The media continues to be filled with forecasts about the investment – and societal – implications of AI. Some of these forecasts are moving markets. On Monday the S&P 500 and Nasdaq sold off over 1% which was at least partially attributed to a dystopian vision of the future by Citrini Research.
The report outlined a scenario where heavy white-collar layoffs and a decimated software industry cause a cascading financial contagion hitting credit card companies and private credit lenders. Software, credit card and private credit shares got hit in the sell-off. There is clearly widespread AI anxiety.
Forecasts are notoriously inaccurate and even the most dramatic are quickly forgotten. Chances are the same will happen with this report by Citrini Research.
Most predictions don’t lead to bold actions – perhaps a subtle tilt of a portfolio in this way or that.
But not every prediction is forgotten and not everybody avoids bold moves...
The poster child for a bad prediction and terrible outcome
Irving Fisher was a professor of political economy at Yale University and at the forefront of his profession. Given his notoriety Fisher led a busy life, and October 1929 was no different.
In a speech on 15 October Fisher proclaimed, “Stock prices have reached what looks like a permanently high plateau… I expect to see the stock market a good deal higher than it is today within a few months.”
In response to some market jitters Fisher declared on 21 October that the market was "only shaking out the lunatic fringe."
According to the NY Times in a speech to a group of bankers on 23 October, Fisher told the audience that prices remained low and hadn’t caught up yet with real values.
Black Mondy occurred on 28 October with the Dow dropping 13%. The next day the market dropped another 12%. Fisher remained upbeat and rushed to write a book.
The Stock Market Crash — And After was published in February of 1930. Fisher doubled down on his optimistic view of the market. By 1932 the market was 89% below the peak.
Fisher has become infamous based on the inaccuracy of his prediction. But you can’t accuse him of not backing his own call. Fisher invested most of his portfolio in Remington Rand.
The company sold office equipment including a visible filing system that Fisher patented in 1913. He was so confident in the company – and presumably his visible filing system – he bought his shares with borrowed money.
Using margin lending wasn’t unusual at the time but it didn’t help Fisher’s situation. Ever the optimist he covered his margin call and bought more shares after the initial market drop. Remington’s shares fell from $59 in 1929 to $1 in 1933. Fisher had to sell his house and borrow $750,000 from his sister-in-law to cover his losses.
Lessons from Fisher
Investing is challenging because it requires a balance between optimism and skepticism. Fisher went all in on the optimism. But he forgot that investing is a probabilistic exercise. No single result is certain and there is always a range of potential outcomes.
All investors are using imperfect information to predict what will happen in the future. The market tends to forget that when overly confident about a particular result. The reaction to the report from Citrini Research shows the confidence in the AI trade is breaking and the market is jittery.
I can’t tell you what the future is going to look like. I don’t know how AI will ultimately impact humanity. But I can give you some advice I first offered after the tariff meltdown in April. If you are feeling anxious about what is next and tempted to act boldly it might be worth considering the work of a Harvard professor.
Proceeding with humility
Amy Edmonson is a professor of leadership management at Harvard Business School. She has created a spectrum of failure. On this spectrum is a classification of failure which Edmonson calls ‘task challenge.’ Task challenge refers to an activity which is too challenging for reliable, failure-free performance.
Think about American ice skater Ilia Malinin. With the nickname "quad god" he was a heavy favourite at the Olympics. He trained hard for a routine that was too challenging for any of his opponents to replicate.
The problem is that a challenging routine means mistakes happen. And that is what happened to the quad god who finished in 8thplace. Often the winner is not perfect - they’ve just made fewer mistakes.
Failures from task challenge go up when you forget about how difficult an activity is. Perhaps going all in for a gold medal was a good decision for Illia Malinin. It is rarely a good decision for investors.
Investing is hard and you will make mistakes. That is ok. The goal is to minimise mistakes because that is how you win.
The chances of task challenge failures in investing go up when emotions are at play. Especially after a long bull market when complacency sets in. For many investors now is one of those times.
Approach the market with the humility it deserves. However you are feeling, consider the impact of being wrong. Something that Irving Fisher never did.
Mark Lamonica
Also in this week's edition...
I find many of the housing ‘affordability’ measures coming out of Canberra bewildering. But I think the 5% deposit scheme is not just counterproductive but actively making things worse. Read my thoughts on why the 5% deposit scheme is bad for homeowners and Australia.
Turning against the AI giants last year got GQG a good deal of press attention. There are now signs that their thesis is playing out. Read about why they think defensive shares are an underappreciated opportunity.
The RBA has faced criticism from all quarters. Ashley Owen reminds readers of the RBA mandate and drills into the central bank’s track record.
Yield hungry fixed interest investors are taking on increasing leverage to maintain returns according to Phil Strano at Yarra Capital Management. This can be a double edged sword as both positive and negative performance is amplified.
David Williams argues that a national longevity strategy is well past due and outlines how greater awareness can benefit individuals and the country.
According to Brendan Ryan savvy buyers are taking advantage of more than 50 government schemes to help Australians with housing affordability. He outlines an approach for potential homebuyers.
Steve Bennett and Sasanka Liyanage from Charter Hall explore the recovery in Australian commercial real estate. Improving fundamentals have thus far been underappreciated by the market.
Curated by Mark LaMonica and Leisa Bell
Latest updates
PDF version of Firstlinks Newsletter
Investment Update with John Pearce, UniSuper
Australian ETF Review from Bell Potter
Listed Investment Company (LIC) Indicative NTA Report from Bell Potter
LIC Monthly Report from Morningstar
Plus updates and announcements on the Sponsor Noticeboard on our website