Follow the rules to survive the AI revolution unscathed

Investors are scrolling through the AI cycle faster than a teen on TikTok. In a matter of months, we have gone from new-paradigm euphoria, via blink-and-you-missed-it bubble, to a desperate scramble to sort the disrupters from the disrupted. It’s exhausting.

What is clear is that investors are not anxious about artificial intelligence itself. As we all start to use the technology, the only difference is where we fall on the ‘wow, that’s unbelievable’ to ‘hell, that’s scary’ spectrum. There is really no-one out there who doubts that this changes everything.

What is unsettling is how fast, unpredictable and disruptive AI is turning out to be. The impact on markets, profits, economic structures, what it even means to be a human, is unknowable and discombobulating.

Anxiety is a rational response to what we are living through. But feeling out of our depth is no excuse for inaction. So, how might we navigate this roller coaster?

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Before we get there, though, let’s think about why this revolution is shaking us up more than its predecessors. First, it is the pace of change. Railways and electricity took decades to transform the world. The internet was years in the making. It is literally only a few months since most of us said AI for the first time, let alone used it. AI tools reached hundreds of millions of users in no time flat.

Second, it is the fact that AI is both creator and destroyer. It drives efficiency, growth and innovation. But it will get there by rendering obsolete many of the things we understand and value. If you are educated, privileged and still working, it might be the first time you have felt this way.

From an investment perspective, this means we are dealing with fear of missing out and fear of loss at the same time. We are stuck between chasing gain and avoiding pain.

While there are similarities to past disruptive phases, this one is happening at warp speed. And that massively increases the chance that we call it wrong. Like the invention of the car, it is already clear that it will lead to a huge and painful shake-out of early adopters. Only a handful of auto makers survived the first few decades of the last century. Relatively few of the AI runners and riders can expect to make it through the next few years.

So, how can we survive this unscathed? Let’s look at how investors navigated earlier disruptive transformations. Some, quite reasonably, left well alone. They just accepted that they didn’t understand the new technology and they allowed others to ride the tiger. The ones who could not stand on the sidelines, however, were wise to follow some rules.

First, they kept it real. They invested in the no-brainers, not the hype. In the railway boom that meant steel makers and finance houses. In the dot.com years, it meant networks, infrastructure and the cloud. Today it probably means chip makers, data centres and power generation.

Second, they focused on cashflow. Anyone can tell a good story. But you have to be solvent to keep your creditors at bay. The survivors 25 years ago had real business models, discipline and a durable advantage. They were protected by wide moats.

Third, successful investors did not rush. We don’t have to be as patient as Warren Buffett who waited until 2016 to invest in Apple. But holding off until after the dot.com bust would have served us well. Waiting for the shake-out, when valuations are more rational and competition has thinned out requires us to tame our FOMO. But the winners will still be there in a few years’ time when the hype has blown over.

Fourth, they thought long and hard about second order effects. The big winners from electricity were the manufacturers of household appliances; the beneficiaries of the motor car were the builders of roads and suburban housing; the internet enabled digital advertising; not until the smartphone could make apps become central to our lives.

Disruption rewards selectivity, patience, and emotional stability. It punishes extrapolation, credulity, and leverage.

In an idle moment this week, I compared today’s FTSE 100 with the initial list of index constituents in 1984 when the UK benchmark was created. There are thirty companies that have stayed the course. They are the companies that dominated corporate Britain in the years running up to the invention of the internet, survived the boom and bust it engendered, and have carried on growing in the 25 years since.

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It is instructive to look at what made it through. They are not the stuff of revolution. There are seven companies that one way or another look after our money: Barclays, HSBC (Midland Bank), Legal & General, Lloyds, NatWest, Prudential, Standard Chartered. Others keep us fed, watered, sheltered and otherwise satisfied: AB Foods, Diageo, BAT, Sainsbury’s, M&S, Tesco, Unilever, Whitbread, Imperial Brands, Barratt, Land Securities, Rio Tinto.

Another group keeps us clean and healthy: Smith & Nephew, AstraZeneca, GSK, Reckitt Benckiser. The rest keep us moving: BP, Shell; communicating: BT; informed: Pearson, RELX; and safe: Rolls Royce, BAE Systems.

I created an index of these thirty companies and compared its performance over the past 42 years with that of the FTSE 100 as a whole. £100 invested in the benchmark at its inception is worth a little over £1,000 today. The same amount invested in the survivors is worth £1,600. With the exception of BT, none of the above were obvious internet plays. But they have all prospered because of it.

So maybe the best way to think about navigating the AI revolution is to bide your time, wait for the first boom and bust to run its course and then seek out the survivors. The companies that will still be here in 40 years’ time will be a lot clearer then. Not very TikTok, I know, but a lot less exhausting.

This article was originally published in The Telegraph.

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