AI Wars Are Beginning With Tech: How To Invest In Artificial Intelligence

Hello loyal readers! Grab a cup of coffee or tea. I have a good one for you today.

Newest Developments

Microsoft recently made a large investment in OpenAI and has already incorporated AI chat technology into it's search engine Bing. If you haven't checked out the future of search I recommend going to Bing.com and clicking the chat icon at the top and using the interactive chat bot using the ChatGPT technology from OpenAI ChatGPT.

Ask it to find you results like you would in Google or Safari. It is incredible and free. It's a streamlined chat style search without the ads, unworthy results in Google's top 10, pop-ups, paywalls or wasted time scrolling multiple results pages.

They are adding things regularly. They now have an AI image creator too. OpenAI is regularly adding features to ChatGPT4 too.

I remember the early days of the internet well in the mid and late 90s. The first time I surfed the web it was with Yahoo search at my dads office because we didn't have it at home yet. I am getting the same vibe using AI powered search now.

AI Is Here To Stay

I think some people maybe even Wallstreet are jaded in believing in AI tech from the over-hype of the metaverse and lack of real-world wide scale implementation. Trust me AI and LLM's(Large Language Machines) is legitimate and is going to be revolutionary. How revolutionary? I believe AI technology is someday going to be more revolutionary to mankind than the internet, especially if AGI or singularity is reached. We still are not experts on what goes on in the brain. What exactly would it take to push AI to a level rivaling human creativity? Human innovation only comes from "learning" and experience after all. If we accelerate the learning as resesrchers are doing as I'm writing this how soon could major scientific breakthroughs occur?

It is already creative and solving problems. It is akin to a 5 year old in its development. Eventually, from what I am hearing they could take an Albert Einstein, Sir Isaac Newton, and Nicola Tesla bot and have them theorize on advanced physics. This novice version we have with ChatGPT when you use AutoGPT can perform jokes and I'm hearing even a full comedy skit with a hook and final punchline like great comedians do.

Some people are afraid of advancing this technology that has given a technological breakthrough already for the average person. It can proof-read writing, fix spelling and grammar and make sentence structure more consice. It can write articles on any subject. It can write a business plan and do web development coding. It is an assistant with the entire knowledge of the internet by your side.

There are crucial externalities like potential slowing investment and the overall economy that could slow down the growth of this technology. If things continue as they are going the research I got from using the Bing chat paints a very prosperous picture for growth.

Future Growth

"According to Statista, the market for artificial intelligence (AI) is expected to show strong growth in the coming decade. Its value of nearly 100 billion U.S. dollars is expected to grow twentyfold by 2030, up to nearly two trillion U.S. dollars.

In 2021, worldwide investment into AI companies has increased by 115% since 2020, marking the largest year-on-year growth in AI investment for at least two decades. Total AI investment reached $77.5 billion in 2021 The global AI market, valued at 142.3 billion U.S. dollars as of 2023, continues to grow driven by the influx of investments it receives3. This is a rapidly growing market, looking to expand from billions to trillions of U.S. dollars in market size in the coming years."

Best AI Stocks To Buy

Google is way behind Microsoft right now with AI search. They don't even have any AI functionality yet. Googles (GOOGL) main revenue segment is search ad revenue. Google has already been struggling with declining growth in many segments and missing earnings estimates the last four quarters. This is a huge loss for them right now. They are losing some searches to Bing every day now. Microsoft is now first to market which may turn out to be a huge advantage as Samsung has been publicly contemplating dropping Google from their devices. I expect all major tech companies like IBM, Apple(AAPL), Nvidia (NVDA), Google(GOOGL), Facebook (META), Amazon(AMZN) among others to develop advanced AI for the consumer.

Many hardware and robotics companies will do well too as the hardware needs to be updated to handle AI The two popular AI ETFs are Robo Global Robotics and Automation Index ticker (ROBO) and Global X Robotics & Artificial Intelligence (BOTZ).These ETFs provide exposure to companies that develop, deploy or benefit from AI. BOTZ is more concentrated and has fewer companies in the holdings. This means it is less diversified than ROBO. That isn't necessarily a bad thing though because it means it has potential to have more price gain or loss.

The newcomer in AI ETFs is Roundhill Generative AI Technology(CHAT) it is an actively-managed fund designed to provide exposure to companies involved in the theme of generative artificial intelligence, and related technologies.

Another fascinating company is Synaptics (SYNA). They make and sell tiny semiconductors for human interface up to 80% smaller than existing solutions.

Internet security as an industry will do well in the future as well. As it gets harder to distinquish a bot from a human security will need to be enhanced. Very soon, if not already voice security will become compromised as bots copy our voices perfectly.

Cyber Security ETFs

The safest way to play the future security growth is with ETF's such as First Trust NASDAQ Cybersecurity (CIBR),ETFMG Prime Cyber Security ETF (HACK) or Global X Cybersecurity ETF (BUG). These sport expense ratios well below 1%. BUG has the highest average daily volume. There are other ETF's but the daily volume is much lower. It is not uncommon for specialized ETF's to fail to deliver because of declining low volume.

