How to invest in artificial intelligence the smart way

Express ticket to riches ? Or fast track to apocalypse? For the artificial intelligence hype machine , there is no in between. Six months since ChatGPT’s debut triggered an AI craze , society still cannot decide if AI is the next dot-com-style boom or a doomsday machine. The hype and fear both miss the mark. There is opportunity in AI , but it is neither a new world’s dawn nor the old one’s death. The term AI conjures visions of sci-fi robots, good and evil akin to the Terminator movies – wildly off-base views partly fanning today’s exuberance and terror. Reality is more mundane: AI simply refers to “machine learning” – algorithms generating text, images, video, computer code or other outputs based on oceans of data absorbed via previous programming. ChatGPT – one application among many – is a form of “generative AI” called a large language model, capable of making almost-human text via simple prompts. It seems intelligent by answering questions and writing text. But it merely regurgitates programming. Hype and fears abound regardless. Among doomsayers’ fears are “deepfakes” (AI-edited images, audio or video made to alter someone’s recorded words or actions), phone fraud using AI-cloned voices, cyber security concerns and an alleged AI investment “bubble”. One cyber security official warned that AI was a potential “extinction event” for humanity – echoing some technology leaders who vaguely claim similarly. But the AI-devoted say it will “save the world” – suggesting not only a utopian future, but also massive early investor gains. Both camps overstate. Start with AI bubble concerns. Some headlines tout an AI investment deluge, inflating a bubble soon to burst. The Bank of America claims AI is in a “baby bubble”, noting hot returns – but not white-hot like past full-blown bubbles. AI’s social effects – whether on jobs, privacy, security, or something else entirely – are unknowable. Good things could happen. Or bad. Or both! Or they could amount to little, such as initially widely hyped self-driving cars or at-home 3D printing (remember that hype?). Regardless, the societal good and bad play out slowly over many years, in the background for stocks and in unforeseen ways. Meanwhile, markets focus on how trends affect corporate earnings over about three to 30 months, as they always do, not further. Current AI fraud does present some immediate risk, yet the reality of deceit is not new or unique to AI. There have always been rats, just as allegations against FTX and Sam Bankman-Fried echo Bernie Madoff, who echoed Charles Ponzi. Beyond flashy window dressing, fraud is structurally similar. Will AI turbocharge the economy and stocks? Unlikely! Sure, AI hype helped technology stocks to attain 34.5 per cent gains in 2023. Semiconductors – crucial for AI development – led to Big Tech’s rise, soaring 53.3 per cent. But Big Tech’s 2023 rise is mostly about quality growth and rebounding from its outsize 2022 bear market slide. Consider this: There has been no global or US recession yet. Value stocks did not get pounded last year to set up a big rebound. Yet many still fear recession ahead while sweating current slow growth. Hence, markets pay a premium for companies able to grow revenue confidently in a torpid economy. Those are real growth stocks – and they are rare. Hence, the largest growth stocks lead now. AI is part of that – largely within semiconductors – but it isn’t alone. Furthermore, we are not in the game-changer phase of AI now. Having polled hundreds of companies, I can say its practical uses today are overall mundane, such as efficiency gains from automating repetitive tasks and marketing fluff. Good, but not game-changing. AI is not new. Technology start-ups pursuing AI attracted venture capital money for years before ChatGPT. Big Tech companies used profitable divisions to subsidise AI research and development. They had the edge over tiny venture capital-funded start-ups because the computing power needed to train these systems is massive … and massively expensive. It is not tiny start-ups in Silicon Valley that are driving AI. It is the big guys in chips, software, data analytics, search and more with pole position. So, while it seems tempting to “get in on the ground floor”, this isn’t a “ground floor” moment. It is impossible to identify such far-flung, long-term winners. If I could, I would! But humility is vital. Even after Silicon Valley’s gruelling start-up shakeout, a sea of tiny companies remain amid excess enthusiasm in AI pure-plays now. Buying within them now is buying hype high. With oodles of ChatGPT clones already available, which start-up will build the profit margins to justify premium valuations? And many are private plays. Sketchy valuations and illiquidity make them doubly unattractive speculations. Some AI exposure may be beneficial. But it should not be the swing factor to own or avoid a given stock or sector. Instead, intelligent investing means seeking high-quality growth. If AI partly drives that growth, OK. Otherwise, no. Ken Fisher is the founder, executive chairman and co-chief investment officer of Fisher Investments, a global investment adviser with $200 billion of assets under management