Is artificial intelligence like the internet boom?

It seems you can’t read an investment column or watch a business news story lately without hearing about AI (Artificial Intelligence). I’m certainly no expert on this topic, so I can write from the viewpoint of someone who knows little about this technology. But I do know a lot about the cycle that new life-changing technology goes through. Some people say AI is the greatest investment opportunity since the internet. That may well be true, but caution is warranted here. Strange things may happen as we progress down that path. So how do we participate?

The internet unleashed a huge productivity boom. Think of all the things you can do today because of the internet that you could not do just 10 or 20 years ago. There are thousands of examples of how the internet has changed our lives.

Relatively speaking, day-to-day activities were so much more difficult before the internet, and everyone has pretty much forgotten that. Everything was harder or more complicated. Everything involved a phone call, a fax, or snail mail. But the investment returns didn’t necessarily follow the productivity boom. Think of the dot.com stocks in the late 1990s. The investment returns were amazing in the beginning, then terrible for about ten years, then amazing again. Everyone jumped on the bandwagon. Stocks of companies with no hope of ever making any money exploded to the upside. Then reality hit, and the weak players went bust and left the true survivors to make the big money going forward.

Every new technology follows this pattern, and the same will be true with AI. The challenge is to find pure-play AI companies and determine who the survivors will be. Otherwise, you are investing in things like Microsoft, Google, and other major tech companies working on AI projects; but it’s all mixed in with the soup. My guess is that there will be some pure-play AI companies at some point. It won’t matter much at what valuation they go public. They will all fly high, and then most won’t. Trust me. I have seen this movie before.

Typically, what happens with Wall Street is that it gets ahead of itself. It seizes on an investment opportunity—like the internet—then everyone plows billions of dollars into it, and you have money chasing bad investment opportunities. Then the whole thing implodes and goes back to zero.

And then what happens is, over time, the potential of the technology is realized. In 1999, there were thousands of dot-com companies. Today, there are just a handful. If you are smart or lucky enough to have the ability to pick the winners, you can earn incredible returns. Remember VerticalNet? Mamma.com? Global Crossing? Exodus? They’re all gone and have been gone for a while, but for a period of time, you could have done very well in these stocks.

There is no question that there will be an AI boom, and it is going to be big. However, sometimes you have to be credulous, and sometimes you have to be skeptical. Now is not the time to be skeptical. I believe AI is going to drastically improve productivity, setting off another productivity boom like we had in the ’90s, which will offset some of the inflation we are experiencing today.

It will also displace a lot of jobs. Everyone had the same fears about the internet. The internet destroyed some jobs and created new ones, with lots more productivity. We were better off in the long run.

Many people are predicting AI will soon steal all our jobs. Yet, people have had this concern for more than 100 years. A headline from The New York Times in 1928 read, “March of the Machines Makes Idle Hands.” We’ve been deploying new technologies for centuries, yet people always think this “next” wave of automation will be the one that takes all the jobs. If AI causes mass unemployment, it would be the first technology in history to do so. It’s true that most inventions do destroy some jobs. Automobiles put buggy makers (and horses) out of business, for example. AI will follow this pattern.

I remember some years ago, someone jokingly wrote about the factory of the future. The machines will do everything, and the factory only needs a dog and one human to operate. The human is there to feed the dog, and the dog is there to keep the human away from the machines. Okay. Maybe it won’t be that bad. But weird things are going to happen, and we have no idea at this point of the unintended consequences of AI, both good and bad.

Someone once observed that when the internet was invented, it obviated the need for memory. Now that AI has been invented, will it obviate the need for intellect? What remains? Emotional intelligence—dealing with other people. People skills will become even more valuable in an AI world. A brave new world, I guess.

Right now, people are experimenting with ChatGPT, seeing what sort of things it can do, and we are barely even scratching the surface. It’s exciting stuff but do not be afraid. As for investing, take advantage of the uptrend in the early stages, but don’t stay at the party too long before phase two starts. After the washout and you see who is still standing, that’s when the long-term money is made. Thanks for reading.