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November 2024 – Artificial Chats
In this issue:
- Global Equity Market Performance
- AI
- ChatGPT
- NVIDIA
- Managing Money
- Wrapping Up
- Wealth Longevity – The Human Element in an AI-Driven World
Global Equity Market Performance
The S&P/TSX 60 had a decent October, up almost 1%. MSCI Emerging Markets was the only other market to scratch out a gain, barely. The S&P 500 looked liked it might put in a positive month but fell 2% on Halloween to close down 1%. No treats for you. MSCI EAFE continues to underperform all three and fell more than 2%.
Our systems remain fully long both the S&P 500 and the S&P/TSX 60.
If you would like to stay current on our measures of trend and momentum in the markets we follow, please click here
This letter is going to cover artificial intelligence (AI). It is, after all, the second birthday of ChatGPT on November 30.
AI
The term artificial intelligence describes all kinds of algorithms that have been in use for many years.
Note that this letter was written with the research assistance of ChatGPT. For writing, it’s useful for correcting grammar and improving clarity but often makes mistakes. Interestingly, students are getting busted for using it to write essays since there is now software that can detect if something was written by a machine.
This, fortunately or not, was written by a human.
Combined with Google and Microsoft’s Copilot, you have a powerful group of resources to do online research. You don’t need to go to the stacks using the Dewey Decimal System to find the research you want. Which is nice.
Many of these tools are not necessarily new. Autocorrect is something everyone is aware of if you use a device of some kind. It’s also the source of much humour. Since this is a family friendly publication you can Google it for yourself.
The iPhone is one of the more recent examples of predictive autocorrect when Apple introduced it in 2007. Microsoft Word has been using machine learning models in its autocorrect function since 1993.
And before that, Optical Character Recognition was developed in the 1950s to convert images to text.
ChatGPT brought to the mainstream what has been developing for decades.
ChatGPT
A few months after ChatGPT’s release to the public, we wrote about it and the immediate consequences to the market.
First we asked it what it was.
But wait, there’s more.
One of the first things Chris Keeley, founder of ICM, did was ask it if it could write code in Python to solve a problem. It did. Oh, hi there HAL.
It can be a toy to have conversations with, cheat on term papers, do research and write code. It can also generate images based on prompts, like the one above of Highway 60 near Algonquin Park.
It’s had a large impact on the stock market. When that was written in February 2023, Microsoft announced it had invested in OpenAI, the owner of ChatGPT. Microsoft soared relative to Google, which seemed far behind Microsoft in releasing a large language model.
Google fell 12% over the next couple of days while Microsoft went up 4%.This isn’t just about the U.S. dollar.
That was the initial reaction. Since then, while the Nasdaq and tech companies have been on a roll, there is one company that rules them all. NVIDIA.
NVIDIA
If you follow the latest stories out of Wall Street, you would have heard of the FANG stocks. Facebook, Amazon, Netflix and Google. Later, Apple and Microsoft were added to the mix. Now we have a new brand: The Magnificent Seven.
As a side note, in the original 1960 movie, only three of them survived. Makes you think.
The reasons for this branding are not clear, other than it may make for good television.
One of the seven is NVIDIA. Since the introduction of ChatGPT NVIDIA has become the most valuable company in the world. Surpassing Apple a few weeks ago and outperforming Microsoft by 420%.
According to ChatGPT, the reasoning is as follows:
NVIDIA’s graphics processing units (GPUs) are highly suited for AI workloads, especially for deep learning. Unlike traditional central processing units (CPUs), GPUs can handle thousands of tasks simultaneously, making them ideal for the parallel processing required by AI algorithms. This capability is essential for training complex models, such as those used in natural language processing and computer vision, which require billions of calculations per second.
What is an investor to do?
Managing Money
In our case, we like math and have a rules-based system.
We own the S&P 500. NVIDIA and other tech companies have had a large impact on its performance. When an asset outperforms relative to the other holdings in a portfolio, once it breaches a certain threshold, we rebalance to its original target and invest in other markets.
Also, since it is important to know what you own, we look at concentration. In other words, we ask the question: Do we own too much of one thing? The reason for this is individual companies contain specific risks. And in this case, they can dominate an indexes’ performance. NVIDIA is now 7% of the S&P 500 and almost 9% of the Nasdaq 100.
Since we know that stock pickers, more than 90% of them, underperform the broader market we don’t play that game. We measure our exposures and adjust accordingly.
Wrapping Up
It’s time for some technology-inspired music.
Back in the early 1970s a band out of Germany, Kraftwerk, was at the cutting edge of analogue computing and synthesiser technology to create music. They were and continue to be pioneers and their influence has been huge in the evolution of how musicians use technology to create sounds and songs. That is good.
In the 1978 song Robots they imagined what is possible:
We are programmed just to do
Anything you want us to
And we will dance and sing for you
We are the robots
We’re functioning automatic
And we are dancing mechanical
Now let’s look at why humans are necessary to the investment process. Robots can’t (yet) do everything.
Wealth Longevity – The Human Element in an AI-Driven World
With AI tools like ChatGPT now mainstream, and technology stocks shaping the markets, it’s easy to feel that technology alone can handle the intricacies of financial management. Tools to automate tasks, analyze data, and even offer investment guidance have never been more accessible. But as powerful as these innovations are, they lack a crucial component—understanding you, your goals, and the nuances that make each financial journey unique.
An experienced financial advisor offers something AI can’t: the ability to interpret complex, shifting life circumstances and provide tailored, strategic advice. While AI might efficiently analyze trends or suggest allocations, it can’t foresee life’s unexpected turns or adjust for personal ambitions and concerns that may not fit into an algorithm.
Advisors help clients identify their risk tolerance, set realistic goals, and establish plans for life changes—whether saving for children’s education, navigating career shifts, or planning for retirement. They offer judgment calls that blend market insights with the human element of empathy, understanding, and experience.
In an AI-driven world, these insights are more valuable than ever. A financial advisor becomes not just a resource but a partner who helps you stay focused on your long-term vision, while leveraging technology to fine-tune along the way.
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Challenging the status quo of the Canadian investment industry.
