse a good idea with a good investment strategy. I would say that's kind of the first areas in which we start and then there's more, but I'll stop there.
Brandon Averill (04:16): Yeah, I think that's a fantastic point, and I'm glad you pointed it out, really talking about diversification and getting access because I think one thing that people may get confused with is we're certainly not saying don't invest in the AI space, but we just are saying do it in a very responsible way. And the most responsible way to do that is if this is really a movement, if this is really a technological change, then allow the companies that are best at it to sort through that information and don't over concentrate yourself. If you're broadly allocated to the US and the world stock markets, I guarantee you that you have access to AI because those companies that are making up those indices or making up those markets are investing in AI. They're figuring out how to implement it, just like you just mentioned with Google or Microsoft, et cetera.
(05:11): There are really, really smart people at fantastic companies that are working on this. You don't want to over-allocate yourself or concentrate yourself somewhere because it might turn out to be a fad. I mean, we saw this right early on in the dot-com boom. Companies had nothing to do with dot-com were adding dot-com to their names. We saw the crypto craze. People that aren't in the crypto business all of a sudden started introducing elements to their business on that side. Then those things didn't work out ultimately. And sometimes they do work out, but at the end of the day, when we're putting portfolios together for clients that are listening, we're doing so with the idea of trying to produce the most reliable outcomes to achieve the highest expected returns that ultimately fit everybody's individual priorities. And over allocating to any one of these areas could blow up that entire plan.
Justin Dyer (06:07): Completely. I think it's also good to remember, you mentioned the dot-com bubble, and this is generally true across cycles or new industries and whatnot, very rarely is it the first mover or the first entrant the one that ends up being the dominant player. Sometimes, and probably more often than not, I don't know the statistics around it, but they generally don't make it. Dot-com bubble is the exact same way. A lot of the companies that kind of were on the front end of that are no longer. I think Google is famous for this. They were not the first player in the search engine market. There were a lot before them. But lo and behold, fast-forward to where we are today, present day, Google is undoubtedly the dominant player there. Now, is AI going to shake up that? Maybe there's a potential. Is OpenAI going to supplant them? Who knows.
(07:00): This is a period of time, and it was similar a couple years back in Web3. And it's not to say that these technologies are not valid and good and have some interesting application. We're just in this period, and still to this day with Web3 and crypto, we're still in this period where these ideas are being thrown out there and no one really knows the exact end game. Are people going to make substantial amounts of money? Yes. You don't know who they are, where they're going to play. Where we can even take this a step further is the private market for those investors and clients where it makes sense, where the level of wealth has allowed to take on that private market risk and get some private market reward, the higher expected return. You start to take what we generally say a picks and shovels approach. Let's not necessarily bet on one specific end result or a cryptocurrency, going back to that.
(07:57): It's the players that are trying to rebuild or build on the infrastructure that this new tool allows them to do is a really interesting play and kind of where we end up thinking about applications in the private market specifically.
Brandon Averill (08:12): Yeah, and I think that's just a great way to continue to look at it, is get access where you can find access. We both know, and we've talked about this before, that private side of investment, right, that is where you have higher expected returns, but risk and return are related. So, you're going to find opportunities really to rely upon some of the best investors in the world to go out and find this new kind of wave of AI companies that are going to make up the future. The reality is that the majority of them are probably going to fail, and that is the business of the private side and venture capital. But at the end of the day, I think the message of just continuing to be widely diversified, allow yourself to get access to all of these things, but not over concentrated, is just a fundamental lesson that we continue to go back to.
(09:04): I think it's just a great thing to keep in mind as we continue to hear more and more that going to be undoubtedly coming about AI and how it's going to take all our jobs and kind of replace everything. I'd also encourage people to not get too scared. I mean, this is a story that we've heard many, many times over and over. And what ends up coming is, even if AI does come in and is a huge part of our lives, which seems highly likely, we will adapt, markets will adapt, and we'll continue to get rewarded for participation in the creation of these economic engines going forward. We just encourage you guys to think about it broadly. Don't get over hyped and just know that when we're allocating your portfolios, our big focus is ultimately getting you guys allocated in the best way to achieve your priorities. And that's being diversified and allocating to those areas of higher expected returns. So, we'll wrap up for today, and until next time, own your wealth, make an impact, and always be a pro.