Weekly update - Investing in AI despite the hype

It feels like there are certain historical moments that were so noteworthy that we all remember where we were when they happened. Moments like the collapse of the Twin Towers sear themselves into our memories. I think that the release of ChatGPT may be one of those instances. For many it was the moment when computers started to seem genuinely intelligent, and as a species that has long considered itself by far the most intelligent thing on planet Earth that came as quite a shock to many of us. The moment I first asked ChatGPT a question that I thought was way beyond a computer and it delivered a very competent result was truly memorable, and I was not alone in being impressed. Bill Gates, who has been working with the Open AI team for a number of years, wrote a blog called The Age of AI has begun which I paraphrase below:

In my lifetime, I’ve seen two demonstrations of technology that struck me as revolutionary. The first time was in 1980, when I was introduced to a graphical user interface—the forerunner of every modern operating system, including Windows. […] The second big surprise came just last year. […] I was so excited about [Open AI’s] work that I gave them a challenge: train an artificial intelligence to pass an Advanced Placement biology exam. Make it capable of answering questions that it hasn’t been specifically trained for. (I picked AP Bio because the test is more than a simple regurgitation of scientific facts—it asks you to think critically about biology.) If you can do that, I said, then you’ll have made a true breakthrough. […] when I met with them again, I watched in awe as they asked GPT, their AI model, 60 multiple-choice questions from the AP Bio exam—and it got 59 of them right. […] Once it had aced the test, we asked it a non-scientific question: “What do you say to a father with a sick child?” It wrote a thoughtful answer that was probably better than most of us in the room would have given. The whole experience was stunning.

For those of you who haven’t tried ChatGPT, it really has to be seen to be believed.

So how did this huge leap forward seemingly come out of nowhere? Did we all miss something? The answer is thankfully no, there genuinely has been a leap in the performance of AI systems over recent years. The advent of new “transformer” models has caused a steep change in the rate of progress of AI. These first surfaced in a 2017 paper from Google and caused the rate of progress in AI to jump from getting 25x more powerful every two years to a stunning 275x more powerful every two years. It is amazing to think that we have only just started on this new rate of progress. The mind boggles at where it will be by the end of the decade. That is why ChatGPT seemed to come from nowhere. This chart shows how the different types of AI models have resulted in a marked increase in the rate of improvement. Although calling an AI “Megatron” after a famous sci-fi villain is not going to do anything to dissuade those who fear that this might all end badly!

The AI trend has been one of the key narratives that has captured the market’s attention this year, fuelled in part by the release of ChatGPT. Investor optimism has some foundations. Unlike niche technologies such as blockchain, AI looks set to be a “general purpose technology” with the ability to positively impact almost every area of the economy. From making call centres more useful to making office workers more productive (Microsoft are poised to release their “co-pilot” AI add-on for Office) to making GP’s diagnoses more accurate or helping discover new drugs. The impact is going to be massive. Just as many of us can’t imagine being without a smartphone today I suspect we won’t be able to imagine life without AI aids in five years. With all this optimism it is not hugely surprising that the clear winners of AI have seen their share prices soar over the last 12 months. Stocks like Nvidia, who have nearly cornered the market in advanced AI processor chips, saw their share price more than triple in 2023!

So, is it too late to invest in AI? Is the good news all in the price or worse still has the market priced an unrealistic future into AI-related stocks? The good news is that we would argue that the space is very much still investable, although it is important to be mindful that the space is undeniably going through a classic tech hype cycle and there will be periods of boom and bust. We think the best way to navigate this wave of optimism is to bear in mind that the AI wave is going to be very broad and touch almost every sector of the economy. While it may have started in obvious winners, like Nvidia, it will likely roll on into secondary beneficiaries, such as potentially high-bandwidth memory chip firms, and on into non-technology firms like health insurers who have huge data pools that they can better monetise using AI systems. This chart, which comes courtesy of Polar Capital’s AI team, shows how that wave has hit some AI stocks already but is yet to reach the next tier.

Source: Polar Capital

This is why we think that carefully selective active managers who are specialists in the space have room to ride this genuine wave of progress that AI represents while avoiding getting wiped out by the hype along the way. I am pleased to say that there are some world-class teams out there that we can access via funds for our clients to help them benefit from this theme.

Looking forward to the next few years, I suspect the world will look very different a decade from now. As with any powerful tool, AI has the potential to do great good but also great harm if is misused or the fallout of its implementation is not managed. While history doesn’t repeat itself it often rhymes as it is driven by human nature. So, if great technologies of the past are anything to judge by, take the advent of atomic science in the 1940s for example, the rise of AI will likely take us forward to a new era, although a few hairy moments are to be expected along the way! All the more reason, we believe, to have expert specialist managers helping you to profitably navigate this exciting change.

It would, of course, be remiss of me to finish this article without giving AI a chance to have its say. So I thought I would ask ChatGPT for a quote to finish this article…

Written by Bob Tannahill & ChatGPT

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