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AI Investments & Landscape: Wading Through the Hype

Ryan Richardson, CFP®, ChFC®, Senior Wealth Management Advisor | Sally Eisenberg, Operations & Client Service Advisor | August 8, 2024

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Over the past few years Artificial Intelligence (AI) has become a hot topic commanding the world’s attention.  Although the field of AI research began in the 1950s, many consider us to be in an AI renaissance.  The excitement around AI has ignited a gold rush mentality, driving unprecedented levels of investment into the AI sector.  However, amidst the excitement and promise, it’s important to wade through the hype and identify true opportunities. 

Key AI Trends 

With public interest in AI being at an all-time high, people are eager to experience and benefit from AI powered systems. This high demand has helped the AI landscape evolve rapidly, with new advancements and applications being released daily.  Some of the most prominent real-world AI trends currently driving the industry are: 

• Generative AI: Arguably the hottest trend with models like ChatGPT and Midjourney capturing the public’s attention.  Generative AI programs are defined by being able to create new content from human prompts.  The most common content created with Generative AI is text and images, however, new generative programs are able to create music, code, and even video content. 

• Multimodal AI: This is the ability of AI models to process and understand multiple forms of data (text, images, audio, video, etc.) This trend is leading to a deeper understanding of content and more human-like interactions. 

• AI for Good: There is a growing emphasis on using AI to have a social impact by addressing global challenges such as climate change, healthcare, and education.  This can include Ethical AI which prioritizes developing AI systems that are fair, unbiased, transparent, and accessible. 

• AI in the Enterprise: Enterprise AI strives to create operational efficiency by automating routine tasks and optimizing processes.  Many companies are working towards embracing Enterprise AI to create an augmented workforce where AI is used as a tool to enhance human capabilities rather than replace. 

Understanding the AI Landscape 

Although AI was born nearly 70 years ago, its recent boom in popularity has the whole world talking about it.  AI has become a trending topic, and with companies slapping the “AI” label on nearly everything, it can create a distorted picture of the market, making it difficult to differentiate between genuine invocation and overhyped promises.  The AI landscape is a complex ecosystem, and in order to make informed decisions, it’s crucial to understand some of the components essential to any AI value chain. 

• Infrastructure: The software and hardware necessary to power AI applications.  This includes high- performance computing systems, data centers, and chips. 

• Data Management and Analytics: High volumes of quality data are the fuel for AI. Accessing, handling, and extracting insights from vast datasets is crucial for AI’s success. 

• Algorithms: These are the core of AI systems. Developing cutting-edge algorithms is a key area of focus for many AI companies.  Some recent breakthroughs include deep learning, reinforcement learning, and generative models. 

• Applications: This encompasses the end products and services powered by AI.  AI driven solutions span across various sectors.  Some real- world applications include healthcare, finance, transportation, and customer service. 

Investing in AI  

Key Considerations 

When considering investments in AI, it’s important to focus on several key areas:  

• Scalability: The ability of a company’s AI solutions to scale effectively as demand grows is crucial for long-term success. 

• Data Management: Effective data management practices are vital, as the quality and volume of data directly impact the performance of AI systems.  Good data in equals good data out.  

• Cost: The cost of developing and implementing AI technologies can be high. Investors should assess whether companies have a sustainable financial model.  

• Talent Recruitment/Retention: The competitive landscape for AI talent is intense. Companies that can attract and retain top talent will have a strategic advantage.  

Challenges 

Despite the immense potential, investing in AI comes with its own set of challenges: 

• Overvaluation: The hype around AI can lead to inflated valuations. Investors should be wary of overpaying for companies with unproven technologies or track records. 

• Regulatory Risks: The regulatory environment for AI is still evolving. Companies may face significant hurdles related to data privacy, security, and ethical considerations.  

• Ethical Concerns: As AI technologies become more prevalent, ethical considerations around bias, fairness, and transparency become increasingly important.  

Navigating the AI Investment landscape requires a careful balance of enthusiasm and skepticism. By focusing on genuine opportunities and understanding the inherent risks, investors can position themselves to benefit from the transformative potential of AI.  

