AI – Smart Money Asia

Vibe investing – stock analysis with Peter Lynch and ChatGPT

The whole generative AI thing is pretty weird, but I think I’m starting to get it: Some people are using AI to generate torrents of slop. Other people are using it as a tool to learn and get stuff done. I want to be the latter and avoid the former as much as possible.

The thing I initially found LLMs to be useful for was taking a long, information-dense document, perhaps written in Japanese, and getting a nice, concise summary in English. In particular, I used it to read the earnings reports of companies I was interested in investing in. However, here’s the catch: I’m not a stock analyst. So, often, even with a nice summary, I couldn’t decide if a stock I liked was actually a good investment.

I recently got around to reading Peter Lynch’s excellent One Up On Wall Street. It’s a fabulous book, written for retail investors. If I were to really simplify the book’s content, it would be:

1) How to find great investment opportunities simply by looking around you and finding companies you already know offering products you love

2) How to analyse the company’s financial disclosures to figure out if it’s really a good investment

Of course, there is more to the book than that. But these two things alone made it a hugely worthwhile read.

Now, investing in individual stocks is not for everyone. It’s not even necessary. As I write this, the Nikkei 225 index just hit a new all-time high. It’s up almost +50% over the last two years alone. The S&P 500 is up almost as much over the same period. There is nothing wrong with just owning the index and spending your time doing something else. Just don’t make the “something else” generating AI slop posts on LinkedIn or whatever. Please…

Where am I going with this? Oh, yes. After reading the Peter Lynch book, I realised that I could use some of the techniques in there to identify stocks I’m interested in and then use some of the questions Lynch asks to get AI to help me better understand those companies’ earnings reports.

I’ll give you an example, which I may regret. But it’s a stock I actually bought recently using this method.

As I get older, I notice a lot of people around me are wearing spectacles. Some need them permanently, while others, like my wife, can no longer read what’s on their phone without them. Japan’s ageing population problem is well-documented. I guess a lot of these oldies need glasses. Perhaps that’s why there are glasses shops EVERYWHERE!

Like everywhere. Along busy roads, in department stores, in malls. There are tons of eyewear shops.

I often find myself perusing this Trading View list of Japanese stocks. I like how you can use the tabs to sort and view a list of stocks with the most cash or the highest dividend. A few weeks back, I was looking at the list of oversold stocks and I noticed JINS Holdings (3046). And yes, they sell spectacles. I was in one of their shops with my wife just the other day, and it was really busy. Their specs are high quality and low price. And their stock took a beating over the last few months.

So, I decided to see how Peter Lynch works with ChatGPT. I downloaded the latest company earnings report and fed it to the machine. Instead of just asking for a summary and trying to figure it out myself, I asked ChatGPT to provide a summary that focused on answering some Peter Lynch-style questions:

What’s the recent growth in earnings?

What’s the P/E ratio relative to historic levels?

What makes the stock a good buy now?

Are existing stores in profit?

Where’s the expansion coming from?

What’s the debt situation?

How will they finance growth without selling lots of new shares and diluting the earnings?

Are insiders buying?

How does the stock price look versus the earnings over the last 5 years?

What are the dividends, and have they always been paid?

What percentage of shares are owned by institutions?

I won’t post all of the answers I got here. You can try it yourself if you want to. Suffice to say that the information I got was way more useful than a plain summary of the earnings report.

Later, I also asked ChatGPT to search the web and try to identify possible reasons why the stock is down so much recently.

Asking it to give a web-sourced breakdown of the reasons why the stock might be down was deliberate. You’re not supposed to ask LLMs to think. That’s not what they do. In fact, I find that if you do ask them to think, they tend to go out of their way to confirm your bias and tell you whatever it is you want to hear.

So, anyway, long story short, I bought the stock on Xmas Day. It’s down -6.5% since then lol. And it’s down almost -4% today, a day where the Nikkei surged over 3% to another all-time high. (earnings miss haha!)

So, I may be an idiot. But it’s probably a little early to judge.

My point here isn’t so much about whether this approach works in this particular instance. I enjoy picking stocks, but am aware that I am weak when it comes to analysis. Asking good questions is a life skill that can be applied to many disciplines. Peter Lynch is very good at asking questions about company financials. And LLMs can answer those questions in seconds by reading the earnings report, leaving you with valuable time to do something else.

Don’t try this at home. Or do, but don’t blame me if it doesn’t work. The usual disclaimers apply. If you do try it, please let me know how it goes, what you learned and what other questions you came up with.

Let’s revisit JINS later this year and see how it works out. I’ll be trying more of this to get a larger sample size.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Is Quantum Computing the next megatrend?

Last month, I read a fascinating article about punters in the NFL. What was particularly surprising is how Australians now dominate punting in American football.

