January 27, 2025
I write often about the importance of focusing our energy on what matters. I want to thank one of our clients for summing up our writing into a simple picture which hit me like a thunderbolt. All you really need is the image below. Thank you T.H. Appreciate you.
“Happiness is when what you think, what you say, and what you do are in harmony.”
- Mahatma Gandhi
Give attention to where the things that matter in your life overlap with the things that you can control.
I love this diagram. The trick is to be able to execute on it. If you can, your energy can be a force of nature propelling you to new heights.
Should we predict how to invest for this AI revolution?
The funny thing about predictions by professionals is that they are almost always wrong. As I have written previously, people pay attention to predictions because of the human desire to have control over the future. One of my roles as an investor is to examine the defining beliefs, market narratives, and the pricing of expectations. When the crowd seemingly is predicting definitive outcomes, we consider what other sources of information are telling us, and where the crowd may be missing something.
We do not have a crystal ball, and we are not in the business of making “predictions” about the future. We place probabilities on outcomes and consider the risk we are willing (and able) to assume to hopefully meet our long-term wealth projections.
We diversify to hopefully capture areas in the U.S. and global economy which will benefit from any potential technology “revolution” but also incorporate that which we do not know. We may over / under weight sectors and geography that are out / in favor, but we must respect and appreciate: what we think we know is dwarfed by what we do not know. That rule can apply to everyone whether they acknowledge it or not.
Artificial Intelligence is fascinating!
I am fascinated by what artificial intelligence can do, and how quickly the tools are being upgraded. I am also concerned about some of the changes to come. I believe if someone can create value more efficiently and effectively by using AI tools, humanity can benefit. Hopefully laws will be created to punish nefarious actors that misuse these new tools to take advantage of others.
It is worth pointing out that the text below this commentary was written in collaboration with Gemini Live (Google). The below are my thoughts, but I had a live chat with an AI model which brainstormed and helped me crystalize my thinking. The back-and-forth discussion I had with this AI model was fascinating. In many ways, it felt like a human interaction, except that I was in complete control of the pace, re-directing “her” thoughts, and prompting “her” to produce the knowledge I was seeking.
It’s also worth pointing out that the process is far from perfect.
So here are some of my observations:
I believe that many investors are focused on the huge potential of artificial intelligence technology to produce returns on investment. While the future of AI is exciting, it's easy for investors to get caught up in the hype and overlook other opportunities which may exist.
I believe that:
Artificial Intelligence is disrupting and will continue to disrupt many industries and change traditional ways of doing business. This is what economists call “creative destruction”.
There is enormous demand for the utilization of artificial intelligence large language models, and there are bottlenecks. Here at August Wealth, as we try to refine our process using AI tools to help identify companies and provide more efficient and faster thought provocation, we are restricted in our usage. These tools have usage limits which require us to stop work and wait several hours before continuing to work (Claude, ChatGPT, etc.). Many businesses across various industries run into the same bottlenecks.
The demand for these tools is partly why there is such a race to more artificial intelligence infrastructure. Google, Amazon, Microsoft, Nvidia, and other large firms which own and control the entire tech stack, want to be the firms that the rest of the economy must use to achieve the benefits from utilizing artificial intelligence tools (across all industries). In some form or another, it must be acknowledged that we will likely be reliant on these large technology firms.
This is probably the reason why these companies trade at prices which look to be incredible valuations in a historic sense. Many of us have heard the stories of how this may be an investing bubble in the top 10 companies in the S&P 500. I have no idea if we are at excessive valuations or not, but we must acknowledge that the concentration risk of these companies is historic (see charts below). These top companies make up a large degree of US and global stock market capitalization.
i See endnotes for Top 10 stocks of the S&P 500
The US economy is attracting global capital flows to capture some of this revolutionary technological change and opportunity. This is pushing the US dollar to new heights. By default, this may make international companies and real estate cheaper on a relative basis to the USA. The chart below shows the US Dollar Index against a basket of foreign currencies. As you can see, it’s near 20-year highs.
This capital flow allocation largely is invested in passive index investing, and this is self-reinforcing. As the index trades higher, more of the same companies will be purchased by default. It may largely be ignoring other important parts of the economy like smaller businesses.
“According to the latest SBA reports (specifically, the 2023 Small Business Economic Profile), small businesses in the USA represent 43.5% of US economic activity. I continue to believe that the US Economy’s lifeblood will continue to be small business, and investors may not be paying enough attention to the opportunities. To see a full report from the SBA: United States Small Business Economic Profile.
