Investing in AI in 2024 and Beyond
Estimated reading time: 8 minutes
As we enter 2024, many experts believe the world may stand on the cusp of another monumental technological shift.
From the steam engine igniting the Industrial Revolution to the electrification of the 20th century, each era of the last 200 years has been defined by groundbreaking technologies. Today, many believe that artificial intelligence (AI) may emerge as the latest torchbearer of innovation.
Indeed, 44% of companies are planning on making serious investments in AI and integrating the technology into their day-to-day operations. Its potential stretches across various sectors – from enabling autonomous vehicles to empowering knowledge workers to revolutionizing healthcare and beyond.
As with any emerging technology, it's crucial to discern between overconfidence and long-term transformative potential.
This article will outline the prospects and risks of investing in AI, including how you can pair this cutting-edge technology with the benefits of tax-efficient investing.
Table of Contents
- What is Artificial Intelligence?
- How To Invest in AI
- Consider an SDIRA for AI Private Equity
- Risks of Investing in AI Companies
- An Increased Demand for Diversification and Due Diligence
- Stay Informed About the Evolving AI Investment Landscape
What is Artificial Intelligence?
AI refers to the simulation of human intelligence in machines that are programmed to think and learn like humans. The primary aim of AI is to enable machines to perform tasks that typically require human intelligence, such as visual perception, speech recognition, decision-making, and language translation.
The evolution of AI technology presents a mix of remarkable opportunities and significant challenges.
Already, AI is able to create fake yet photorealistic images, new protein structures, and entirely novel strategies for a 4,000 year-old board game. If the technology continues developing at a rapid pace, AI may help us tackle complex problems like chronic disease, flooding and wildfires, and sustainable energy management.
However, the picture isn’t all sunshine and roses.
Automation through AI may lead to job displacement, particularly in industries reliant on routine tasks. The use of AI in surveillance, data collection, and decision-making raises ethical and privacy concerns.
When it comes to the benefits and risks of AI, “potential” is the key word. Nothing is certain; everything is imaginable.
How To Invest in AI
Investing in companies poised to leverage AI presents tremendous opportunities. The key lies in identifying the right channels that align with your investment goals and risk tolerance.
Here are a few avenues to consider:
Publicly Traded Tech Companies
One of the most straightforward methods is to invest in stocks of companies that are leading the charge in AI. Big tech firms like Google (Alphabet), Amazon, Microsoft, and IBM are heavily invested in AI research and development. These companies not only develop AI technologies but also apply them across various sectors, from cloud computing to consumer electronics.
Look for companies in sectors like healthcare, finance, automotive, and retail that are adopting AI to revolutionize their operations. Investing in such companies can provide indirect exposure to AI growth.
AI-Specific ETFs and Mutual Funds
For those seeking diversified exposure without picking individual stocks, exchange-traded funds (ETFs) and mutual funds focused on AI and technology can be a good option. These funds may include companies specifically involved in AI, machine learning, robotics, and related fields, providing a balanced portfolio in this sector.
It's important to note that while these funds offer diversified exposure to AI and related technologies, they still carry the risks associated with investing in the tech sector. Moreover, the rapid pace of technological change means that these funds may need to continually adjust their holdings to stay relevant.
Private Equity and Venture Capital
Investing in private equity and venture capital focused on AI startups presents a unique opportunity, especially for those with higher risk tolerance and greater capital. This investment avenue allows you to potentially capitalize on the early growth stages of companies that could become major players in the AI landscape.
For example, OpenAI, known for products like ChatGPT and DALL-E, skyrocketed to a valuation of around $90 billion within just eight years of its inception. This rapid growth is indicative of the significant potential that AI startups hold.
If you are an accredited investor, you may have more options to directly invest in AI startups. This involves identifying startups with strong potential and a viable path to profitability. Direct investment allows for a more hands-on approach but requires a deep understanding of the AI market and the risks associated with startup investments.
Some venture capital funds are dedicated to investing in AI and machine learning startups. These funds pool money from various investors to support a range of emerging companies in the AI field, diversifying risk while capitalizing on the sector's growth.
Consider a Self-Directed IRA For AI Private Equity Stocks
Investing in AI through private equity offers incredible growth potential. However, if one of your investments skyrockets in value in a taxable account, you’ll likely have to pay a great deal in capital gains tax.
That’s why many private equity investors look to minimize their tax liability with a self-directed IRA (SDIRA). These investment accounts enable you to invest in alternative assets like private equity, real estate, and more while benefiting from the favorable tax treatment of IRA investments.
This means you can directly invest in AI startups or private companies specializing in AI technology, a sector that's often inaccessible through most IRAs or 401(k)s. If you have expertise or a strong understanding of the AI sector, an SDIRA empowers you to leverage this knowledge. You can select investments that align with your insights and risk tolerance.
