Saturday, 27 January 2024 — Melbourne, Australia

By Kiryll Prakapenka Editor, Fat Tail Daily

[4 min read]

Dear Reader,

In March 2016, DeepMind’s AlphaGo AI program defeated the world’s best Go player to shock and fanfare.

But the fanfare died down. And the public’s attention drifted.

Fast-forward to 2023’s launch of ChatGPT and the public can’t get enough of AI.

What changed?

Why now?

Why is this AI’s moment? 6

And why are the AI technologies behind ChatGPT a step-change to the technologies behind AlphaGo?

Above all else, how should investors approach artificial intelligence as an investment theme? What methodologies should they adopt to pick AI stocks?

In this week’s What’s Not Priced In, I quizzed two special guests best placed to answer these questions.

They are Ryan Dinse and Charlie Ormond. The tech specialists heading the new investment service Alpha Tech Trader.

As Charlie quipped during the episode, there is the age before ChatGPT and the age after.

Forget 2024. This is Year 1, AC (After ChatGPT).

This episode swarmed with insights. An instant classic. Here are the key topics we discussed:

• Is AI ‘the most profound technology humanity is working on’?
• Biggest misconceptions about AI
• Economics of AI — costs, supply chains, and margins
• The most viable AI use cases now and in the future
• Impact of AI on labour market and productivity
• Best ways to play the AI theme as investors
• Methodology to picking AI stocks
• Does the ASX have viable AI stocks? 
• Can AI ever be commoditised with high competition?

How transformational is AI technology?

AI is the hottest thing in town. That comes with a lot of hot air.

This is how a Goldman Sachs report from June last year described the technology:

‘The rapid rise and mass adoption of generative AI in a relatively short amount of time…have led to a velocity of fundamentals shifts and strategic decisions we haven’t witnessed since the advent of the Internet and mobile technology.’

Google CEO Sundar Pichai waxed philosophical about AI’s impact:

‘I’ve always thought of AI as the most profound technology humanity is working on. More profound than fire or electricity or anything that we’ve done in the past.’

And Nvidia’s Jensen Huang said this on the chip maker’s recent earnings call:

‘Generative AI is the largest TAM expansion of software and hardware that we've seen in several decades.’

AI as transformational as the Internet. AI as impactful as electricity. AI the largest total addressable market in decades.

These attitudes inevitably percolate into stupendous projections. Like this one from McKinsey in June 2023:

‘Our latest research estimates that generative AI could add the equivalent of US$2.6 trillion to US$4.4 trillion annually across the 63 use cases we analyzed — by comparison, the United Kingdom’s entire GDP in 2021 was US$3.1 trillion.’

US$2.6 to US$4.4 trillion annually?!

Funnily enough, Ryan Dinse mentioned McKinsey’s estimate. He agrees AI will be transformational…but in a mundane way.

Mundane in what it will improve. Namely, labour productivity.

AI will be a big efficiency booster. Drudgery, grunt work, administrative red tape…all eliminated or reduced by AI.

Here’s that McKinsey report again:

‘Our updated adoption scenarios, including technology development, economic feasibility, and diffusion timelines, lead to estimates that half of today’s work activities could be automated between 2030 and 2060, with a midpoint in 2045.’

But that raises questions…and fears.

Is AI coming for our jobs?

Labour efficiencies are often euphemisms for job losses.

So I asked Ryan and Charlie if AI will lead to job losses on net.

Both agreed some jobs will go. The real question is what jobs will be created.

Each technological innovation displaced jobs dependent on obsoleted technology. But each innovation created new jobs entirely.

But is AI technology of a different kind?

Will most of us soon sympathise with the Luddites?

Top economists polled by Chicago University’s Kent Clark Centre for Global Markets are ambivalent about AI’s impact on labour.

Most either agreed or were uncertain that AI will hinder the earnings potential of ‘substantial numbers of high-skilled workers in advanced economies’.

Only 5% thought AI use wouldn’t affect the earnings potential of white-collar workers in the next 10 years.

Not a great sign.

Eggheads at the heart of the AI revolution are ambivalent, too.

Earlier this month, Bill Gates interviewed OpenAI’s Sam Altman. During the conversation, Gates raised concerns about the speed of AI improvements:

‘I guess you and I have some concerns that AI will force us to adapt faster than we’ve had to ever before.’

To which Altman replied:

‘That’s the scary part. It’s not that we have to adapt. It’s not that humanity is not super-adaptable. We’ve been through these massive technological shifts, and a massive percentage of the jobs that people do can change over a couple of generations. And over a couple of generations, we seem to absorb that just fine. [But] each technological revolution has gotten faster and this will be the fastest by far.’

Here’s the discomfiting part:

‘That’s the part that I find potentially a little scary — the speed with which society is going to have to adapt and that the labour market will change.’

