I recently watched a segment on “60 minutes” that explored the potential for artificial intelligence to impact education.
In the piece, Sal Khan, founder of Khan Academy, discusses Khanmigo – an AI-powered tutor developed to enhance education. Khanmigo provides personalized tutoring to students and helps teachers with tasks like lesson planning and grading.
One former English teacher talked about how she previously taught 100 students. When she needed to review first drafts of an essay, she would spend only about 10 minutes per student. But that limited amount of time per essay still meant that she was spending about 16 hours just to review first drafts. AI-powered tools like Khanmigo already have shown the capacity to review papers and provide thoughtful feedback in a matter of seconds. The potential efficiency for teachers is game changing.
As I read, listen and watch pieces like this about the impact of AI, I can’t help but think about how best to invest in it. While it is becoming more apparent that AI has the potential to make significant changes to the world of work, it’s difficult to know which companies will be the biggest beneficiaries.
In my lifetime, there have been several similar technological advancements that have radically changed how we operate — computers, the internet and cellphones. Each of these new technologies ended up bringing huge amounts of growth to the companies that capitalized on them. But with perfect hindsight, it’s clear that picking the right companies to capture these trends was incredibly difficult.
In the late 1990s, Global Crossing was widely regarded as a premier investment opportunity, building and operating a global fiber-optic telecommunications network built to provide high-capacity internet and data services worldwide. By 1999, Global Crossing’s stock had soared and the company was valued at $47 billion.
Global Crossing then collapsed spectacularly. The dot-com bubble burst, demand for bandwidth shrank, and Global Crossing could not generate enough revenue to cover its massive costs. By January 2002, the company filed for bankruptcy.
Meanwhile, Amazon was an upstart online retailer that specialized in books. Many investors in the 1990s viewed Amazon as overvalued. Amazon did not show a profit until the 4th quarter of 2001, nearly five years after becoming a publicly traded company.
In the late 1990s, many investors would have chosen Global Crossing over Amazon — and with good reason at the time. Moreover, even if you did buy Amazon stock in January 1999, a $1,000 investment would have collapsed to just $113 by late 2001. It was impossible to foresee that same $1,000 investment would eventually be worth over $78,000 today.
Cellphones are another great example. If you were an investor interested in cellphone technology in 1999, you likely found your way to Nokia or Motorola, two of the largest companies in the world. It looked obvious that these companies were going to benefit massively from the rapid proliferation of cellphones. Turn the page to the early 21st century, and you might have jumped on the Blackberry bandwagon. Any of these investment ideas looked foolproof at the time.
But the company that ultimately capitalized on cellphones didn’t develop its first model until 2007 — nearly a decade after the craze began. If you bought Apple computer in the late 1990s, you had no idea that iPhones were going to be the impetus to propel Apple to one of the largest companies in the world. In 1999, Apple showed revenue of just over $6 billion. By 2024, that revenue was $391 billion.
These stories are meant to point out that even if we know a new technology is likely to impact the world, it can be very difficult to identify companies in which to invest. In early June, Nvidia took over as the largest company in the world once again. As the biggest chipmaker for AI-related technology, it looks obvious that Nvidia will continue to be a huge beneficiary of the trend. That may or may not be true. There may be upstarts that aren’t even on our radars as investors that take over in the next decade. AI is evolving rapidly, but also faces regulatory, ethical, and competitive risks that we cannot predict.
What are we to do as investors to capitalize on this trend? If you want to find the next Amazon, Apple or Nvidia, it’s going to be very difficult. One might argue that you really need to get lucky to pick the right stock. I study markets religiously, and I couldn’t guess who the next big winner will be.
The only way to make sure you capture the next big winner is by owning a broadly diversified portfolio of stocks — ideally the entire market. Apple IPO’d in 1980 and was a part of the S&P 500 by 1982. A simple investment in an S&P 500 index fund would have provided exposure to Apple from those early days. Granted, it was a very small slice of the overall investment, but it gave you ownership of Apple that paid off bigtime. A $1,000 investment in the S&P 500 in 1982 would be worth more than $48,000 today with dividends reinvested, thanks in large part to that little slice of Apple.
Could you try to target the next Apple by picking individual stocks? You can try, and maybe you’ll hit the lottery. I’ll admit, I try it with a little bit of money too. Your investment style is going to be unique to your personality and tolerance for risk.
But a simpler way to capture all the opportunities is to own a little bit of everything. Even if you don’t hit the lottery, broad diversification has consistently proven to be one of the most effective ways to build wealth over time.
