Random Reflections on AI - Tactical Investor

Random Reflections on AI: The Nasdaq and S&P500 Driven by a Select Few Stocks

July 13, 2023

The excitement around AI is growing rapidly, with many people believing that a new bull market has begun. However, it’s important to note that the Nasdaq and S&P500 were driven by about nine stocks. This suddenly changed over the past 14 days or so and would have been a splendid bullish development were it not for the massive spike in bullish sentiment. In essence, in roughly four weeks, sentiment went from a low of 22 to a high of 49. It appears we have a mini feeding frenzy in place.

Random Reflections on AI: Managing the Massive Spike in Bullish Sentiment

AI is being hailed as the next big thing, but those making this claim fail to understand a crucial factor. The general public only embraces a new concept when it adheres to the principle of KISS (keep it simple, stupid). Currently, AI bots do meet this standard. One has to understand how to prompt them to reap the benefits.

In simple terms, people want an AI personal assistant that can understand them effortlessly and is easy to operate. However, chatbots often struggle to provide satisfactory answers and can be frustrating. While they can occasionally give insightful responses when prompted correctly, learning how to communicate with a chatbot effectively can be time-consuming and inconvenient. This outdated approach is reminiscent of the DOS prompt era, which is a step backwards.

A recent study revealed that only 20% of individuals actively use these models, and even among that group, I would estimate that less than 5% truly understand how to utilize them effectively. Therefore, it seems senseless for big companies to invest heavily in a fundamentally flawed product. The flaw lies in AI’s inability to factor in human fallibility. In other words, it struggles to engage effectively with those who are not well-versed in its intricacies. Until this changes, the masses will not fully embrace AI.

Random Reflections on AI: Entering the First Phase of the AI Frenzy

Therefore, all the commotion and excitement surrounding companies adopting AI ultimately come down to their desperate efforts to profit from the AI frenzy. Similarly, when individuals were asked why they were purchasing tulips during the tulip mania, I am certain that the most common answer was that others were doing it and making money. Blindly following trends without understanding them can be risky. However, such moments of chaos also create opportunities for astute investors who are prepared to be patient and wait for the right moment to make their moves.

Additionally, there is a high probability that one or more new leaders will emerge to challenge NVDA’s dominance. The market is highly competitive, and with the rise of AI, disrupting the status quo will become increasingly effortless. This could lead to a price deflation war within the semiconductor industry, where only the truly robust players, not the overhyped and overpriced ones, will survive. The stories posted at the end of this issue illustrate that competition is already lining up. And now that AI is so easily accessible, all it takes is money and talent to develop something revolutionary. Even if giants like NVDA hold onto their lead, they won’t be able to hold onto their pricing power. Competition drives prices lower.

Random Reflections on AI: Playing Defensively Despite the Optimism

AI mania is rampant, with companies pledging to cut back on spending after going wild during the COVID era. Now, they are again splurging and boasting about incorporating AI into their product lines. Take Spotify, one of the many companies hyping its AI offerings. The situation is spiralling out of control. However, this isn’t the end of the AI frenzy; it’s merely the potential conclusion of Phase 1. There will be at least three phases, each ending with significant casualties, and potentially some companies will be permanently pushed out of the race. The true repercussions will become more evident in Phase 2.

Consequently, we need to play defensively. It’s preferable to make an error by being cautious and buying back in later than being arrogant and buying in at these levels. Numerous excellent secondary candidates didn’t experience a surge in the initial phase. We can still acquire them at attractive prices even if we are mistaken.

Random Reflections on AI: Cautiously Navigating the Psychological Shifts

Nevertheless, we cannot ignore the psychological data. The general public has become noticeably optimistic in a remarkably short period of time. In just 28 days, the levels of positive sentiment have shifted from cold to boiling hot. Four weeks ago, bullish sentiment readings stood at 22, whereas this week it has risen to 49. For a year and a half, Bullish sentiment remained below its historical average of 39.00.

Mass Psychology suggests that it is wise to exercise caution, and we will adhere to its principles. Therefore, we will aim to close out many of our positions that we would typically hold for a longer duration, but with the specific intention of repurchasing them at a later date.

Conclusion

While there is growing excitement around AI and its potential, there are important factors to consider. The recent surge in bullish sentiment and the frenzy surrounding AI may not necessarily indicate a sustainable bull market. The current state of AI technology, particularly chatbots, fails to meet the principle of simplicity that the general public seeks. The difficulty in effectively communicating with AI models limits their widespread adoption and utilization. As a result, only a small percentage of individuals truly understand how to leverage the benefits of AI.

Investing heavily in AI products without addressing their fundamental flaws seems impractical. The inability of AI to factor in human fallibility and engage effectively with a broader audience hinders its mass acceptance. Companies rushing to adopt AI may be driven more by a desire to profit from the AI frenzy rather than a well-founded strategy. Blindly following trends without understanding them can be risky, but it also presents opportunities for astute investors who can patiently wait for the right moment.

Furthermore, the dominance of certain companies in the AI market is not guaranteed. The competitive landscape is dynamic, and the rise of AI may lead to disruptive changes and challenges to established players. A potential price deflation war within the semiconductor industry could emerge, favouring robust players over overhyped ones. New leaders may emerge, and the market could witness significant shifts in power.

While the current AI frenzy may be the conclusion of Phase 1, there are still subsequent phases with potential casualties and reshaping of the industry. It is essential to approach the situation defensively and exercise caution in making investment decisions. Instead of being arrogant and buying at inflated levels, it may be wiser to be cautious and wait for more attractive prices. Secondary candidates that haven’t experienced an initial surge could present better opportunities.

Considering the rapid shift in positive sentiment towards AI, it is prudent to heed psychological data and exercise caution. The public’s optimism within a short period raises concerns about potential market overheating. Adhering to the principles of mass psychology suggests being cautious and closing out positions to repurchase them later.

In summary, while the excitement surrounding AI is undeniable, it is crucial to evaluate its current limitations and potential risks carefully. A balanced approach that combines a critical assessment of AI technology with an understanding of market dynamics and psychological factors will help navigate the evolving landscape of AI and make informed investment decisions.

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