Gates then chimed in saying the fear of white-collar job displacement has obscured the threat to blue collar jobs via robotics:

‘[Robotics] could change the job market for a lot of the blue-collar type work, pretty rapidly.’

How to play the AI theme as investors?

OK. So AI is transformational.

But how should investors play it?

What is the AI stocks universe?

Currently, only the giant firms like Nvidia, Microsoft and Google are seen as obvious AI stocks. Nvidia the prominent one.

But what are others?

Goldman Sachs recently created a basket of potential AI winners. Its list was dominated by software firms.

But how do you go about finding others?

Ryan and Charlie both explained their methodology on the pod. I recommend having a listen!

I’ll outline part of it here.

One way is to break the AI industry down. Let’s have a quick go of it here.

• Hardware of AI
• Data of AI
• AI models (LLMs)

Then you can follow the supply chain for each until you find firms with monopolistic tendencies.

Take the hardware of AI. Like GPUs. None of the fancy AI tasks performed by the likes of ChatGPT can happen without GPUs.

And no one currently produces GPUs more suited for AI than Nvidia.

Nvidia currently boasts a large competitive advantage. Its mighty margins reflect that.

But you can follow the supply chain further upstream.

What’s the hardware behind GPUs? And who has that segment cornered?

Chips require photolithography tools. And there’s only one photolithography company capable of manufacturing components for advanced chips.

That’s ASML.

But I don’t want to spoil or misquote Ryan and Charlie here. The episode was lengthy and substantive. Nothing beats hearing what the guys have to say for themselves.

And, if you want to know what AI firms Ryan and Charlie find attractive, watch on here!

Enjoy the episode!

Regards,

Kiryll Prakapenka,
Analyst and host of What’s Not Priced In

Kiryll Prakapenka is a research analyst with a passion and focus on investigating the big trends in the investment market. Kiryll brings sound analytical skills to his work, courtesy of his Philosophy degree from the University of Melbourne. A student of legendary investors and their strategies, Kiryll likes to synthesise macroeconomic narratives with a keen understanding of the fundamentals behind companies. He’s the host of our weekly podcast What’s Not Priced In, where he and a new guest figure out the story (and risks and opportunities) the market is missing to give you an advantage. Follow via your preferred channel and check it out!

By Nick Hubble Editor, Strategic Intelligence Australia

[5 min read]

Dear Reader,

I very much enjoy watching other people adopt new technologies…from a safe distance. They always rant and rave about their latest tech purchase, before reality eventually sets in. And then things start to go disastrously wrong.

I’ve watched an expensive robot vacuum get utterly destroyed by the dog it had latched onto.

My mum’s new German washing machine almost destroyed her Scottish cottage.

There’s nothing like driving past EVs that are stuck in the snow, queuing for chargers, or using diesel generators. The cart before the horse analogy couldn’t be more apt.

When it comes to new technology generally, Shadenfreude doesn’t even begin to cover how it makes me feel.

And when things fail to go disastrously wrong, I often attempt to help them along.

At a mall in Japan, I made a concerted effort to try and get run over by a robot which was handing out flyers to unsuspecting customers. It politely refused to flatten my toes, even after a long standoff and several efforts to thwart its evasive manoeuvres.

Local onlookers seemed pleased to see I had confirmed all their beliefs about foreigners…

Occasionally, even I forget to express the amount of tech-scepticism needed to survive in the modern world. A few months ago, I signed up to several fintech providers which promised a variety of international bank account services. All I wanted to do was receive and send foreign currencies. But none of them make it possible!

One allows you to spend foreign currency, but not to receive it. Another only permits you to receive, exchange and send the foreign currency in one transaction, making it useless to me because I have both bills and incomes in a variety of currencies. And I can’t remember what was wrong with the equally flawed third option, but it all ended up being a vast waste of time.

I don’t know who was more humiliated. Me for my temporary faith in technology, or the customer service teams who had to confirm that their services don’t actually do what they claim.

Despite my cynicism about new tech, every now and then, something comes along that I just can’t avoid because it’s so damn good. The best example was Google Maps.

I still remember very clearly the moment I decided to start using it. We were at a nightclub on the Gold Coast and my friend Jack (his real name) had decided he needed to vomit.

We ran for the exit, which featured a steep staircase. This being the Gold Coast, the nightclub was above ground level instead of below it, like in civilised places in the world. My friend made it halfway down the dimly lit stairs before spraying the remaining steps…and the handrail, as I discovered the hard way.

It was time to go home, but we didn’t know where we were. My friend pulled out his phone and used Google Maps to discover both where we were standing, where the nearest taxi rank was, how to get there and how far away it was. Impressive stuff, even in the circumstances. So I decided to take the technological plunge and I haven’t been lost since.

