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The AI Revolution is Here. Should You Fire Your Fund Manager?

Jun 5, 2023

The AI Revolution is Here. Should You Fire Your Fund Manager

My in-laws celebrated their 50th wedding anniversary last month. God bless them.

Now, as their only son-in-law who does writing for a living, I was requested to write their invitation card. And I happily obliged.

However, little did I know that there isn't a lot of overlap between writing about stocks and writing invitations. It isn't as easy as it seems. Besides, my reputation as a good writer in the eyes of my in-laws, was also at stake.

This is when I hit upon an idea - outsourcing this task to ChatGPT. This small AI tool that is winning rave reviews the world over, was perfectly suited for it.

After all, writing a small invitation note would be a child's play for a software that can put together a brand-new crime thriller without as much as breaking a sweat.

Yes, that's right. ChatGPT not only helps you edit your book writing. It can even write the entire book for you. Welcome to the world of Artificial Intelligence.

So, getting back to the assignment from my in-laws, I fed instructions to ChatGPT for the kind of invitation letter I wanted.

And voila, out came a delightful small note. All I had to do were a few edits and the note was ready. Needless to say, the in-laws were mighty impressed.

As for me, I easily saved couple of hours' worth of effort. In other words, ChatGPT made me more productive. It freed up my time to pursue other activities.

Well, these are early days. But there's no denying that this gem of a software, powered by slick hardware, is having the exact same impact on people's lives across the spectrum.

It's making them more productive by doing things faster and at the same time, producing a much better-quality output.

There are reports galore of ChatGPT donning multiple hats i.e. turning into a coder, an editor, and even a resume writer of the highest quality, with minimum fuss.

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Little wonder, experts across the world are calling AI or Artificial Intelligence of which ChatGPT is a live example, one of the biggest inventions in human history.

Infact, Bill Gates, one of the pioneers of the tech revolution, has termed it as revolutionary as the mobile phone and the internet.

There's a solid reason behind why Gates feels this way. He has been in touch with the team behind ChatGPT for close to 6-7 years now and in mid-2022, he gave the team a formidable challenge.

Train the AI they are working on to pass an Advanced Placement Biology exam. Make it capable of answering questions that it hasn't been specifically trained for. If the team manages to achieve this feat, then they will have made a true breakthrough in the eyes of Bill Gates.

Well, the results shocked Bill Gates. He thought that the challenge would keep the team occupied for 2-3 years. They finished it in just a few months.

Not only did the AI pass the exam, it did so with flying colours. The result convinced Gates that something truly revolutionary has now arrived.

In case you are still struggling to figure what makes AI truly revolutionary, read the Bill Gates instruction to the AI team once again.

Bill Gates wanted the team to make the AI capable of answering questions that it hasn't been specifically trained for. Here, in this very sentence, is hidden the true essence of AI.

You see, the computers that we have used uptill now weren't capable of thinking on their own. Their outputs were entirely based on a set of instructions or the code as they are called in the technical language.

To put it crudely, no matter how fast or how efficient the computer, it is still a calculating machine at its core.

However, AI is a different beast altogether. It's an intelligence that has been inspired by the natural or the human form of intelligence. In other words, it tries to mimic the human brain.

Just as the human brain is capable of taking in tens of thousands of inputs and then processing them to arrive at a decision, something similar is happening inside the machines that are powering Artificial Intelligence or AI.

In fact, Bill Gates has summed it up brilliantly by way of the following paragraph...

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  • For decades, the question was when computers would be better than humans at something other than making calculations. Now, with the arrival of machine learning and large amounts of computing power, sophisticated AIs are a reality, and they will get better very fast.

Here's another way of putting it.

Imagine that you need to arrange your cupboard and you take help from robots. Now, a robot powered by a simple computer program, will arrange it the same way every single time.

However, it's entirely possible that a robot powered by AI will take your personal preference into account while doing the same. So, it will arrange the cupboard of your wife in a different way than yours and so on.

Ditto for making tea. While the conventional robot will make the same tea for all the family members, an AI powered robot is very much capable of serving you a masala tea and your wife a green tea if that's what it has been trained to do.

Let me make a broad generalisation here. You see, computers have evolved from performing calculations to now learning on a very large data set. This learning is then being used for reasoning and problem solving, very much like us humans.

However, they do not have the limitations of speed and processing power of the human brain. So they're proving to be more intelligent and productive.

Now, just as every coin has two sides, so does Artificial Intelligence. It's not only its benefits and enormous advantages that are doing the rounds of internet and social media. A lot of experts are also talking about the downsides and the disadvantages that come with it.

Foremost among these is the fear of job loss across a wide variety of industries. We are well aware that software has already eaten the lunch of a lot of the workforce that was engaged in low level work.

Now, its elder brother i.e. Artificial Intelligence, will go after the high level work. As it keeps becoming more sophisticated, there don't seem to be too many jobs that are safe from the AI onslaught.

We've already seen how ChatGPT has shown promise to code better than the best coders, write fiction better than the best fiction writers, and even thrash out arguments better than the best lawyers.

In fact, here's a sobering statistic. Back in 2013, a University of Oxford study found that 47% of US jobs could be eliminated by AI over the next 20 years.

Now, I usually take such studies with a pinch of salt. However, the more I see AI at work and the output it's capable of generating, the more the spectre of widespread job replacements looks real.

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What about investing and stock market research though? Is AI likely to snatch the fund manager's job as well? Can it make better investment recommendations than the smartest fund managers?

More importantly, should one start looking at it as a genuine alternative to investment advisors and money managers?

Well, a question of exactly the same kind was posed to Messrs. Warren Buffett and Charlie Munger at the recent Berkshire Hathaway AGM.

Here's what Munger said in response to a question about whether AI technology would have a positive impact on stocks, the market and society as a whole.

  • Well, if you went into BYD's factories in China, you would see robotics going at an unbelievable rate. So, we're going to see a lot more robotics in the world. I am personally skeptical of some of the hype that is going into artificial intelligence. I think old-fashioned intelligence works pretty well.

Not surprisingly, his partner Warren Buffett is also skeptical of AI tech's impact on stocks and the stock market. The Oracle of Omaha opined that AI tech may have the potential to change everything in the world. However, it cannot change how men think and behave.

I believe that's a wonderful observation. Investing is first and foremost about trying to keep your head when everyone is losing theirs. It's about being fearful when others are greedy and greedy when others are fearful. It's also about not giving in to the herd mentality and having one's own independent opinion backed by facts and figures.

I don't think AI tech is in a position to influence any of these things in a meaningful way nor will it be 10 years from now.

Mr Market is likely to remain a moody, temperamental fellow with or without AI. He will continue to have mood swings. He will continue to keep pricing stocks that either reflect too much optimism or a lot of pessimism from time to time.

AI technology could perhaps smoothen the volatility in the stock market. But for all you know, it can even increase it.

What is certain is that the stock markets will continue to remain volatile, thus providing opportunities to sensible investors of the value investing kind.

So, to sum up, the AI genie is well and truly out of the bottle. And as an optimist, it's my belief that it will prove to be a net positive for the society.

However, as far as investing is concerned, AI is unlikely to have any significant impact unless it figures out a way to change human gene and in the process, fundamentally change how humans behave.

Until then, keep your fund managers and your advisors close to you and keep following sensible investment principles. You should be okay over the long term.

Happy Investing.

Warm regards,

Rahul Shah
Editor and Research Analyst, Profit Hunter
Equitymaster Agora Research Private Limited (Research Analyst)

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