Entertainment Will Boom

I suspect as many creative and coding jobs become replaced by machine learning the entertainment and movie industry will benefit greatly two-fold. Firstly, they will be bringing amazing new visual and creative masterpieces to movies and various forms of entertainment. GPT is already creating comedy sets by comedians that have passed. With new voice technology our favorite people from the past will be brought back to life in artificial form. Imagine Albert Einstien or any famous figure from the past re-inacted. Large movie companies will improve their margins and have bigger profits.

Many people including myself believe a recession of varying magnitudes will arrive shortly. This is not necessarilly a bad thing for movies overall. During the Great Depression, with the advent of new and impressive film technology, people escaped their daily lives by paying for entertainment. Even though unemployment was high people would pay to see the new technological advances in film at the time.

The 1930s are considered the golden era of Hollywood cinema. During this time, the movie industry thrived. Technological advances such as color and sound made movies truly extravagant. The breakthrough of synchronized sound occurred at the end of the 1920s and that of full color motion picture film in the 1930s. Two companies I see potentially benefiting greatly are Warner Bros. Discovery, Inc. (WBD), and The Walt Disney Company (DIS). Both are publicly traded on the stock market.

Some Major Tech Companies Are Behind

There is major trouble lurking for Google. At the moment Google's stock is at huge risk of significant losses as they are day by day losing searches to Bing. I am long some Google May puts. It's also a worthy pair trade to be long MSFT stock and short GOOGL at the same time. Microsoft is currently in the process of acquiring Activision Blizzard (ATVI) making Microsoft the third largest video game company. My hunch is they will be incorporating GPT into video games bringing a new level to interactive gaming. Duckduckgo.com search is even adding A.I. functionality now while Google is getting left behind in the chat search revolution.

I highly suspect having lived through the 90's that the long-term leader in this new tech will take time to emerge. I expect they will share market share significantly as I-phone people will use AI on their phones and Google people will use Bing or maybe Google or even another company not yet in our radar. The future will include deep learning A.I. advanced large language models (LLMs) are machine learning models that are very effective at performing language-related tasks such as translation, answering questions, chat and content summarization, as well as content and code making. They distill value from huge data sets and make that “learning” accessible out of the box.

I've also seen LLM's referred to as "life long learning machines" which is essentially what GPT does as it learns from your input and corrections. I've heard it is best to be polite to the chat bots because they will immulate human emotion with emoji's and attempts at showing emotion if you ask it emotional questions.

Final Thoughts

Finally, as far as stocks go I see the most obvious alpha in shorting the companies losing to this technology right now. I am long May Google puts so if the stock falls I see profit. I plan on continuing to long puts as the market is not aware of the changes happening with chatbot search. It's hard to pick THE winner with new technology as every other technology breakthrough has shown. Few would have pegged Amazon a lowly book seller as becoming the giant it is as just one example.

I expect many industries will benefit from this technology becoming acessible to consumers. Right now Microsoft, Google's Bard and Snapchat are battling in the war for large LLM's.

Quality High Yield ETF's and Stocks

With high inflation the search for yield protecting from inflation becomes more challenging. Everyone knows about bonds but I'd like to dive into some vehicles I believe have a good shot to beat the risk free rate.

Marc Lichtenfeld's book Get Rich with Dividends: A Proven System for Earning Double-Digit Returns really opened my eyes to the possible returns from the right dividend stocks. I had read of famous portfolio manager Peter Lynch's study on an all stock retirement portfolio beating any bond portfolio. I was just naturally inclined to view equities as riskier than bonds though. I now conceptualize a diversified equity portfolio as equal or superior to bonds. Not that there is never a place for bonds but with smart stock selection I think there is edge in dividend stocks. I am going to touch on some interesting dividend ETF's and a stock with a stable history of dividends. I like to invest for quality and above average yield and steady returns.

The first high yield ETF we will look at also has the highest yield at a 19% dividend yield paid monthly. Cornerstone Strategic Value Fund (CLM) is a $1.6 billion closed end fund started in 1987 with diversified assets. By diversified I mean everything practically. From large-cap tech, healthcare, energy, MLP's, foreign equity, and other ETFs. Ten year total returns have been pretty much on par with the S&P 500 index. It underperformed the S&P by about 1%. CLM's management was smart to be overweight tech going into 2023.

Highland Global Allocation Fund (HGLB) is the next ETF with an 11% dividend yield payed monthly. 10 year returns were 5.3%. It is a discretionary fund designed to have low correlation to the U.S. equity market and they have done well with that objective. It holds an unconventional portfolio of equities and debt. One of it's largest holdings is communications company TerreStar Corp. via their stock and debt. They also have a variety of REIT's, MLP's, energy warrants, utilities, sovereign debt and preferred stock.