A much less disastrous affair with technology was learning about bitcoin in 2012 and grasping its implications early on. That one was easy, even as others remained sceptical.

An episode of technological adoption which I am truly proud of occurred in Spain, while visiting my sister there. A vast queue for bus tickets was building because the teller decided she would like to talk to everyone about why they would want to visit anywhere in central Spain rather than remain on the coast.

About half an hour into the queue, I spotted several ticket machines well hidden in an alcove. I left my dad in the queue and wandered over. Ten seconds and three buttons later, I had bought our bus tickets from a machine which spoke fluent English, but didn’t ask about why I might want to go there.

I turned around, tickets in hand, to find everyone in the queue staring at me. The ticket lady was frozen, her jaw hanging open. They could not comprehend what I had just done.

It might not sound to you like I was adopting a revolutionary technology. But you should’ve seen the shift my avant-garde attitude brought upon the packed ticketing office. A stampede of people hoping to avoid the ticket lady’s conversation charged over and were promptly served, completely clearing the vast queue in minutes. I still claim Spain’s GDP spiked as a result of my early-adopter tech influencer status there.

Sometimes new technology forces its way into our lives, whether we like it or not. That’s when I get really worried, because it creates the risk of widespread failure. The war on cash and the transition to digital money, for example. It could wreak havoc on society if the digital financial system goes down.

When internet coverage went down in the middle of the Nullarbor Desert, petrol stations could no longer process transactions. I found myself at a petrol station without enough cash to buy fuel and without enough fuel to get to the next petrol station in either direction…

During the recent Optus outage, my wife was scheduled to be induced to give birth. We couldn’t call the hospital to find out whether they were too busy to go ahead as planned, as we were required to do. They were too busy, it turned out, and we spent a day at the hospital doing nothing for no reason. It struck me that we couldn’t have called an ambulance if we needed one either. Time to get an old-school landline…

During COVID, technology imposed itself on us. Sometimes in awful ways. But it greatly improved lives too. Pubs in the UK, where I was living for the first year of COVID chaos, allowed people to drink on the street to make social distancing possible, and allowed customers to order drinks via their app so that they didn’t have to queue at the bar.

This technological revolution eliminated awkward queuing, time away from friends, having to remember other people’s drinks and all sorts of other inconveniences. These days, we still order food on apps all the time, so we don’t have to wait for short-staffed waiters.

So, new tech comes packaged in all sorts of guises with all sorts of hidden consequences.

Which category does AI belong into? Is it a disaster waiting to happen to one of your friends, or a solution to the challenges we face every day? Are you being a Spaniard for refusing to even consider using AI, or just wise to be patient? Can you afford to ignore it any longer?

At first glance, it’s painfully obvious. And I just can’t wait for things to go disastrously wrong all around me. I already got a fictional preview while watching The X-Files a few months ago…

One unusually bizarre episode features a visit to a sushi restaurant run by artificial intelligence. A particularly malicious form of AI that attempts to bully its guests into leaving good reviews, and a whopping tip. And woe betide anyone who dares to refuse, because the AI running things back at your home is in league with the one running the restaurant.

Part of the plot was a dig at the nature of our culture in the age of smart phones. The main characters barely spoke a word to each other for the entire episode! They were too busy posting pictures of their robotically prepared sushi…

But the key theme was that giving AI too much control over our lives could cause rather a lot of trouble. In this case, a rogue vacuum robot tearing up your home while you’re away fighting its fishy cousins…

To be fair, this was a significant improvement to the previous episodes’ attempts to instil a fear of technology. Nobody got stuck inside a computer game...and a computer didn’t try to take over the whole world…

But perhaps, given time, the episode about AI sushi will look just as ridiculous to our children.

Anyway, it’s obvious how AI might go dreadfully wrong.

But what if I’m wrong about all this? What if AI is more like bitcoin and Google Maps — technologies I should adopt now.

If you’re pondering that same question, we have an answer for you here.

An explanation of why investors can’t afford to ignore AI any longer, and how they can make the most of its potential to improve their returns.

Go on, don’t be a Spaniard. Try it.

Kind Regards,

Nick Hubble,
Editor, Strategic Intelligence Australia

Nick Hubble found us at Fat Tail Investment Research in 2010 after a stint inside Wall Street’s most notorious bank, Goldman Sachs, during the 2008 GFC. That’s where he saw the true nature of the investment banking business. Since then, he’s been the editor of the Daily Reckoning Australia and the UK-based Fortune & Freedom and Gold Stock Fortunes.

He’s delighted to work as Investment Director and Editor for Jim Rickards’ Strategic Intelligence Australia. Here he helps turn Jim’s big-picture views into specific actionable advice and ideas for Australian investors.