AI & Big Tech
HOW INVESTORS CAN STILL PARTICIPATE WHILE “THINKING DIFFERENT” IN THEIR OWN PORTFOLIOS:
As we’ve discussed in the past, markets are cyclical in nature. That does not mean there are not tectonic-like shifts happening, beneath the surface. One of those major happenings presently in the stock market is of course the excitement around Artificial Intelligence, or “AI.”
AI is defined as “the theory and development of computer systems able to perform tasks that normally require human intelligence.” The sheer thought of AI someday replacing many things in our society and economy is troubling, for some. For others: it is an exciting proposition from an efficiency and investment perspective, as companies such as Microsoft, Amazon and Google are looking to harness its powers, while companies such as Nvidia continue to lead the way as the number one sought after “infrastructure provider” of AI.
A lot has been said about the present state of the stock market, led by this AI boom. Some stock market gurus are comparing it to the 2000 dot com “bubble.” However, this AI led market rally has important differences. For one, the companies leading the way are very profitable and maintain incredibly healthy balance sheets – a major difference between this rally, and the dot com bubble (profitability, and the lack there of, in the late 90’s). In many cases – not only does AI help make Big Tech’s current operations more efficient, but they also stand to profit from packaging “AI-as-a-service,” and rolling it out to its current customers.
A very rare top and bottom-line phenomena; a true radicalization about the way we potentially do business, in the future.
Investors don’t have to try terribly hard to get exposure to AI, as the names presently investing in AI’s future are synonymous with the major holdings in the S&P 500 index, itself. I’m talking of course about MSFT, AAPL, GOOGL, META, AMZN and NVDA. That’s good news for investors. But there’s also the potential for significant disruption. For example: Google’s market share for internet searches, which it is believed they dominate 85 – 92% of all search inquiries, and profit heavily from advertising as a result ($170 billion in search income annually, according to a breakdown of their latest earnings call) could be at risk.
You’re probably wondering – where then would those dollars (and search activities) go? The answer could very well be that those ad dollars just go to another one of those top names, Microsoft (MSFT), with its recent integration of an AI chatbot to its search engine, Bing. So, a potential “break even” at the end of the day for investors owning these big names, passively… but such a disruption rarely takes a “linear path,” and it’s not without at least a little bit of price volatility.
Here are a few ways to make sure, as an investor, that you’re getting the exposure to AI, while not leaving yourself terribly exposed, if disruption does occur:
Continue to own and dollar cost average into major indexes, such as the S&P 500, as a “core holding:”
MSFT, AAPL, NVDA, AMZN, META, GOOGL/ GOOG are presently the top 6 names in the S&P 500, according to the S&P 500 Dow Jones Indices[i].
Couple this core holding with a factor-based investment:
A “factor-based” investment means it starts with a universe of stocks, such as the S&P 500 or the Russell 1000, but will then add an additional metric such as earnings potential; return on equity; or valuations, to ultimately decide which companies to invest in.
It is important to consult with an investment advisor on which “factor” to couple with your “core,” and what percentage.
My present take is that “value” compliments well with the core – I believe we’re starting to see a preference for companies that are inexpensive and generating cash now – but (again).. every investor is different, and it may be that a combination of factors is ultimately what you are looking for.
Look down the market capitalization “line,” for other companies who stand to benefit from the AI boom:
There are other sub industries in tech that stand to benefit from the AI boom. Among them: cyber security, data storage, and software companies, which can be owned within a diversified “active” ETF, or mutual fund wrapper.
However, and to not get terribly over-exposed – this exposure should be much smaller in size (percentage-wise).
If you’re considering making any changes to your current investment alignment – it is important to carefully review the investment prospectuses and disclosures to fully understand their risks, before ultimately deciding or hiring a professional.
Thank you as always for listening – and whether you are a current investor, or looking to work with an investment advisor, please do not hesitate to reach out: jason@lynnleighco.com.
Sincerely,
Jason P. Curtis, CIMA®
[i] https://www.spglobal.com/spdji/en/indices/equity/sp-500/#data
Investment advisory services offered by Jason Curtis as an Investment Adviser Representative of J. Curtis Wealth Advisory Services, a doing business as name for LynnLeigh & Company, LLC., a Registered Investment Advisor. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of entire principal and potential illiquidity of the investment in a falling market. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price.
Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from J. Curtis Wealth Advisory Services or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed above to your individual situation, you are encouraged to consult with J. Curtis Wealth Advisory Services or the professional advisor of your choosing. All information, including that used to compile charts, is obtained from sources believed to be reliable, but J. Curtis Wealth Advisory Services has not verified its accuracy and does not guarantee its reliability.
