Investing in AI: AI in Investing
The AI bubble is well and truly here and with it comes the opportunity and the risks. Understand more about how to invest in AI, and how investors are using AI in their investment process.
Written by Victoria Kent, Senior Investment Specialist
This information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs.
The AI bubble is well and truly here. And like other technological innovations before it (think blockchain and crypto), it’s easy to get swept into the hype. Understandably, people are looking to trade or invest to ride the AI wave that’s expected to take the 21st century by force.
AI represents a global market worth hundreds of billions of dollars, and its wide range of practical applications includes smartphone face recognition, predictive algorithms in internet search, smart home devices, and autonomous vehicles.
The potential for AI technology to transform industries has gotten everyone excited (and wary). But regardless of your ethics outlook, it’s clear companies leading the AI charge could be set to experience rapid growth.
A word of warning to investors here: like with all trends, just because a company claims that they use AI or has exposure to it, does not necessarily make it a good investment. And just because a company may be growing, does not mean it’s a sure investment bet.
Let’s step back and look at the various ways to get AI exposure, and discuss how AI is now being used in investing itself.
How does an investor get exposure to AI?
One way of getting investment exposure to the AI thematic is through an AI-themed exchange traded fund (ETF).
AI ETFs provide exposure to a broad range of the best AI companies, eliminating the need to research and choose individual stocks on your own. Some notable examples include Betashare's RBTZ, Global X Robotics & Artificial Intelligence ETF (BOTZ), ROBO Global Robotics and Automation Index ETF and iShares Robotics and Artificial Intelligence ETF.
A more direct way of investing in AI would be to invest in the companies utilizing AI or indeed powering it.
NVIDIA, a California-based designer of graphics processing units, is a crucial enabler of AI through its hardware and software. Investors enjoyed a ~36% increase in its share price in May 2023 alone, and the company's borderline monopoly (estimated 80%) on AI chips means its future is linked to the growth of AI.
Other tech companies championing AI like Meta, Amazon, Alphabet (Google owner), Tesla and Microsoft (investing heavily in Open AI) stand to gain significantly from the increased commercial uptake and mainstream onboarding of AI.
Many of these companies employ AI in different ways, and there are several exciting stock opportunities out there for AI enthusiasts.
Incorporating AI into the investment process
Investment professionals are rushing to integrate AI into their processes, collectively acknowledging the invaluable benefits it adds to their decision-making, from managing risk and diversification more effectively, to achieving superior risk-adjusted performance.
In a recent live event hosted by MDOTM, various subject matter experts discussed how AI-powered algorithms can automate various tasks, such as data analysis, portfolio optimization, and risk management, which traditionally required extensive manual effort.
Because of its ability to analyse vast amounts of data and identify patterns, AI can automate routine tasks, optimize processes, and improve operational efficiency, freeing up human capital to focus on more strategic, value-added activities.
AI algorithms can be trained to identify patterns and trends in the financial market and provide recommendations for portfolio additions or subtractions. This task is accomplished through predictive analytics — using historical data and market conditions to identify trends and patterns to predict future market moves.
But it's not just grunt work that makes AI a value add in investing.
Because of its ability to process and analyse vast amounts of data, AI is able to identify patterns and could actually generate insights a human might miss.
Additionally, AI algorithms can analyse market data objectively and provide valuable insights without being influenced by the emotions or biases human investors often face. Investors are famously susceptible to cognitive biases, especially during times of market turbulence.
AI incorporated investment tools are already on the market. Companies like Magnifi claim their product offers “more support than a brokerage, more control than a robo without the cost of an advisor”. It’s certainly an appealing prospect. But is AI really at the stage where we can trust it with our personal wealth?
Will AI replace human investment professionals?
No AI article worth its weight in AI would fail to include the perspective of AI on the matter, so of course I put this question to old mate Chat GTP. Diplomatically, it reassured me:
"AI can be very useful in many fields and can assist humans in many tasks, but it is not yet advanced enough to replace humans entirely. There are many tasks that require human intelligence, creativity, and decision making that AI is not yet able to perform. Additionally, there are many ethical, legal, and social implications of AI that need to be considered and addressed. Therefore, while AI can be a valuable tool, it is not yet at the point where it can replace human effort entirely."
Perhaps the true value lies in the combination of human perspective with AI insights.
For now, we can choose to view AI as a tool to complement and assist human professionals rather than replace them.
By utilizing AI, investors might be able to make more balanced and well-informed decisions. But if you do, please continue to practice scepticism and critical judgment.