Deep Seek, a Chinese artificial intelligence company that uses older Nvidia chips, operates a large language model that is offered at much lower prices, and viewed by many to be superior to the artificial intelligence models offered by the major players like ChatGPT and others.
SaaS (Software as a Service) companies are being disrupted by AI (supposedly) and the largest technology companies. AI can give bespoke solutions specifically to me and my company if I build it, but from a practical perspective, I still need these software companies to help my business! Although SaaS companies do not own the entire tech stack, and they rely on the large technology firms, does this mean that SaaS companies will go extinct? I originally thought they might be in big trouble, but now I wonder if these software service companies will evolve to become more efficient, offer more bespoke solutions, and become more profitable. A couple of things to think about.
These companies are using AI to obtain efficiency gains, cost cutting, and better bespoke delivery to clients. They may be better placed to offer targeted solutions to their customers and at a lower price.
Because there are so many bottlenecks in cutting edge AI for small and midsized businesses, it’s expensive in both time, money, and energy. The AI infrastructure is being built, but the question is: Will this provide the pragmatic solutions that my business and other businesses need today? Not likely. How quickly might this come? I don’t know. But right now, we rely on SasS companies to help us provide solutions we need for our clients.
How should we invest to take advantage of the Artificial Intelligence Revolution?
Some areas where we have been focused (and will continue to be): S&P 500, Nasdaq, Utilities, Power, Energy, Mining, and others. As usual, for most of the families we serve, we need to have diversification to try and meet the goals of growing wealth over time, protecting purchasing power, and/or producing current income.
Some of the best performers in 2024 have been (as we all know) the top 10 names in the S&P 500 index. Will it continue? Maybe, maybe not.
We do our best to be able to increase exposure to quality companies, sectors, and countries when the rest of the market may experience forced selling, or where we find quality and value that is out of favor in the short term.
If you have ever wondered why we do not recommend 100% concentrated risk in the S&P 500, it is due to the added risk and uncertainty of the below, which can produce adverse conditions in an investment environment:
Recession.
Inflation and aggressive rate hikes by the Federal Reserve.
Adverse regulation.
Underperformance due to excessive valuation compared to other sectors.
Lack of power generation needed to power AI.
Poor investment decisions which don’t produce enough return on investment.
A decline in the dollar.
Other unforeseen events.
Volatility and uncertainty that may cause a deviation from one’s investment plan.
Conclusion:
Given the above, it is worth highlighting the opportunities which may exist, and it is where we are spending a lot of our time focusing and researching on the investment side for you.
Diversifying to help protect you against the possibility that the expected AI winners may not deliver the essential solutions to business as expected, or that the expected investment returns from these companies might disappoint.
Finding opportunities in companies that trade at more attractive valuations, which are benefiting from AI and may be able to increase their efficiency and margins.
Investing in a broad range of individual companies and indices that may capture the margin expansion and likely productivity gains that may come as a result of this technological revolution.
Investing internationally at possibly more attractive valuations as companies overseas provide more diversification and growth opportunities for the same reasons as above.
Taking advantage of a steady stream of fixed income through US Treasuries that should also work to protect against any adverse conditions in the stock market.
All that said, it is still worth pointing out that the impressive performance of the largest Technology companies in the USA are probably telling us something important. Largely it tells me:
· The USA provides the greatest innovation and legal protection, mobility of labor, and openness of information in comparison to any other economy (I advocate for the USA model as an investor because it’s the best from my perspective).
· The companies that own the entire tech stack in their respective field may become quasi monopolies or oligarchies. They could likely continue to produce investment opportunities into the future. But what price you pay for this is an important factor.
· The development of these technologies can increase productivity, create new industries, and create exciting new investment opportunities. However, I do not think these opportunities will exist ONLY for the MAG 7.
· The new and existing businesses that deploy these technologies could likely create economic value with far less need of capital and labor compared to the past.
“It’s not what you buy, it’s what you pay for it that determines whether something is a good investment or a bad investment”.
- Howard Marks
Thank you,
Joe
ii
i Top 10 stocks of the S&P 500
· Apple (AAPL)
· Microsoft (MSFT)
· Amazon.com Inc (AMZN)
· Nvidia Corp. (NVDA)
· Alphabet Class A (GOOGL)
· Tesla (TSLA)
· Meta Platforms Class A (META)
· Alphabet Class C (GOOG)
· Berkshire Hathaway Class B (BRK.B)
· UnitedHealth Group Inc (UNH)
ii Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor. Stratos Wealth Advisors, LLC and August Wealth Advisors are separate entities.
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