The not so inevitable investment case for AI
13 mins read

The not so inevitable investment case for AI

Conventional wisdom is a by -product of group thinking that presents solutions that are good enough for the average person and at the same time are not right for any individual. You follow it at your danger. The more different you are from the person who defined a rule, the less you should follow the rule. Every Monday I will challenge the investing norms that can only hold you back from living the life you want.

The not so inevitable investment case for AI

“It must have been moments even that afternoon when Daisy tumbled briefly from her dreams – not through his own fault, but because of the colossal vitality of his illusion. It had gone beyond her, beyond everything. He had thrown himself into it with a creative passion and added it all the time and covered it with every light spring that drove his way. “

– F Scott Fitzgerald

In 2009, an experiment was conducted by Rob Walker and Joshua Glenn called the significant object project. The prerequisite was simple. 100 near useless items were purchased in thrift stores and garage sales for a total of $ 128.74. A writer created a compelling story about each object and it is put on sale on eBay using a picture of the object and the story. The 100 articles were sold for $ 3,612.51. The lesson is simple. A good story goes a long way.

Stories are powerful and we see them throughout the investment world. Stories about the overall market and individual companies shape investors’ behavior. Stories are used by the investment industry to sell funds and ETFs.

We create stories to motivate our own bad behavior even when we know that we are not doing the right thing. How many investors have motivated to sell in a case of the market by calming themselves that they will “get into the bottom when the market seems safer”. Our stories about the past reinforce our sense of self -value. They attribute great skill and foresure when things have gone well and inevitable bad luck when things have gone bad.

Here is a story about an investment opportunity. Does this seem to be an attractive investment opportunity?

There is a new technology that is early in the adoption cycle. This new technology will reshape the world and within 20 years the 150 million current users of the technology will grow to 4.5 billion users. These people will use technology daily and it will play such a big role in their lives that a movement will begin to limit their use of technology. It doesn’t work. The technology will make them more productive, change how they buy and sell goods and services and change how they interact with the world and their fellow human beings.

There are several ways you can invest in this technology. You can invest in the expansion of the infrastructure that supports the adoption of the technology. You can invest in the companies that provide the technology to users. Or you can invest in the companies that will sell goods and services with the technology. More about my story later.

The predetermined AI travel plan

The investment world has been focused on Deepseek. I woke up as surprised as most investors that Deepseek has created an AI model that is open source code, as accurately as other ownership AI models, about as quickly as other AI models and uses 95 percent less chips than other AI models. Will all this be true? There is a lot of skepticism.

Part of this focus on Deepseek is the fact that in recent years the market has been driven by the AI ​​story. To succeed, a story does not have to be coherent. It can connect different threads in a doubtful way and still drive behavior.

Conventional wisdom suggests that AI will change how we do everything while we are extremely profitable for a different set of companies along the AI ​​value chain. In a simplified value chain there are suppliers of raw materials, companies that create goods and services of the raw materials and consumers of goods and services.

The story about AI proposes great wealth for suppliers of chips and data centers needed to support the AI ​​models. Nvidia NVDA is the poster child for the suppliers, but the local data center provider Goodman Group GMG is another example. The prevailing story is that there will be no disturbance to this inevitable result. Nvidia will flourish, data centers suppliers will flourish and power suppliers will flourish. Innovation will not interfere with this predetermined course.

The story is less clear when we turn to the creators of the AI ​​models and consumers of AI. But the market also insists that this will be good for investors. We can take the case with the alphabet Googl and meta meta as an example. They spend billions at AI. For example, Meta promised only to spend $ 65 billion on AI 2025. But it is unclear exactly how they will make money on their AI models. The market seems untouched. The alphabet and meta will flourish together with Amazon, Apple and anyone else who could possibly use AI. Even Telstra exhibits its AI references – but to be fair it doesn’t work for them.

The business models of the alphabet and Meta are that they offer fantastic free products to attract huge audiences that allow them to sell advertising. Will AI expand its share of advertising? Unlikely because their market share is already so high that they are facing concern for trust. Can they take more for better targeted advertising? Seems doubtful whether everyone has AI -directed advertising and the total marketing expenditure is not increasing.

Can these expenses be defensive and are alphabet and meta only in an AI weapon to maintain status quo? Perhaps. Meta and alphabet dominated advertising because they could target ads better than anyone else. AI threatens this moat because it may be able to make search and social better and goal advertising better. Winning this race may be necessary to maintain their embankments. But investors may have been better if AI did not exist.

