Artificial Intelligence: The Promise (and Perils) for Investors
“I’m sorry, Dave. I’m afraid I can’t do that.”
Those famous words were spoken with eerie calm by the HAL 9000 computer to the astronaut Dr. David Bowman in the 1968 sci-fi classic 2001: A Space Odyssey. HAL is an example of artificial intelligence (AI) run amuck. HAL has murdered all of Bowman’s colleagues and he intends to doom Bowman too, by refusing him entry into the spacecraft.
For decades, popular fiction has delivered dystopian warnings about AI’s threat to people. But in this article, I want to focus on the opportunities and dangers of AI from an investment standpoint. Below, I also steer you toward a solid money-making play on the AI megatrend.
In system theory, AI is what’s known as a “singularity,” whereby a small change can cause a huge, exponential effect. A singularity also implies changes that are uncontrollable and irreversible, spawning unforeseeable changes (and perhaps an existential threat) to human civilization.
The outperformance of the technology sector year to date has been driven by AI, a dynamic that has in turn boosted the broader indices. However, leadership within the tech sector has been concentrated in a handful of behemoth “story stocks.” This means market breadth has been narrow, albeit improving.
Investors have been in a volatile mood in recent days. In pre-market futures contracts Friday, the main U.S. stock market indices were trading in the red, extending Thursday’s sharp losses.
But then the Bureau of Labor Statistics on Friday released its jobs report for June and it was nearly perfect: not too hot, not to cold.
The U.S. economy added 209,000 jobs last month, and the unemployment rate edged down to 3.6% from 3.7%. June’s total was lower than May’s unexpectedly robust showing of 306,000 jobs, and below consensus expectations for a net gain of 225,000 jobs. It was the lowest monthly gain in jobs since a decline in December 2020. Inflation fighters were pleased, but so were those worried about a recession.
In the wake of Friday’s jobs report, stocks reversed direction and headed higher. But then, in the final hour of trading, stocks executed another u-turn and closed mostly lower, as follows:
- DJIA: -0.55%
- S&P 500: -0.29%
- NASDAQ: -0.13%
- Russell 2000: +1.22%
Volatility is back, as investors get whipsawed by the headlines. The good news is, the S&P 500 still hovers above its 50- and 200-day moving averages (see chart).
Moving averages identify the trend in the movement of a stock or index to determine support and resistance levels. Despite losing steam lately due to renewed pessimism over inflation and monetary policy, the stock market rally still seems to have legs. Don’t turn your back on growth stocks.
Much of the market’s momentum is due to the frenzy over AI. The size of the global AI market was valued at $136.55 billion in 2022 and it’s projected to expand at a compound annual growth rate (CAGR) of 37.3% from 2023 to 2030, according to Grand View Research.
But the rise of AI isn’t just creating investment opportunities among individual stocks. AI is transforming the act of investing itself.
The global market for AI in asset management was worth $2.6 billion in 2022 and it’s projected to expand at a CAGR of 24.5% from 2023 to 2030, according to a new and separate report from Grand View Research. The report states: “Asset and wealth management firms are exploring potential artificial intelligence-based solutions to improve their investment decisions and extract insights out of their historical data.”
What’s more, a recent survey by Market Makers has found that 9 out of 10 hedge fund traders will use AI in 2023 to achieve alpha.
It’s clear that AI isn’t just a fad. It’s revolutionizing our daily lives and the investment world. But there are downsides. Government leaders and Big Tech are wrestling with the ethics of AI and trying to devise appropriate regulations. AI could commandeer weapons of mass destruction and trigger a nuclear holocaust (think Skynet). AI also could act as an accelerant for market crashes.
AI has the ability to generate “deep fakes,” i.e. fabricated videos or images of real people. AI can be used to clone voices or create people who don’t exist. This phenomenon is roiling a political world that’s already grappling with fake news.
From the perspective of retail investors, there’s the danger of AI investment scams. A growing number of companies are expropriating the term “AI” as if it’s some sort of pixie dust that guarantees profits.
Case in point: Texas regulators in May shut down what they called an “artificial intelligence investment scam” that promoted a TruthGPT Coin using fake animated avatars and images of Tesla (NSDQ: TSLA) CEO Elon Musk to hoodwink would-be investors.
A frequent arena for AI scams is cryptocurrency. Scammers are using AI-driven chatbots or virtual assistants to seek out and engage with individuals, dole out dubious investment advice, and promote fake crypto tokens.
We’re also seeing the emergence of high-tech startups making hyperbolic claims about their technology, reminiscent of Theranos’ blood-testing kits.
When it comes to artificial intelligence, be sure to apply natural commonsense.
A better, safer way to profit from AI…
As I’ve just explained, AI scams abound. What’s more, a lot of the legitimate AI companies sprouting up these days won’t survive. As for the Big Tech stalwarts making massive investments in AI…well, they’re obvious plays on the trend and they’re trading at rich valuations.
How can you safely invest in AI? Consider the advice of my colleague Jim Pearce.
Jim Pearce is the chief investment strategist of our flagship publication, Personal Finance. Jim has found a better way to cash in on the AI super-boom. It’s an obscure “picks-and-shovels” play that you won’t hear about on CNBC.
Jim started his career as a stockbroker. He has spent decades in Wall Street’s trenches, separating investment hype from reality.
Jim has carefully vetted his AI pick. And as the white-hot AI market continues to expand, this unique company’s profits should soar in lockstep.
Jim’s AI investment lets you get started for about $100…and it generates regular cash payouts of up to $5,397. With no gimmicks. Want to learn more? Click here.
John Persinos is the editorial director of Investing Daily.