For instance, Peter Thiel funneled a couple thousand dollars worth of shares of an early-stage startup into a Roth SDIRA. Over time, the initial investment grew to be worth over $5 billion.
Because he held these assets in a Roth IRA, once he turns 59½, he may be able to save about $1 billion in capital gains taxes.
While this is an exceptional example, it demonstrates the power of combining potentially lucrative investments like AI with the tax benefits of a Roth SDIRA.
Of course, it's important to conduct thorough research into potential AI investments and understand the compliance aspects of an SDIRA. Additionally, keep in mind that private equity investments typically have longer time horizons and lower liquidity compared to public stocks. You may not be able to exit at the first sign of trouble, so make sure you believe in the company for the long haul.
AI Infrastructure Providers
Companies that provide the necessary hardware (like advanced microprocessors) and infrastructure for AI operations are also critical to the growth of AI.
Nvidia has emerged as a leader in the AI hardware space, especially with its powerful GPUs, which are crucial for AI computing. The company's stock has seen significant appreciation, with a notable rise in 2023, largely attributed to its dominance in AI and deep learning applications.
Similarly, Google has been investing heavily in AI hardware. Their development of Tensor Processing Units (TPUs) – specialized chips designed to accelerate machine learning tasks – positions them as a significant player in the AI infrastructure market.
Finally, the world's largest dedicated independent semiconductor foundry, Taiwan Semiconductor Manufacturing Company (TSMC) plays a critical role in the AI hardware supply chain. They manufacture chips for many of the world's leading tech companies, including those specializing in AI.
As AI continues to evolve and expand, these infrastructure providers are likely to see sustained demand and growth, making them potentially high-growth options for investors looking to capitalize on the AI boom.
Risks of Investing in AI Companies
It goes without saying — no investment is without risk. Venturing into artificial intelligence demands extra caution. The inherent technological and regulatory uncertainties surrounding AI make it a uniquely shaky terrain.
Before diving in, consider these potential risk factors:
AI technology is rapidly evolving, and there is tremendous uncertainty as to which form of AI (if any) will live up to the hype.
One prominent category of AI models is large-language models (LLMs), like GPT-4 that powers ChatGPT. These models process vast amounts of data, learn patterns, and attempt to generate content based on those patterns.
However, LLMs often generate plausible-sounding but entirely fictitious information, referred to as 'hallucinations'. While AI can process language at a superficial level, it lacks an in-depth understanding of context, often leading to errors, misunderstandings, or total fabrications.
Further, AI systems are often seen as 'black boxes' due to their complex and opaque decision-making processes. This lack of transparency can be an issue in critical applications like medical diagnostics or criminal justice, where understanding the rationale behind a decision is crucial.
AI is increasingly coming under scrutiny for ethical, privacy, and security concerns.
AI can inadvertently infringe on existing intellectual property rights, particularly in areas like content creation. Recently, Universal Music Group launched a lawsuit against leading AI firm, Anthropic, alleging infringement of lyrical content.
These systems often rely on large amounts of data, which can include sensitive personal information that violates privacy laws. A case in point is the €20 million fine leveled against Clearview AI for using facial recognition technology without consent.
Market Competition and Hype
The AI field has seen a surge in new startups and projects, leading to a crowded market.
This intense competition can pressure companies to rush products to market without adequate testing or to over-promise capabilities. For instance, the proliferation of AI chatbots has led to a market where many offerings are undifferentiated, raising concerns about the viability and quality of these products.
AI technology is often subject to significant hype, leading to inflated expectations that may not align with current technological capabilities. An example is the early promise of fully autonomous vehicles. While significant progress has been made, the initial excitement suggested a timeline and level of autonomy that has yet to be realized, leading to public and investor disappointment.
An Increased Demand for Diversification and Due Diligence
Investing in the dynamic and rapidly evolving field of AI requires a strategic approach focused on diversification and due diligence.
A well-balanced portfolio that combines high-growth potential startups with stable, established companies can optimize the risk-reward ratio. Moreover, AI's diverse applications across multiple industries, such as healthcare, finance, and retail, present unique growth opportunities in each sector.
Geographic diversification is equally crucial, considering the different regulatory environments and market maturities across regions. This approach not only taps into varied growth potentials but also shields against region-specific regulatory risks.
Stay Informed About the Evolving AI Investment Landscape
Some of the most powerful investors in the world are firm believers in the power of generative AI. Others remain skeptical. Regardless, it’s rare that a new technology so quickly captures the public imagination.
As this dynamic field evolves, it offers a spectrum of opportunities for the informed investor, from direct investments in pioneering AI companies to sector-focused ETFs.
However, it's important to note that the future of AI may not match current expectations. Investors should approach the promises of AI with a healthy dose of skepticism, a commitment to due diligence, and a deep understanding of the sector.
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