High Income Securities Fund (PCF) has a long track record having started in 1987 and sports an 11% dividend yield paid monthly. The share price has had very low volatility since it started and 10 year returns at 5%. It primarily invests in discounted closed end funds. It holds an extrememly diversified portfolio with 57% of assets in funds, 20% in preferred stocks and 16% in business develpment companies. It holds a whopping total of 45 closed end funds from global equity to corporate bonds. It also holds some RETI's and a steel company preferred Steel Partners. It has some minor allocattion in other sectors. Though the long-term returns are nothing overly impressive I like the share price stability over the years and consistent dividend.

Ternium S.A. (TX) is an $8 billion steel company that sells steel in many Latin American countries and the U.S. It has a 7% dividend yield and the stock has returned 13% over the last 10 years. Free cash flow has been stable and has even grown since 2019. Total shares outstanding has been unchanged at 1.9 million over the last 4 years. They have payed dividends since the 1990s and increased the dividend since the late 90s.

I believe these ideas can provide some high grade unconventional diversification to an income portfolio.

Gold and Miners Poised To Make a Big Run

Throughout history there have been many years and even decades when gold outperformed equities. The question I am going to ask is "is this time different?" I am particularly interested at looking at the 1970's when the U.S. had high inflation and low economic growth. The FED is tightening yet many economic indicators are slow to point to a full-blown recession. Inflation has been hard to tame for Jerome Powell thus far. Stagflation is a probable outcome in this economic scenario. There is also the increasing potential for geopolitical events as it relates to oil as there is tension between eastern and western nations.

So far, many parts of the economy have been unprecedently resilient to higher rates. Housing has been one of them as many people are buying from fear of missing out and moving to cheaper cities. The second period in history that saw gold outperfrom equities was 2000 to 2012. This was following a long secular expansion and tech bubble collapse. We now are at the end of a long expansion and crypto and Bitcoin bubble burst.

Gold also did well following the 2008 banking panic but I am particularly interested in the years when gold rose as stocks fell. These are the years in the 1970s and 2001 to 2003. So, I see a couple likely scenarios economically. The FED tightening causes a recession that is mild or severe. If it is mild I see a possibility of inflation sticking around like the 70s. If it is severe and there are major bank panics it will likely be resolved quickly as 1907 was with J.P. Morgan helping bail out Trust Company of America and the 2008 panic were. In 2008 much of the deflation came in less than one year as housing collapsed and banking products failed. The Government in 2008 was fairly quick to inject capital and launch QE in 2009. Gold benefited from that.

In 2009 I predicted the pivot point on gold and was bullish right before its historic run. I said, "This chart sends a powerful signal. It is saying that it is more than likely that gold the commodity will continue higher. Let me rephrase that. Very likely." I had noticed a triangle formation on the gold chart.



What Can We Learn From The Past?

Let's switch gears and go back to the 1970's. It was a period of much uncertainty politically and economically. The highlighted regions show two periods where stocks fell and gold rose. Even the entire decade had stocks losing to gold. Gold traded for $35 in 1971 and went to over $850 returning 2,300% in ten years.

Next let us view the 2001 recession and gold and stocks. We see yet again periods when gold rose as equity indices fell in 2001 to 2003. This was during the recession of 2001 when unemployment rose from 4% to 5.5%. Then Fed Chair Alan Greenspan kept interest rates historically low during his tenure.

Here is a longer-term chart of equities and gold.

The gold market is now signaling extreme strength as the daily chart is showing a very powerful consolidation pattern. It is a bullish triangle formation as you can see below. Gold miners are alreading breaking higher from this consolidation like Franco-Nevada (FNV). I am currently long the gold ETF GDX calls. Other liquid ETFs include VanEck Junior Gold Miners ETF GDXJ and SPDR Gold Trust GLD. GLD doesn't hold physcial reserves though. Sprott Physical Gold Trust PHYS is a gold etf that holds actual gold.

Final Thoughts

Everyone is scrambling to find cheap gold mining stocks. As gold is consolidating at levels near last years highs I see a good possiblity of different scenarios. Over many recent years gold has been a "risk on" trade. Meaning it usually will only rise when stocks and other assets do. There were a couple days during the most recent banking troubles, however, where gold and Bitcoin had positive days while equities fell. Currently, gold is surpassing Bitcoin in this potential "flight to safety."

I see it rising as it did in 2001 and 2009 if the FED ends up reacting to a recession with QE like 2009 or with another extreme loosening like in 2001. The odds are stacked that we are going to get a recession with historic FED tightening and yield curve inversion. The other scenario is a recession with elements of inflation sticking like the 1970 and even a weak U.S. Dollar.

Whether one sees it as a stagflationary safehaven or an inflation hedge on a declining stock market. I see gold as a historically wise investment vehicle at this time and for many years to come as we sort out this economic cycle. It may start making new highs very soon or it may take months before the momentum starts but I see gold moving higher over the next year. Increasing allocation to gold just makes sense.

Subscribe to my Substack for deep value stock ideas.



Full disclosure: I am long GDX call options currently and may take positions in stocks mentioned. I have no physcial gold holidings. I have approx. two dozen silver coins.

charts courtesy bullionvault.co.uk and stockcharts.com