Terry Smith: AI Hype or Real Revolution? Why Picking the Winners is a Fool’s Errand

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In his latest 2023 Annual Letter, Terry Smith discusses the rise of AI as a significant force behind market growth, particularly for Nvidia and the Magnificent Seven. He offers the following observations:

  1. AI Hype: The recent surge in AI’s stock market popularity isn’t entirely new. Significant developments occurred earlier, like IBM’s Watson in 2011 and Google’s DeepMind acquisition in 2014
  2. Early Winners? Identifying definite AI winners (like Nvidia for chips and Microsoft for ChatGPT) seems overly optimistic based on past tech revolutions. Companies like Intel, Nokia, and Yahoo initially led their respective fields but later faded
  3. Multiple Players: Several companies are developing and deploying large language models, including Alphabet, Meta, and Microsoft. Widespread adoption might limit competitive advantage, similar to spectators all standing up to see a football game (no one gains a real advantage, but everyone is less comfortable)
  4. Conclusion: Predicting clear AI winners at this stage is premature. We should watch the unfolding landscape before declaring definitive victors

Here’s an excerpt from the letter:

I thought it would be amiss not to mention two events which marked 2023.

The first event is the rise of Artificial Intelligence, or AI, as one of the driving forces behind the rise of most of the Magnificent Seven and especially Nvidia. What to make of it? I would offer a few observations.

Firstly, AI is not quite as new as the rise in interest in AI in the stock market this year, driven by Microsoft’s investment in OpenAI and the adoption of its ChatGPT large language model (actually launched in November 2022). IBM launched an AI model called Watson which beat two human champions in the US quiz show Jeopardy! in 2011. Google (now Alphabet) acquired the AI developer DeepMind in 2014.

Secondly, the stock market, in a fashion exemplified by the earlier cartoon, has decided at the outset that it can identify winners in AI in the form of Nvidia designing the chips on which the generative AI models will run and Microsoft as a provider of an AI model. If it can do so at this stage it would seem to me to be a break with tradition.

Think back to some of the major technology developments of the past half century or so and the early leaders:

• Microchips: Intel
• Internet Service Providers: AOL
• Mobile Phones: Nokia
• Search Engines: Yahoo
• Smartphones: Research In Motion (Blackberry)
• Social Media: Myspace

Where are they now? Does this experience suggest that we can predict a winner in the area of AI at the outset?

Moreover, maybe there won’t be a winner, either in the provision of large language models or their use. There are numerous large language models in development and deployment by the major tech companies: such as Alphabet’s Gemini, Meta’s Llama 2 (stands for Large Language Model) and Microsoft’s ChatGPT, as well as stock market excitement about the deployment of such models by Adobe, Intuit and Fortinet amongst just the companies that we follow. There is no shortage of contenders.

The adoption of AI may lead to a situation where everyone has it, so no one has any advantage. The analogy I would offer (with acknowledgement to Warren Buffett) is a football stadium. As the game becomes exciting and the striker runs into the penalty area with the ball, the second row of spectators stands up to get a better view.

This blocks the view of those in the third row who follow suit. Pretty soon all the spectators are standing but no one has a better view than before, but they are all less comfortable.

So, I think we will suspend judgement of who, if anyone, will emerge as a winner in AI.

You can read the entire letter here:

Fundsmith 2023 Annual Letter

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