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The double edged sword of AI

Published on
June 16, 2023

Artificial Intelligence (AI) has risen to prominence in the early parts of 2023, making headwinds across various industries. The investment sector was no different as it saw artificial intelligence making waves both positively and negatively. In this short article, we give our immediate thoughts and explore how this could impact you as an investor.

AI: The Good and The Bad

AI has allowed investors to process informational data without the emotion element attached, allowing for a more objective analysis. It can also ease investors with the automation of repetitive and time-consuming tasks, helping to ensure time is spent both more reliably and efficiently. The benefit of automation is that it endeavors meaningfully to reduce human error.

On the other hand, AI implementation creates challenges that policy makers and industry professionals should be acutely aware of. These include:

  1. A potential threat to long-term employment of jobs which can be fulfilled through AI
  2. Particularly in investing, though objective data analysis at scale can definitely improve efficiency, the lack of human touch and intuitive judgement that is lost by relying solely on AI can have a consequential impact on investments.
  3. The threat of AI to create large-scale misinformation and volatility. Already we have seen the use of AI generated images for example effecting the market. An AI image  was virally spread through a verified account on Twitter, “Bloomberg Feed” (unaffiliated to Bloomberg News), which showed a massive plume of thick smoke near what looked like a government building. Together with the image, a click-bait title reads: “Large Explosion near The Pentagon Complex in Washington D.C.” As a consequence of the viral tweet, investors started selling off their holdings as worry mounted. The S&P 500 Index (SPX) price dropped 0.63% from USD 4,208.37 to USD 4,181.80 within a span of 30 minutes from 9.40AM to 10.10AM. Throughout the day, however, the market normalised as the validity of the post was disproved, and the SPX ended the day at USD 4,192.63.
Image Source: Screenshot/Twitter/@sentdefender
Source: https://www.wsj.com/market-data/quotes/index/SPX/advanced-chart

What does it mean for Investors

The legendary Warren Buffet once said, “In the short-term, the market is a voting machine but in the long-term, it is a weighing machine,” highlighting the notion that the market moves based on sentiment, emotions, and temporary factors. However, over the long-run, the value of investments is determined by the underlying fundamentals of the assets as investments.

The markets can be extremely volatile if you view them on a daily basis. This perspective encourages investors to focus on the intrinsic value of investing (fundamentals), emphasizing long-term thinking (strategy) and removing emotions from the decision making process (discipline) rather than being swayed by human sentiment.

The 'Bloomberg' case above acts as an important reminder for us to take a long-term approach to how we view investing. AI is having an extremely large impact on the markets in the short-term but understanding the underlying fundamentals of the industry will create real and sustainable value long term.

Remember, investing is a marathon, not a sprint.

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