I looked up the word ‘punt’ and it has four distinct meanings: a narrow, flat-bottomed boat, to kick a ball upfield, to speculate or gamble and the basic monetary unit of the Republic of Ireland, before the Euro.

You can probably guess which one I’m interested in.

As regular readers will know, I favour a core-satellite approach to asset allocation. The core is a diversified portfolio, mainly denominated in your base currency and matched to your risk profile. Satellite holdings give things an extra spice, or maybe even, an extra kick. If 20% of your investments are in satellites, that 20% may also be broken down into traditional assets, such as commodities, niche stock market sectors – such as biotech, or alternatives. You may even want to take a small portion of the 20% and have a punt on something truly speculative. Imagine if you took a punt on AI a few years back.

The art of the punt is to find a candidate for the next megatrend and allocate a small amount of your wealth to it. If you are wrong, it’s money you can afford to lose. And if you are right, the returns are asymmetrical.

Megatrend: a long-term, large-scale shift that can impact economies, industries, and the way people live. Megatrends can be driven by technological advancements, demographic changes, or global policy shifts. Some examples of megatrends include: the rise of the internet, the ageing population, the shift to renewable energy, rapid urbanization, and technological breakthroughs.

That overview came from Google’s AI, by the way.

Earlier this month, Google caused a stir when it introduced Willow, a state-of-the-art quantum chip. Willow has been in development for 10 years and has reached the stage where it can ‘perform a standard benchmark computation in under five minutes that would take one of today’s fastest supercomputers 10 septillion (that is, 10²⁵) years — a number that vastly exceeds the age of the Universe.’

Does that sound like a megatrend? It sounds like a punt to me! The key thing about technologies like this is that the pace of development is exponential. Nothing happens for years and then massive progress is made in a short period.

A few years back, a friend dragged me to a quantum computing seminar. He was attending to show support to one of the presenters. My friend is a finance pro and I’m a pretty good generalist and I remember clearly how, about a minute and a half into the presentation, we looked at each other like, WTF?????

Needless to say, I will not attempt to explain how QC works. Do your own research, as they say!

Here’s a nice friendly BBC article to get started with.

And, here’s a great thread by Charles Edwards. It helpfully identifies four stocks that punters can buy if they want to get exposure. They are IONQ, RGTI, QUBT and QBTS.

Please note: This is not investment advice. These stocks are a punt! You should not put a large chunk of your net worth into them. Also, they have gone up a lot since the Willow announcement. They will exhibit a ton of volatility and there will probably be better entries in the future. Funnily enough, three of them were down big just last night. I have seen threads detailing how QUBT barely has a business. Three of them might amount to nothing. Maybe all four companies will go bankrupt. However, one of them might develop the ChatGPT of quantum computing.

So, buyer beware. Do as much reading as possible and, if you decide to get involved, only play with money that is truly available for a punt. There is no need to rush into anything and you don’t need to invest a lot to spice up a well-diversified portfolio.

And, unless it’s really your thing, don’t go to any quantum computing seminars!

Top image by benzoix on Freepik

AI: Bubble or boom? Some stocks to watch

It’s pretty incredible that the US Federal Reserve has gone through a 27-month hiking cycle and US stock markets are at all-time highs. Unless you’ve been living under a rock during this time, you are probably aware that the main growth driver has been the intense hype surrounding artificial intelligence (AI) and more specifically, generative AI.

What is AI?

The Encyclopedia Britannica defines AI as ‘the ability of a digital computer or a computer-controlled robot to perform tasks commonly associated with intelligent beings’. The US company Nvidia says AI is ‘the capability of a computer program or a machine to think and learn and take actions without being explicitly encoded with commands’.

In March 2023, Bill Gates published a blog post titled ‘The Age of AI has begun’. In it, he says: ‘The development of AI is as fundamental as the creation of the microprocessor, the personal computer, the Internet, and the mobile phone. It will change the way people work, learn, travel, get health care, and communicate with each other. Entire industries will reorient around it. Businesses will distinguish themselves by how well they use it.

Technological revolution or a waste of resources?

I read a couple of interesting threads about AI last week. The first one by David Mattin considers the recent UK election as the last ‘pre-AI’ election we will hold. He sees a world entering a period of deep economic transformation that will change how we live and work and accelerate the process of scientific discovery. Rather depressingly, he expects this transformation to split society into two camps: enthusiasts/accelerationists, who want to lean into this new technology and sceptics/decelerationists, who want to resist the incursion of technology into daily life. This split is not hard to imagine when you look at how divided the Western world has been on almost every issue of late.

The second thread, by Ed Zitron, summarises a recent Goldman Sachs report on generative AI, which brutally dismisses Chat-GPT and its ilk as unreliable and power-hungry. The report concludes that generative AI is unprofitable, unsustainable and fundamentally limited. Moreover, the huge surge in AI-related stocks is a bubble that will soon burst. Original report here.

