September 6, 2023
“All of humanity’s problems, stem from man’s inability to sit quietly in a room alone.” - Blaise Pascal
Artificial Intelligence (AI) is fascinating and dangerous.
AI can consume information at rapid speed. From your smartphone, cameras, microphones, purchases, clicks, etc. It can then digest information and intimately identify your desires. This is useful and scary.
Useful:
Data patterns and analysis.
Idea generation when asking probing questions.
Speed of output.
Code writing specific to your personal or business needs.
Original/Creative thinkers have a very powerful tool to build with.
Scary:
Manual entry and human interaction with computer not required.
Predicting your personal behavior (can be useful and dangerous).
Change happening exponentially fast makes it difficult for humans to adapt.
Nefarious actors will use your information to their own advantage.
Potential Impacts:
Ability for small business or person to scale and disrupt much larger, slower moving organizations or people.
Organizations and/or people with something to lose, will naturally resist change. Before they know it, they have already been disrupted.
Government ability to analyze massive amounts of data on individuals/groups and detect anyone that may be a threat to its power early. Once predicted, action can be taken to mitigate the perceived threat.
AI will learn all on its own. Culture, art, stories (the things that propel humanity forward), can be analyzed rapidly, providing a baseline in which to suggest new ideas, stories, culture, and art. This will likely be done without human involvement. It will have the ability, and it will likely influence the world in which we live.
This is already happening. It taps into your emotions. It feeds false narratives about people, voting, and financial markets. It knows that by feeding you information that outrages or scares you, it can manipulate your behavior.
It can push you to extreme views. To the point where people cannot agree on simple truths or facts. Consider the way the current political climate plays out in the media.
Many young people isolate themselves; they spend time with manufactured truth about what is important. They focus less on human interaction. They focus less on the physical world and its beauty.
Is it any wonder why seemingly everyone needs a therapist? It’s the only time many people unplug from screens and hints at the truth about what human beings really need. Love, support, natural beauty, and gratitude.
Nobody can understand all the changes that AI will bring, but what can be said with certainty?
Change is happening, and it will continue to happen exponentially.
Humans are extremely poor at perceiving exponential change.
Change will disrupt our lives in ways we cannot currently predict.
To address these challenges, some helpful actions might be:
Unplug often from on-line devices.
Be still and mindful of the present moment.
Accept your reality without judging it.
Spend less energy on stories being fed to you online that you cannot change.
Spend more energy on your own actions, and how you can make a positive impact on the things within your control.
Interact with other people without distraction.
Recognize the beauty and gifts in your own life with gratitude.
So that’s the human advice. What’s the advice for approaching financial markets?
Personally, I am very excited about the prospects for August Wealth because I believe we have an edge when considering:
The Current Reality (accept it without judgement or thinking we know better).
What we consider likely to happen (our probability-based approach).
Expressing points 1) and 2) through liquid, transparent, and low-cost portfolios that seek to capitalize on the available market opportunities.
Potential for market change:
Demand for computing power will continue to increase.
Smaller companies that have vision and are opportunistic can throw mud at the wall to see what will work.
Smaller companies can pursue strategies rapidly and perhaps with lower barriers to entry once they perceive a particular action working.
There will likely be fewer people needed and lower capital requirements as AI does more of the work.
Profit margins for innovative and enterprising companies will likely expand.
Larger companies may be at risk as they protect their entrenched position. They may be slower to change a model that is already producing revenue.
Before they know what happened, a competitor may be disrupting the market, and unless they are pro-active, it may cause damage to their business.
Larger companies with entrenched market positions may also be at heightened regulatory risk compared to smaller rivals.
What is being reflected in the price?
It is now widely recognized that Artificial Intelligence is going to be a dominant theme in our lives and in the markets. Because of that, investors have flocked to many of the names that produce the hardware that make AI possible. Many of these names (like the most popular Nvidia) will likely produce growing cash flows.
The questions now should focus on:
What price are you willing to pay for this current and growing cash flow?
Could Nvidia and other hardware company businesses be disrupted by other companies in the future?
Do too many investors already own concentrated positions in this AI hardware demand story?
As I described back in our June commentary, https://www.augustwealthadvisors.com/post/spring-alterations, we reduced our concentrated positions in companies like NVDA (and others). However, the truth is that I cannot answer the above questions in absolute terms, but I can suggest some probable answers which may help.
Answers:
Many of these companies are priced at much more expensive levels relative to their cash flow and growth than they were 2 years ago. I therefore believe the uncertainty is higher, which is another way of saying these companies are riskier to own.
It is possible given how quickly scientific discovery is happening, that any company could be disrupted. This creates more uncertainty and more risk.
Because this story of demand for AI hardware has become obvious to almost everyone, in my experience with markets, this is something to be cautious about. Therefore, risk should be reduced, not increased.
None of my answers suggest whether the price of Nvidia or other AI related companies will continue to rise; they may or they may not. We still hold Nvidia and other companies like it through our diversified ETF holdings.
However, I believe with certainty:
Most market participants believe the price of these companies will continue to rise.
There is more uncertainty and risk in these companies today than there was 2 years ago.
My goal is to protect purchasing power of wealth over time and to achieve growth in value while minimizing risk. In that regard:
Given higher levels of uncertainty, there should be more diversification across portfolios. Through diversification, we may identify the companies that will drive the US and world economy for the next decade (not the previous one).
Smaller companies compared to many of the large cap well-known companies may be poised to utilize AI and computing power in the years to come. Users of technology may benefit more than the suppliers of the technology.
Given much higher short term interest rates, on a relative basis, it makes sense to:
Own fixed income for certainty of cash flow.
Own companies that are producing and growing free cash flow at a reasonable price.
Own essential sectors of the economy that are potentially being ignored by investors.
Diversify through low-cost ETFs in the US and Global Economy.
Keep fees and expenses low.
Joe
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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