Five rules for investors drowning in AI news

You can read articles and reports about artificial intelligence every minute of every day. I feel like I am. AI has it all. It’s exciting, confusing, mind-blowing, complicated, and of course, scary. And given its newness, AI’s potential is limited only by one’s imagination.

Bill Gates said in a recent interview: “There’s never been a product less understood in terms of what its capabilities are.”

No matter what AI means to you, it’s worth thinking about how you’re consuming all this information.

For every action

I always remind people that markets are impossible to predict because of the number of factors at play, and the ever-changing way in which they interact. AI is like that except on steroids.

The weakness of most forecasts, particularly for something as novel as AI, is that they only adjust the most visible variables and leave everything else static. The economy doesn’t work that way. For every action, there’s a reaction. And the reactions ripple down many layers below the level of most financial models.

If AI allows a company to offer something new, what’s it replacing? Will the new thing produce additional revenue and market-share gains, or just become an industry standard? And what can users afford to pay for AI from an economic, environmental and societal perspective? We’re only starting to see how usage patterns change when individuals and companies have to pay real money to use chatbots and agents.

Triple it

If I’m trying to guess the age of a young nephew or niece after not seeing them for a few years, I always add three to whatever I think their age is. It works most of the time.

I suggest doing the same thing when trying to get a handle on where AI is taking us. Whatever you think will happen, triple your expected growth rate, or cut the amount of time it will take by a similar multiple. The speed of the AI revolution is nothing short of remarkable. It makes the pace of previous tech cycles look glacial.

I learned this trick from much slower-moving innovation cycles, namely the internet and mobile communications. In hindsight, the early projections around the use of cellular phones were laughable. In the early days, analysts assumed Rogers and Bell would take a number of years to achieve penetration levels (of the population) in the single-digit percentages. The actual numbers were multiples of that in a matter of months.

Wait five minutes

It’s easy to point out what AI isn’t good at, or where claims have been overblown. There’s bound to be disappointment, and lots of evidence for deniers to latch on to, because the hype machine is revved up. It’s the wild west out there and everything goes. But it’s risky to write off AI too soon because of early missteps or overreach. If it isn’t doing something well now, wait a few minutes. AI is better than us at iterating and improving.

A recent article in this paper talked about how poor chatbots are at providing financial advice. That may be true, right now, but wait a few years – or should I say months. The results are going to be far better.

Incentives

There are a lot of smart people saying a lot of smart things right now. Things you can learn from. But in addition to assessing whether their analysis has gone deep enough, consider what their incentives are.

Are they throwing cold water on AI because they have a profession or business to protect, or they don’t like change? Or is it a tech bro who desperately needs to keep the music playing? Someone whose next round of financing (or initial public offering) depends on it.

Both things can be true

And finally, it’s important to distinguish between the technology itself and the capital markets that underpin it. AI may live up to its lofty expectations while the related debt and equity cycles flame out. Both outcomes may occur, as was the case 25 years ago when the internet took off and the stock market was a tech wreck.

We have a front-row seat to watch how the AI world unfolds. It’s fascinating, and did I say, complicated. It’s time to take bold prognostications with a grain of salt, especially if they’re lacking in detail and vague about timing. It’s better to take Ted Lasso’s advice – be curious, not judgmental.

Tom Bradley is a portfolio manager with Purpose Investments, co-founder of Steadyhand Investment Management, a member of the Investment Hall of Fame and a champion of timeless investment principles.