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AI Winter Is Coming - How to profit from it?

by maximkazhenkov1 min read5th Dec 20207 comments

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EconomicsAI TimelinesFinancial InvestingAIPractical
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Note: This isn't the place to debate/convince others of your position on AI winter. There are plenty of threads on Lesswrong for that already.

There are already a few posts on how to profit from rapid AI progress in the near future. I figured it would be worthwhile to also discuss the opposite scenario - a third AI winter, if nothing else to hedge against it.

I don't expect many people to agree with my pessimistic view on future AI progress, especially considering the recent hype around GPT-3 and AlphaFold. But if you're predicting another AI winter, it's precisely the best time to take a bet, namely when expectations are high.

However, I find it quite difficult to operationalize such a position. Disentangling deep learning from the rest of tech is hard. It doesn't make sense to short Nvidia stock since their main business is still gaming hardware. Tesla may well succeed in the electric cars/solar energy industries even without full self-driving. Alphabet, Microsoft and Facebook all could go on just fine if deep learning turns out to be a mirage.

That's why I've come here for advice. I have intentionally left out any precise definition of 'AI winter' because I don't want to rule out any potential ideas that only fit some scenarios. Any input would be greatly appreciated.

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Make bets here? I expect many people should be willing to bet against an AI winter. Would additionally give you some social credit if you win. I’d be interested in seeing some concrete proposals.

You can short some AI ETFs. https://etfdb.com/themes/artificial-intelligence-etfs/ has a list, although some of those are obviously miscategorized - check the holdings to see how much you agree that they're representative.

You're left with market risk (i.e., beta) when you do this, but if you have a diversified portfolio you're probably okay with not putting on an additional specific hedge. That is, if you're right and the whole market rallies (but your ETF rallies less), you'll be okay.

If you want to be more tactical, I would look at companies that are AI-exposed and have insane P/Es. You mention Nvidia having gaming hardware, but NVDA's PE is something like 135.92 right now, which prices in huge levels of growth. Compare 2016, when their P/E was 20-30. An AI winter would collapse the expected growth rate, leading to a corresponding drop in stock price. If you're not convinced on NVDA, you can make a similar case for other companies whose growth narrative is driven by AI. 

Finally, you should ideally have a view on when your thesis is going to play out or what the catalyst will be. Remember that during the dotcom boom/bust, "everyone" agreed that the market was nuts, but it kept going up for quite a while. And of course you should think about how to size your position and how to manage your risk while you have the position on. As the saying goes, the market can stay irrational longer than you can stay solvent.

These are some valuable ideas, thanks! Do you also see any opportunity for long positions? I.e. are there companies/industries that will actually benefit from AI failing?

2ThomasJ6moI don't have any immediate ideas on long positions - the AI winter isn't AI failing per se, right? It's just that we stop making progress so we're stuck where we are. Maybe something like Doordash? They filed for an IPO recently, and if you think autonomous robots aren't going to drive down the cost of logistics then last-mile logistics companies might be underpriced. I have much less confidence in this kind of trade though.

Certainly NVDA will drop briefly if there's a widely publicized AI winter, even if it doesn't actually affect their bottom line. Probably the safest way to profit (as in, the downside is bounded, as opposed to shorting, where the downside is unbounded), then, is to identify companies that will experience short term drops because of publicity, without actually being harmed, and buy the dip(s).

Hmm that's betting on the market overreacting to AI winter in addition to betting on AI winter occurring itself. I guess it's only applicable to scenarios where there's a sudden crash instead of a slow, steady decline of investments, but still, thank you for the idea!