AI’s Broader Impact 

Economic Growth 

AI’s impact on economic growth is profound, with predictions estimating its contribution to be up to $15.7 trillion to the global economy by 2030. This staggering figure likely surpasses the combined current output of China and India, driven significantly by $6.6 trillion worth of enhanced productivity and consumer demand from AI-based products and services. (Sizing the prize (pwc.com)) 

Job Market Transformation 

The job landscape is set for a major transformation due to AI, affecting almost 40% of jobs globally. This shift will require carefully balanced policies to manage the transition effectively, ensuring that workforce disruptions are minimized while new opportunities are created.  

Investment Surge 

The flow of investments into AI development is robust, reflecting its perceived high value and potential to disrupt various industries. This surge underscores the crucial need for investors to identify genuine opportunities and avoid fleeting trends.  

Beyond Economic Impact 

AI’s influence stretches beyond economic factors to affect national security, politics, and culture, establishing its role as a transformative force across all societal facets.  

Identifying Real Opportunities in AI Investments 

Investors are urged to focus on sectors where AI could cause significant disruption. Notable areas include healthcare, finance, transportation and logistics, manufacturing, and retail. 

1. Healthcare 

1. Disruption: AI can significantly enhance diagnostic accuracy, predict patient outcomes, and personalize treatment plans.  

2. Profitability: Investing in AI-driven healthcare startups and companies focusing on AI-based diagnostics tools and personalized medicine can lead to substantial returns as these technologies become standard in medical practice.  

2. Finance 

1. Disruption: AI is transforming finance through fraud detection, algorithmic trading, personalized financial planning, and Risk Management.  

2. Profitability: The use of AI to improve fraud detection can lead to reduced financial losses and increased customer trust, while Algorithmic trading enhances trading efficiency, and AI tools are able to enhance risk assessment by analyzing various risk factors and predict potential issues to help institutions make informed decisions.  

3. Transportation and Logistics 

1. Disruption: AI optimizes route planning, autonomous vehicles, and predictive maintenance.  

2. Profitability: Companies developing AI for autonomous driving and logistics optimization like self-driving truck startups and AI-based fleet management systems, offer promising investment opportunities.  

4. Manufacturing 

1. Disruption: AI-driven automation improves production efficiency, quality control and predictive maintenance.  

2. Profitability: Investing in AI firms specializing in industrial automation and robotics can be lucrative as manufacturers adopt AI to enhance productivity and reduce costs 

5. Retail: 

1. Disruption: AI enhances customer experience through personalized shopping, inventory management, and sales forecasting.  

2. Profitability: Investing in retail companies leveraging AI for customer analytics and supply chain optimization can be highly profitable as they gain a competitive edge in the market. 

Risks and Challenges in AI Investments 

The emerging nature of AI technology brings with it risks such as algorithmic bias and data privacy issues. Investors must conduct thorough due diligence to sidestep investments in overhyped “fake AI” or “AI washing.” This refers to the practice where companies claim to use AI technologies to boost their appeal and attract investment, but they lack the substantial AI capabilities to back these claims.  

Investment Strategies for AI 

A strategic approach to AI investment involves a blend of short-term tactical moves and long-term vision. This includes staying vigilant of AI advancements and learning from both triumphs and failures within the AI sector.  

Energy Intensity of AI 

While AI offers significant benefits, it is also energy intensive. Training large AI models requires substantial computational power, leading to high energy consumption. For instance, data centers housing AI systems consume vast amounts of electricity, contributing to the carbon footprint of AI technologies. Efforts are being made to develop more energy-efficient AI algorithms and use renewable energy sources to power data centers, aiming to mitigate the environmental impact of AI.  

Conclusion 

AI has undeniably captured the world’s attention. With every passing day, we witness groundbreaking advancements. From self-driving cars to medical innovations, the potential applications of AI are seemingly limitless. However, amidst the excitement and promise, it is crucial to navigate the hype and identify genuine opportunities. Navigating the AI investment landscape requires a balanced approach of enthusiasm and caution. With a deep understanding of AI’s technological underpinnings, legal considerations, and market readiness, investors can successfully leverage the countless opportunities presented by this dynamic technology.  Through our portfolios Weatherly is embracing AI by adding to the sector in diverse ways.  We continue to discuss new opportunities and risks as they relate to our individual clients’ accounts and look forward to new advancements in this sector. 

** The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.