The prevailing story gives no credibility to the inevitable losers from AI. Expired workers and populist politicians will say. Supervisory authorities that are already worried about the power of Big-Tech will say. The creators of the content and intangible property that AI steals will say. Can any of them track AI? Probably not quite, but they can interfere and influence the appointed path that many investors see for AI. Nothing in life is inevitable.

All of these details only get in the way of the convincing story. Each new technology is an opportunity and a threat to any existing business model. It often takes a while to find out the consequences. Many very smart people try to find out the investment consequences of AI. Many of them are financial incentives to promote hype for as long as possible. When the Hype machine stops to stop, it is often everyday investors who have bought in the story Krokinje and lowering that remains that holds the bag.

The delicious body drinking the new wine

Deep in Malaise after World War II sat a group of French surrealists around Montparnasse. They played a game that was about writing down a single word on a piece of paper and transferring it to the next person to add another word. According to the legend the first time the game was played, the collaboration resulted in the phrase that the exquisite body will drink the new wine. Not too bad.

I think of this story as I read the marketing for investment products with exposure to AI. A spin through Wepages of AI ETFs says it is a “transformation technology megatrend.” Apparently “we are at the beginning of an intelligence evolution, more in -depth than all previous industrial revolutions.” AI has “the potential to change how a huge part of the economy works.”

Like the line from the surrealists, the AI ​​marketing sounds good but means nothing. But there is a difference between art that is designed to please the aesthetic and marketing that is designed to influence behavior. In the former, the lack of meaning can increase the allure. In the latter, our bubble detectors should be triggered.

Morningstar recently conducted research on thematic means and ETFs. A thematic fund or ETF is an investment product based on a convincing story that many investors consider very likely to eventually and – in an adaptation of linear thinking – will lead to high returns. AI is a perfect example of an all -encompassing thematic designed to titillate investors.

There were 2,776 thematic funds globally at the end of June 2024. The chance is that most of them will not exist in the long term. During the 12 months before June 2024, 18% of thematic funds survived and surpassed its Morningstar Global Target Market Exposure Index. If we go back 15 years, the success rate drops to 9%. Over 60% of the total thematic agents available to investors 15 years ago have since been closed.

Investing in a thematic can seem smart. Yet it is Hubris personified to think of great wealth is so easy to obtain. Just like the significant objects projects sold is nothing more than a story. In the real world we call a gimmick.

Last thoughts

The new technology I described earlier in the article was the internet. I described the prevailing story sold to investors in the late 1990s. Everything I described was true. Everything happened. The Internet transformed the world. By 2020, there were 4.5 billion people who used it daily.

Infrastructure was needed to support the expansion of the Internet. Nevertheless, internal infrastructure investments performed terribly. Global Crossing and Worldcom that put the fiber to connect the world went out. Cisco, which provided the network equipment, which was traded at such an inflated valuation of the share price is still below the high from 25 years ago. Microsoft took close to 15 years to reach a new height after the bubble burst.

The companies that gave access to the Internet through search have all been crushed by Google that did not become public until 2004. Almost every early Internet shops went out and Amazon came out of the wreck.

The transformative vision for the technology came into being. The internet was all it was cracked to be. The investment return was not. Optimistic investors created a story that motivates high values, investors jumped in and became burned.

Whatever happens to AI, I think the Deepseek section puts some doubt in the prevailing story. Ferocity of the sell-off before the facts were known may indicate that some people at AI bandwagon know how insecure a “too good to be true” story can be. They know they buy a story but do not care because they make money. They also know that it can’t be forever.

Just remember that every story needs a universal truth that is used to motivate all kinds of fantastic results. The snake’s oil seller who promotes the story can point to that truth to bludgeon all Naysayers. AI can change the world as we know of it, but that does not mean that the current investment environment will lead to wealth. Be careful the next time you hear if one cannot miss thematic.

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What i’ve eaten

Pilu is one of my favorite restaurants in Sydney. It is difficult to beat the combination of the view of the freshwater beach, fantastic Sardinian food and good service. Below is spaghetti all chitarra with vongole from my last trip to the northern beaches. Chitara is a guitar in Italian and refers to the preparations involving the pasta that is shaped by pressing it through a set of wires taken between a wooden frame.

Vongol