I don’t think my opinion on the first part is worth much, but I am not really interested in taking sides. There are clearly opportunities for massive positive change and there are also equally glaring risks. In a perfect world, these would be balanced sensibly but that world doesn’t exist. Things are about to get interesting…

As far as generative AI goes, time will tell. I think the most common complaint people have is that they don’t want gen-AI to write stories, produce art and know everything. They want it to do all the boring jobs that we humans don’t want to do and free us up to be more creative.

Investing in AI

From an investment standpoint, I don’t think AI can be ignored. It seems imprudent to dismiss the whole field as a bubble. However, if some parts of the industry are in a bubble, the key question is how long can the bubble continue inflating? As George Soros has pointed out, there is a lot of money to be made by rushing into a bubble. The tricky part is getting out before it bursts.

There are relatively few pure-play AI stocks to invest in. However, many great companies are using AI technology and making investments in AI. I have picked up a few below that I think are worth watching. This is neither an exhaustive list nor a recommendation to invest. Just some ideas to get you started so you can do your own research. (performance is quoted up to 15 July 2024)

Nvidia Corp (NVDA) and Super Micro Computer Inc (SMCI)

If I asked you what the best-performing AI-related stock is over the past 12 months, you could be forgiven for answering Nvidia. However, Nvidia has actually been beaten by a company it is partnered with – Super Micro.

The Motley Fool did a nice write-up on these two companies here: Essentially, they aren’t really competitors, they complement each other. NVDA designs graphics processing units (GPUs) which, among other things, are used for AI model training. SMCI designs servers and it takes Nvidia’s GPUs and other components to make them and sell them to its clients. These are what some people refer to as ‘pick and shovel’ investments in AI.

Year-to-date performance: NVDA +159.4% / SMCI +215.8%.

Microsoft Corporation (MSFT)

Of all the big-name tech companies, Microsoft is perhaps the most bullish on AI. The company is accelerating its own AI commitments and has invested some $13 billion in OpenAI in a partnership that dates back to 2019. Microsoft has integrated all of its generative AI assistants into a single AI product named Microsoft Copilot. Copilot offers both free and paid versions and is integrated into a wide range of Microsoft applications providing access to Chat GPT-4 and DALL-E 3.

Investors can keep up with Microsoft’s AI developments here.

Shares are up +21.2% in 2024 so far.

Arm Holdings ADR (ARM) and Softbank Group Corp (9984)

Majority owned by Softbank Group, Arm Holdings was listed on the NASDAQ in September 2023 and has quickly established itself as a major force in AI. The company architects, develops and licenses central processing unit (CPU) products and related technology which semiconductor companies and original equipment manufacturers (OEMs) rely on to develop their products. 99% of smartphones run on Arm-based processors and Arm has shipped 287 billion chips to date.

In Q4 of fiscal 2024, Arm reported its highest-ever revenue of $928 million, up 47% year-on-year. Shares are up +216.5% since listing and +136.3% year-to-date.

Softbank Group has had its ups and downs but is recovering in 2024. Led by the charismatic and controversial Masayoshi Son, Softbank Group has aggressively invested in a broad range of fields including robotics, AI, real estate, e-commerce, telecoms and more. It would be fair to say that the company has backed more than its fair share of losers, but Arm is proving to be one of its better bets.

AI stands at the forefront of Softbank Group’s vision and strategy so investors should expect the heavy investment in AI-related companies to continue. CEO Masayoshi Son says: ‘We are heading for an AI revolution, and we will be the investment company for the AI revolution’.

Softbank Group shares are up +81.1 % so far in 2024.

These are just a few ideas to get you started. There are many more companies involved in AI that are worth considering. Both Amazon and Meta are making huge investments in AI. Arista Networks (ANET) AI networking has driven impressive returns over the past five years. In Japan, NEC Corp is developing a range of AI technologies under the banner of ‘NEC the Wise’. And, of course, the huge boom in semiconductors has largely been driven by demand from AI.

The majority of investors will already have a larger allocation to AI-related stocks than they probably realise. Any S&P 500 or NASDAQ tracker will have significant exposure, so it isn’t always necessary to make an effort to dig out the next big name.

As for timing, returns over the last 3 years have been extraordinary. It remains to be seen if this is a bubble that is soon to burst, but sudden deep corrections can occur at any time. If you are a long-term believer in the AI narrative, there is no rush to pile money into the space in one go. Dollar-cost averaging is a solid strategy, and so is adding on significant dips.

Whether you are allocating passively or building a portfolio of AI satellite holdings, things are going to get interesting and maybe just a little weird.