We all read a lot of commentary these days – both good and bad – about how AI will change things.
Yet most of it misses the essential point for investors.
Let me explain…
On the negative side, AI will eliminate millions of blue-collar jobs that involve routine physical tasks and white-collar jobs such as analyzing data, drafting documents, or handling customer service calls.
Privacy and security challenges loom large. That’s because AI doesn’t just enhance cybersecurity efforts. It also empowers hackers, cyber criminals, and other bad actors.
And deep fakes will make it much harder for people to know if the information or instructions they receive are accurate – or even legitimate.
On the positive side, AI will transform healthcare with more accurate diagnoses, faster drug discovery, and personalized treatment regimens tailored to the patient’s personal genome.
In transportation, it creates self-driving cars and trucks, smarter traffic controls, and coordination of urban infrastructure to lower carbon emissions, reduce accidents and save lives.
In education, it will provide personalized instruction, adapt materials to each student’s pace and learning style, and shrink learning gaps.
There are many more positives, of course, as well as many more negatives.
AI – like most transformative technologies – is not inherently good or bad.
It is a set of risks… and opportunities.
Yet little of the discussion centers on the most transformative aspect of AI: How it will dramatically enhance corporate productivity and efficiency at non-tech companies.
AI will boost economic growth, increase corporate sales, and make public companies far more profitable.
That’s great news for shareholders.
And investors have bid up The Magnificent Seven – and other megacap tech leaders – to record highs.
Since these stocks make up more than a third of the S&P 500, the market has hit record highs too.
But as an investor, the important thing to understand is the world-changing ramifications…
This is not just about the companies creating and improving AI.
It’s about the many hundreds of public companies whose business fortunes will improve dramatically as a result.
For example, during the dot-com boom 26 years ago, investors could foresee the dramatic impact of the internet.
As a result, they bid the leading internet companies on the Nasdaq to levels that were ultimately unsustainable.
The result? From its March 2000 peak to its October 2002 trough, the Nasdaq lost three-quarters of its value.
And many internet stocks lost over 90% of their value.
Think about that. The leading internet stocks were worth only a tenth as much a couple years later, even though the internet did indeed “change everything.”
Over the past few decades, every company has had to move a significant portion of its operations online.
Every company had to cut costs by eliminating middlemen.
And every company began selling products and services on its own website and through other e-commerce sites.
If they didn’t – or were slow to adapt – they’re no longer around.
Many of the dot-com names that investors were chasing – like eToys and Pets.com – are gone.
Former tech darlings like Cisco Systems (Nasdaq: CSCO) and Intel (Nasdaq: INTC) have massively underperformed the market.
Heck, Intel is worth less than it was 26 years ago.
Meanwhile, companies that were not obvious internet beneficiaries at the time – Old Dominion Freight Line (Nasdaq: ODFL), Deckers Outdoors (NYSE: DECK) and Visa (NYSE: V) for example – are up tens of thousands of percent.
Don’t get me wrong. Most AI stocks are not as overpriced today as internet stocks were in the first quarter of 2000.
I don’t believe they will crash and burn like the Nasdaq did 25 years ago.
But many of them are likely to underperform in the months and years ahead.
And the likely outperformers? They are not the ones spending countless billions to build and improve these platforms.
They are the ordinary companies that will be the beneficiaries of all that spending.
Banks, manufacturers, retailers, hospitals, homebuilders, energy companies and even utilities will see a huge increase in efficiency, productivity, and profitability.
But – here’s the key point – without spending all that money, much of it will ultimately be written off because the innovations don’t turn out to be best of class.
Instead, these non-tech companies will merely buy – or subscribe to – what they need and reap the benefits.
That means many of tomorrow’s best-performing stocks – from both an offensive and a defensive standpoint – will be not The Magnificent Seven but smaller companies.
We have many of these in our Oxford Club portfolios now, as we position for the eventual rotation out of Big Tech and into Global Value.
Bottom line? The upside is greater. The valuations are better. (Much better.) And the downside risk is far lower.
Given the market events of the past few weeks, this rotation already appears to be underway.
That means the high-growth/low-risk play today is not the tech behemoths that everyone has been chasing for the past two years.
It’s value stocks, both large and small.