Is artificial intelligence (AI) the disruptor we thought it would be? Last year, we hosted a discussion with AI specialist Barbara Gray, CFA of Brady Capital Research on its potential impact. Since then, AI-driven tools, public experimentation and investment have continued to grow rapidly. On September 20, 2024, Barbara rejoined our team and our invited guests to share her latest outlook on this evolving space.

Following an introduction by Alex von Schroeter, partner on the Cumberland leadership team, our Chief Investment Officer, Peter Jackson, took the podium to lead the conversation with Barbara, who was joined on stage by two members of the Cumberland investment team, Levon Barker, Portfolio Manager, US Equities, and Phil D’Iorio, Portfolio Manager, Global Equities.

Barbara fielded the first question by walking the audience through some of the main points from her eleventh book, Secrets of AI, published last year.

The Eight secrets of AI

Barbara laid out a convincing case for the disruption already underway and yet to come as a result of AI technology. She shared the following eight “secrets” of this disruption:

1. The Magic Beans. AI is growing faster than any technology in history. ChatGPT gained 100 million monthly users within two months of launching in 2022.
2. The Serpent. AI is super-powering long-tail search. Imagine being able to ask Spotify to curate a playlist that you will love, or AirBNB to find the perfect place to stay.
3. The Vinyl Record. AI is creating a second Napster moment. It can fake or replicate virtually any content. It can translate a movie or podcast into a dozen languages.
4. The Ancient Scroll. AI will replace much of the world’s intellectual and creative labour, just as machines replaced much of the world’s physical labour.
5. The Crucible. AI will unlock the value of long-tail proprietary data. Think of a social media platform with billions of samples of text and images with which to train AI.
6. The Eye. AI increasingly has “senses,” able to not only listen to users via voice prompts and respond with audible language, but also see and create images.
7. The Robot Factory. AI will enable robots to manufacture more robots. It is already being used to train existing robots on new skills.
8. 007. AI agents are the next emerging tool. Imagine having an AI assistant that knows your tastes and preferences and can handle tasks and communications for you.

Next up, Levon and Phil answered a series of questions about how to approach AI from an investment perspective. Here are a few highlights from their comments:

• Value will emerge over decades. The winners of today may not be the winners of tomorrow, and there will be secondary and tertiary beneficiaries over time. Levon shared the examples of Microsoft and IBM. At the dawn of personal computing in 1990, IBM was worth roughly 8x more than Microsoft, and seemed poised to dominate. By 2023, it had become apparent that software created more value than hardware, and Microsoft was worth almost 19x more than IBM.
• Tech stock valuations are relatively reasonable. Based on their price/earnings ratios, the Magnificent Seven tech stocks of today are in line with long-term norms and considerably less expensive than the tech bubble leaders of 2000, the Japan financial bubble stocks of 1989, and the Nifty 50 stocks of 1973. In addition, today’s top tech stocks are growing their earnings roughly 60% faster than the broader market.
• There will be direct and indirect beneficiaries. Phil shared his perspective that AI hardware makers such as Nvidia, Applied Materials and Broadcom, as well as chip-making software providers like Cadence, are obvious direct beneficiaries, as are companies with massive pools of AI training data, like Microsoft, Google and Meta Platforms. However, there are also opportunities among indirect beneficiaries, such as S&P Global, which has a vast cache of financial data, Thomson Reuters and RELX, which are using AI to enhance information services provided to legal, tax, accounting and compliance customers, and ThermoFisher, which is a health sciences provider with the potential to leverage AI to help develop drugs more quickly.

Questions and answers

The panel fielded a variety of questions from the moderator and the audience, addressing the accelerating rate of change in the space, the need for regulators to try to keep pace, the industries that may be most vulnerable to disruption, the potential trajectory of earnings growth among today’s leading technology stocks, and Cumberland’s approach to making investment decisions in such an environment.

All three panelists expressed optimism about the economic prospects for AI, while Barbara shared some concerns about the level of uncertainty that can accompany such a profound technological innovation, particularly as a parent to two young boys. One theme that emerged was the potential for AI-driven productivity gains to spur economic prosperity across companies and sectors well beyond the tech industry itself.

A lively conversation followed as guests and panelists mixed and mingled on our patio overlooking Yorkville on a mild September evening. If you have any questions about our approach to investing in the age of AI or would like access to a video replay of the event, please contact your Cumberland Portfolio Manager or Alexandra von Schroeter at alexv@cpwm.ca.