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  • Writer's pictureJoe Cardello

Changing the Game

May 24, 2023

Artificial Intelligence is changing the game

AI is certainly changing the world rapidly. But artificial intelligence is not new! Many companies have been using increasingly powerful computing technology to make their businesses more efficient, and to power new growth areas for many years.

However, with the release of ChatGPT to the public, awareness of “AI” has increased dramatically. It seems clear that this awareness and hype is feeding into financial markets. For example, one company we own across the portfolios is Nvidia. It’s in our diversified basket of innovative technology companies partly because of its pole position in graphics technology that is essential across many parts of the global economy. The share price of Nvidia has doubled in less than 6 months. Another example may be the fact that Apple computer’s market capitalization at roughly $2.7 trillion is now worth more than the entire Russell 2000 Index (a widely used index of small to mid-cap companies).

I cannot tell you if the valuations of Nvidia or Apple or other large cap technology stocks are too expensive, but I believe it’s fair to say this is partly a result of the media attention on Artificial Intelligence. Please look at the relative performance of NVDA, S+P 500, and the Russell 2000 over the past year:

I would posit that NVDA is now (at least to some degree) being recognized for its role in supplying infrastructure on which to build Artificial Intelligence.

I think some additional observations are also worth pointing out:

  • Artificial Intelligence is indeed changing many professions rapidly. One area directly related to August Wealth’s business is in research. Our ability to streamline information from publicly available sources, present it, and analyze the information without human involvement is truly remarkable. This is already making us more efficient and at drastically lower costs. The positive changes we see, lead us to believe these changes are occurring in millions of ways across the global economy.

  • Change will occur at an exponential pace. We are typically very poor at interpreting exponential change. For example, about 15 years ago, the first Apple iPhone was released. For perspective, there was no WAZE or Maps providing turn by turn directions, there was poor camera quality, there was no voice control, no digital payments, and there was not even an App store. Now we can run an entire business on the iPhone or similar quality device. Now imagine that the next 15-year change in technological advancement is being compressed into the next 15 months. It is hard to imagine what that will mean, but I think it’s fair to say the world is going to be disrupted with enormous changes.

  • Aside from the obvious examples of the required companies in the supply chain of high-powered semi-conductors, there will be a myriad of businesses from all sectors and geographic locations that will benefit from the increases in artificial intelligence. Just some of the obvious candidates will be:

o Legal and financial research

o Biotechnology research o Medical technology

o Analytics across many industries

o Risk assessment across many industries

If the status quo will be disrupted, what are some of the risks and opportunities?

Possible Risks

• Some popular current investments in companies may be at risk:

o Google is 90% of global search, but the way we utilize the internet is likely to change in the next 10 years compared to the previous 10. o The way we shop for goods on the internet could be completely changed. Amazon may be less useful for shopping in the future. o The way we are delivered information is likely to change. I do not interact much on social media by design (it seems like a lot of work and distraction), but what if I had the ability to interact through AI on my behalf? Could my AI “like” posts, produce content, respond to others automatically based on certain parameters? Could be a risk for many social media sites.

Possible Opportunities

• Some smaller innovative companies (across multiple industries) could build scale much faster than ever before using some of these AI tools. This could present incredible opportunity:

o It may be tricky to identify the winners, but diversification across smaller market cap growth companies could present the answer to capture opportunity. This is how successful “venture capital” works. By buying companies early, diversifying, letting your winners grow, and cutting your losers out, you can possibly own the next “Google” or the next “Apple”. o The edge that a small company has is its ability to change rapidly, hire quality people quickly, and build organically. This could put many larger, slower moving companies at significant risk. It is worth being mindful of the advantages and disadvantages of large-scale organizations. o The United States provides an excellent foundation to build and scale businesses. It has fewer barriers to entry, legal protections, free flow of capital, education, and many other attributes that put it at an advantage over many other countries.

Where should I be putting my money?

• I wrote at the start of May how large cap technology companies are pushing the major indices higher, and that smaller and mid-cap companies are lagging in short term performance. This is still currently the case. But, what if:

o The market is just chasing returns of the larger established and (more obvious) companies due to the fear of missing out on making money in the short term.

o What if the long run opportunities are actually in the smaller and mid- sized capital companies? If AI is making the world smaller, technology and information cheaper, and if there is less requirement for capital and labor, won’t there be great opportunity for these smaller companies? o Why is the flow of capital and investment not going to smaller companies?

Same old foundations for my action plan:

  1. I don’t have all the answers; so:

    1. Remain invested for the long term.

    2. Look beyond the short-term noise.

    3. Understand how much volatility in profit/loss we can assume.

    4. Diversification will reduce volatility and help identify winners.

    5. Keep fees low!

  2. What we do know:

    1. Change is coming.

    2. Change is coming exponentially fast.

    3. It is easier to invest and grow in countries where individual liberty is protected, and risk taking is encouraged.

    4. Some small companies will use the new AI tools to grow into big companies.

    5. We would like to be part of this growth.

  3. Have faith in young people:

    1. They will innovate because they are more open to change.

    2. They will innovate because they want to preserve the environment.

In summary AI is changing the world, and it is creating many risks and opportunities for investment. We are excited to take part in the expected growth to come. We believe in our country, its people, and our ability to help you navigate this uncertain world.

As always, thank you so very much for trusting us to help guide you into the future.

If you would like to discuss your portfolio or our views, we welcome your questions.


Joseph Cardello, Principal

August Wealth Advisors, LLC

51 Riverside Avenue, First Floor

Westport, CT 06880

Direct (916) 461-9451 toll free (800) 985-9477

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