Monthly Merricks – What Would The Romans Have Made Of AI?

Watching a news item this week on the latest excavations going on at Pompeii and the incredible insight that the current site gives us on life as it was in those days, it struck me how remarkably similar much of life in Roman times was to today – the bakery and market place, their equivalent of a launderette, beds and home decorations etc – but it also made me wonder just how fantastical things that we take for granted today would have been to the average Pompeii citizen – the TV cameras that were showing us around, air and space travel, phones and those gadgets that can catch spiders without bending down – you know, the important stuff.

And AI. What would they have made of the AI debate that has taken off in 2023? In fact, you don’t need to go back to Roman times to find a civilisation that was unaware of its potential. You only really need to look back as far as pre-pandemic 2020 to find an overall dismissal of AI as a “fanciful futuristic pipedream”.

For over a decade I’ve been investing in Robotics and Automation as a theme. While the growth of robots had been largely limited to factory production lines and the cleaning of swimming pools there was an air of complacency shown by those who had more conventionally well paid jobs. Now that AI is seen as coming for the jobs of those in the legal, accountancy, fund management, journalistic and screenwriting professions, more people are taking notice and becoming a little more defensive and agitated about its “effects”.

An Overnight Sensation Years In The Making:

It is this approach that makes me a big supporter of thematic investing. We knew Robotics and AI were part of all our futures, but no one knew when they would break out into the mainstream. The AI boom this year was an overnight sensation that was years in the making. Nvidia became a household name and became part of the Magnificent 7 that has driven the S&P 500 to new heights this calendar year, yet the share price went nowhere for years previously (see chart below). Since January 22, 1999, NVIDIA’s market cap has increased from $562.80M to $992.00B, an increase of 176,161.05%. That is a compound annual growth rate of 35.90%.

Within other themes that we follow in our portfolio such as cybersecurity, cloud computing, healthcare innovation, genomics, new energy and transportation and online life for example, we wonder how many Nvidias we have embedded in there already. Only time will tell, but we are pretty confident that the names of the future will not all be the same names as the past.

The Rorschach Inkblot Test:

In the Rorschach inkblot test, the same inkblot pattern looks like different things to different people. 2022 was a very interesting inkblot.

Against the backdrop of a sudden reversal in interest rates and an inflationary explosion, virtually everything that had done well for investors in the previous decade became toxic while those with immense patience that had been able to wait for their perfect storm to arrive did tremendously well. This is where the Rorschach Test comes in.

For those who look at the 2022 performance tables in isolation, they can see either the dawn of a new beginning or the end of an era. They can view funds that had done brilliantly since the GFC as now totally useless, or those which topped the charts in 2022 as the ones to follow. Again, this is where a belief in following themes comes in useful because, if you are right in your theme selection, a resumption in performance is likely to happen.

The beginning of this year was typified by all manner of forecasts over how deep, and when, a global recession would hit. Deliberations are still going on today, resulting in many active managers still sitting on the sidelines waiting for their views to be confirmed. I admit that I was one of those expecting a far worse beginning to the year than we actually got and the fact that our fund is fully invested meant that we didn’t miss out on the unexpected uptick in markets, led primarily by the mega cap tech stocks that many had written off in 2022 as being too overvalued.

The fear of recession may be worse than the actual results if you look at the table below that I’ve borrowed from First Trust. The 2000/01 recession was a bad one for investors in technology in particular, and it was this that was suggested by numerous experts as the most likely blueprint to which 2022 should be most closely aligned. Of course, we will not know that we have reached the bottom of the bear market until hindsight reveals whether a worse leg down is still to come, but markets year to date are suggesting that there will not be. The table below suggests that waiting for the worst to happen, and then the worst fails to turn up, can affect returns more adversely than simply taking what is thrown at us on the chin.

There is a risk to over-thinking things. It’s a very human trait and one that AI may not learn to replicate.     

Andy Merricks is co-manager of the Margetts IDAD Future Wealth Fund

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