Investment idea: basket of tech stocks weighted towards AI

by ioannes_shade2 min read12th Aug 20206 comments

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I'm not an investment advisor and this isn't investment advice. Excerpted from an occasional newsletter I write about investing.

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Recent developments in AI (AlphaGo Zero, AlphaFold, GPT-3) make transformative AI seem plausible within the next 10-50 years.

There's no fire alarm for AGI, so now is as good a time as any to have my portfolio reflect this belief. (A little embarrassing that I've waited so long to follow my conviction here! The joys of compartmentalized cognition...)

If transformative AI follows the trend currently being set by OpenAI, where it's expensive to initially train an AI model and cheap to deploy it once trained, profits will most likely be captured by the companies that train the AIs & the value chain supporting these companies (OpenAI's API is an early version of this; see also Gwern's fantastic analysis of the strategies of various AI research groups).

If training costs aren't the limiting factor, it's less clear that profits will be captured by the companies that own the models. This scenario feels higher variance & weirder... probably the big tech companies still benefit a lot (they're already set up to deliver services at scale and they can just buy smaller firms who might otherwise compete), and makers of GPUs & semiconductors probably still benefit as well. Peter McCluskey has a good rundown of sectors that could benefit.

Happily these two scenarios are pretty aligned from a small-investor perspective – apart from OpenAI, a lot of AI development & the supporting value chain is housed within big tech companies, and even OpenAI runs on Microsoft compute.

Finally (and more weirdly), I think now is a good time to invest in "shamanic" leaders (h/t Max for the term). It seems like a lot of society doesn't really know how to orient anymore, so when someone comes along with a clear + compelling vision, they can raise a lot of capital. Bezos & Musk use this dynamic to power their companies; Neumann & Holmes exploited it.

This shamanic consideration isn't driving my decision-making but I take it as a plus when I see it. Amazon > Microsoft. Facebook > Google. It's a bad sign when I can't remember the name of the current CEO.

Here's how the allocation looks:

  • 40% FAANG (everything except for Netflix)
    • Amazon is exciting because AWS is the dominant cloud computing service, its retail business is becoming an important pillar of the global economy, and Bezos is shamanic
    • Google is exciting because everyone uses gmail + youtube + maps + search, it has an AWS competitor, and it owns DeepMind, Google Brain, and Waymo
    • Apple is a bit of a special case because they're still riding the winds of the culture established by Jobs (the archetypal shaman-founder), and things like Airpods Pro show they can still develop amazing products after his death. They're also building their own chips, but I haven't heard of them doing anything exciting with AI
    • I'm "meh" on Facebook, though Zuckerberg is definitely shamanic. Excepting WhatsApp & Messenger, their products seem sorta evil (and their good products are subsidized by the revenue of their evil products)
    • There's nothing compelling about Netflix

  • 20% AI-focused ETFs
    • 10% to BOTZ
    • 10% to ARKQ
    • This gives some exposure to random companies in the value chain that I don't want to have to track individually

  • 10% non-FAANG cloud computing companies
    • Microsoft, a little Oracle, a little Salesforce

  • 10% GPU companies
    • Nvidia, AMD, Intel

  • 10% semiconductor companies
    • I haven't figured out which ones yet, and I haven't figured out whether it's worth holding fabless companies
    • Probably TSM, NXP BRKS, LRCX, KLAC, AMAT, and maybe some fabless names like Broadcom, Marvell, MediaTek

  • 10% to Chinese tech companies
    • Tencent, Baidu, Alibaba
    • Given what's happening with the Uighurs and in Hong Kong, holding stock in Chinese companies feels more & more like holding stock in German companies circa 1935, so I might back out of this... though everything is so globalized now that I'm not sure the analogy holds

Unfortunately all these companies are currently super expensive (many are at all-time highs), but I still think it makes sense to buy them – if we're in an AI acceleration, we'd expect to see valuations go higher & higher as firm productivity increases rapidly. Unfortunately, from the inside this would look a lot like a FOMO-driven bubble.

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6 comments, sorted by Highlighting new comments since Today at 4:41 PM
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There is a specific piece of evidence that GPT-3 and the events of the last few years in deep learning added: more compute and data are (very likely) keys to bring transformative AI. Personally, I decide to do a focused bet on who produces the compute hardware. After some considerations, I decided for Nvidia as its seems to be company with the most moats and that will benefit more if deep learning and huge amount of compute is key to transformative AI. AI chip startups are not competitive with Nvidia and Google isn't interested/doesn't know how to sell chips.

Investing into FAANG because of the impacts of transformative AI is not a direct bet on AI: the impacts are hard to understand and predict right now and it is not a given that they will increase their revenues significantly because of AI. They already have a business model, and it isn't focused on AI.

Depending on how much of that "10% non-FAANG" MSFT is, I might weight it a little higher, given their relationship with OpenAI. (Also Satya seems good.)

Yeah, I'm roughly as excited about Microsoft as I am about Facebook or Apple.

I wonder how much of OpenAI they got for their $1B...

I wonder how much of OpenAI they got for their $1B...

Yeah, me too. My guess is around 30%, but my error bars are pretty wide. Would not be shocked if you told me it was 50%, or 10%.

(I think they probably didn't give up more than half the company to Microsoft. And even with an all-star team, it's hard to imagine that they'd be valued as a decacorn when they're pre-product and pre-revenue. So that makes me think their 2019 valuation was somewhere in the 2-10 billion range. Probably on the lower end of that.)

A quote from the thread which suggests weighing Google and FB more than Amazon, or at least more consideration than above.

I don't understand why one would invest more in Amazon over Alphabet. Alphabet owns 1. the strongest industry research division around (especially DeepMind), 2. a very strong vertical with Google Cloud -> Tensorflow/Jax -> TPUs. Amazon only has an arguably more established cloud (I'm not sure if this is even true for machine learning purposes), but has a much weaker research division and doesn't own any of the underlying stack. I mean, for example, GPT2 was trained primarily on TPUs. So Google owns better shovels and also better diggers.

Facebook owns the second best industry research division, as well as PyTorch (which is the most popular framework in ML research right now). Unfortunately for FB stock, it doesn't have a particularly clear path towards monetizing it. However, many of the other companies mentioned (Microsoft and OpenAI for example) are heavily invested in it.