We have to focus on the bigger picture and the future

We all know by now that different asset classes provide different benefits at different times. If we look at the accompanying graph, we can see that the longer-term winner has been the S&P500 index and cash the loser. It is also worth noting that all these asset classes, except for cash, have experienced periods of underperformance. Most recently we have seen some very positive moves in equities and gold, and some disappointing performances from bonds. If we want reasons for these moves, we have to look at historical and current developments. We usually look at graphs of historical interest rates, valuations, debt levels, inflation levels, GDP growth rates, unemployment levels and a thousand other indicators. What we sometimes neglect to take into consideration, are future developments.

There are times in our lives when something happens that negate all these historical data we analyze for answers because it creates an opaque, yet exceptionally powerful potential. We are at one of these inflection points with the birth of Artificial Intelligence. AI will have such a profound impact on our lives over the next decade or two, that it will necessitate the adjustment of historical data to create a new entry level for measurements going forward. Before we go into too much detail about AI, we have to acknowledge that we are not experts on the subject but due to the impact it is having on the world around us, we have to think about it deeply. What we do know, is that a lot of people will be replaced by AI, and a lot of new job opportunities will be created. Consider this simple example: the efficiencies of using AI will replace a 5-day workweek with a 4-day workweek. People will now have more leisure time, which will benefit the hospitality industry. Hotels, airlines, online travel sites, sporting events, music festivals and many more businesses will thrive, and any business supporting these will be caught up in the surge.

The point we are trying to make is that just relying on historical data to make future predictions can be very dangerous. If you don’t get the feeling that things are changing at an accelerated speed, then you just have to wait a little bit because it is going to catch up with you soon. Sometimes we just can’t see the potential in something. If we take Instagram as example: in 2012 Facebook (META) bought this video-sharing app for $1 billion. Personally I thought they had lost their way, because how were they going to make money with an app where people just shared a little video clip? Well, the answer, of course, was online advertising – in 2021 Instagram made $32.4 billion.

To take this discussion full circle, let’s get back to asset class returns. If you listen to market commentators, you will always get two different points of view, both of which are backed up by very solid historical data. This, of course, creates a market with some people who want to sell at the same time someone wants to buy. Over the shorter term these different opinions about things like inflation, interest rates, equity valuations, bond prices, geopolitical tensions, the level of your currency, the potential for GDP growth, unemployment and many more will prove one opinion to be right and the other to be wrong. But these small victories will not win you the war because things can change very quickly.

As individual investors the war we have to win is the ability to fund our required lifestyles with the growth generated by our investments for the rest of our lives. The only way to do this is to get the paradigm-shifting calls right. So what are those you might ask? Well, if we take some examples, in 1886 it was whether to invest in horses or the internal combustion engine; in 2007 it was whether to invest in the Apple iPhone or in Kodak film; and in 2023 it was whether to invest in companies leading the AI race like Nivida, Microsoft, Meta, Alphabet and Amazon.

Perhaps we should worry less about the valuation of big tech companies in the USA, or the falling profitability of Apple and Tesla in China, or even when interest rates are going to come down and whether we will see a mild recession soon; and rather worry about what will happen if the USA can’t repay their massive debt because the dollar has lost its status as the number one reserve currency, or if the rand depreciates with 100% due to bad policy decisions made by a desperate ANC government.

The bad news is that the future is uncertain, the good news is that it has always been. Most of the petty potential problems we fixate on will be solved by human ingenuity and most of the major disasters we have endured have made us stronger. We believe this will be the case going forward as well.

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