Why I am not orienting my portfolio around AI

Artificial intelligence has been the big topic recently in investing. AI is an exciting technology which has the potential to have a dramatic impact on society. Many companies have been investing in AI, and the pace of innovation seems to be rapid.

Why then have I not reoriented my portfolio to focus more firmly on AI? That is what I intend to answer in this article.

Picking Winners

While I strongly believe that AI is a significant technology which will have a significant economic impact, that is not enough for me to make a successful investment. Rather, I need to be able to predict which companies will stand to benefit from AI, to predict which companies will be winners in the race for AI. In this, I have much lower confidence.

Some companies seem to have an edge currently in AI. I have, for example, been very impressed with how Microsoft has deployed AI. Nvidia is, very famously, a major leader in the AI space. Palantir should also be mentioned as a company which seems to be an AI leader. These are just a few of the names that could be mentioned.

The problem is that a current lead in AI does not ensure continued success. History shows that many early technological leaders lose their position and get superseded by competitors. Just think of Blackberry and Yahoo!. Therefore, I do not have a very high confidence level that many of the current AI leaders remain leaders in ten to fifteen years. Rather, based just on history as a guide and the fiercely competitive and fast-changing nature of the tech industry, I would guess that many current AI leaders fail to maintain their leadership over the next decade.

While some of the current AI frontrunners might be able to maintain their current edge over the next few decades, I am not very confident in my ability to accurately forecast who the winners will be. Technological innovations can be rapid, and I find many AI technologies to be difficult to evaluate. In short, a startup company could come out with a new AI program that outperforms competitors and I am not confident that I would be able to quickly and accurately evaluate the competitive threat.

Commoditization

Similar to my concern about my ability to pick the long-term AI winners is my concern about commoditization. I will reiterate that I believe AI will have a significant impact on businesses and society at large. Furthermore, I think some companies will likely be significant beneficiaries of AI. However, I also believe that there may be commoditization in some areas of AI.

Essentially, I think it is possible that many companies develop similar AI capabilities in some areas, meaning that AI becomes a commodity with little differentiation. None of companies gains much relative to competitors because everyone is using AI. In such a scenario, AI makes little long-term differentiation to companies’ profitability.

I should clarify that I do not believe that all AI will be commoditized. I believe some AI systems will be significantly better than competitors. However, I think it is very possible that some areas or types of AI get commoditized, and determining which areas do or do not get commoditized is challenging. 

Valuation and Hype

AI is being talked about constantly in the investing world. Even many people that normally don’t closely follow the stock market have heard of the big share price appreciation of Nvidia and have become interested in investing in AI companies. This general enthusiasm for companies that are connected to AI means that valuations have risen.

The higher valuations are pricing in more future earnings. If AI does not generate as much future profitability as many hope, these stocks will likely suffer.

The higher valuations means that I would want a higher level of confidence in the future of these companies in order to invest in them. However, as I previously explained, I don’t currently have that high of a level of confidence in my ability to forecast their long-term future.

Wide Usage

AI will likely eventually be used by many companies in many different industries. Due to this, some companies in my portfolio may end up being beneficiaries of AI even though I would not consider them to be more direct plays on AI. For example, Nu Holdings, the parent of Nubank, seems to me to be a company well positioned to better utilize AI than most of its competitors. Technology and innovation are strengths of Nu, something which I would not necessarily say about many legacy banks.

Since some of the companies in my portfolio may be beneficiaries of AI, I believe my portfolio still may benefit from AI even without investing in companies which I consider to be more direct plays on AI.

Other Options

I also don’t believe that I need to aggressively invest in AI companies. I have other options. There are other stocks out there which I believe will generate positive long-term returns which I currently have more confidence in and am more comfortable holding in my portfolio.

Stocks of companies with a strong connection to AI tend to be considered by many to be more exciting and offer more potential than other stocks, However, many non-technology stocks have done exceptionally well in the past, and I believe that there will continue to be stocks of non-tech companies that do exceptionally well. And even among technology companies, I suspect there will continue to be some major winners even among companies which don’t have a strong connection currently to AI. Hence, I just don’t feel it is necessary for me to invest heavily in AI stocks for me to accomplish my long-term investing goals.

Conclusion

At the time I am writing this, my portfolio is not oriented towards companies fueling the AI race for the reasons explained above. If circumstances change, for example relative valuations change and/or if my knowledge level and conviction on an AI company increases, I may decide to invest in companies more directly involved in the evolution of AI. Therefore, I am certainly not ruling out investing in companies more directly involved in the growth of AI. My plan is to try to learn more about AI and the leading companies fueling the AI race.

Disclaimer: This article is for discussion and entertainment purposes only. Nothing contained in this article is financial advice, investment advice, tax advice, or any other kind of advice. Nothing contained in this article should be considered a recommendation to buy or sell any stock. Nothing contained in this article should be considered a recommendation to undertake any type of financial activity. The author is not a financial advisor. The views expressed are solely the opinion of the author, and the author’s opinion may change at any time. The author has no responsibility to update this article if his views change. The author does not guarantee the accuracy of the information contained in this article. Investing, including investing in stocks, involves risk. The potential to lose capital invested is a risk of investing in stocks. Past performance does not guarantee future results. Before making any investment decision, a person should do their own research, consider their individual circumstances, and strongly consider seeking the advice of a properly licensed professional. The author is not responsible for any decisions made by the reader. The author is not responsible for any actions of the reader. The author is not liable for any loss a reader may suffer from buying or selling stocks. The author is not liable for any loss a reader may suffer from any financial decision made by the reader. Once again, this article is NOT financial advice, investment advice, tax advice, or any other kind of advice. As of May 20, 2024, the author is invested in Nu Holdings Ltd (NYSE: NU). The author’s portfolio of stocks may change at any time, and the author does not have an obligation to inform readers if and when the author’s portfolio changes. Likewise, the author does not have an obligation to update this article if the author buys or sells any stock, including but not limited to stock of the companies mentioned in this article.