Artificial intelligence is a hot trend. But investing in AI isn’t as easy as you might think.

It’s the golden age of investing in artificial intelligence, says Eric Schmidt, former head of Google, now known as


Alphabet
.

UBS sees AI as a major investment theme for the coming decade. So where are all the attractively priced stocks? Don’t suggest using AI to search for them – I spoke with a guy who does exactly that, and the beginnings are slow.

Schmidt says the machines will cure our illnesses and enrich our lives, and they probably won’t wipe us out like the Terminator. But they could trap us by annihilating each other; he recommends making some changes while we can.

There is a 3000 year old Chinese game called Go that is so complicated that it has more possible board configurations than there are atoms in the universe. When an Alphabet program called AlphaGo became the world’s best player in 2017, it benefited from seeing humans play. But he was quickly overtaken by a version called AlphaGo Zero, which had only learned the rules and taught itself creative and never-before-seen strategies. Gambling, as Alphabet (ticker: GOOGL) puts it, is “no longer constrained by the limits of human knowledge”.

AI allows machines to behave like humans. A subset called machine learning involves training muscular computers using labeled data, so they can then make educated guesses or inferences about the raw data, and improve as they go. A subset of this, called deep learning, uses artificial neural networks modeled on our brains to reduce the need for human intervention.

There have been two previous booms in AI research that have fizzled out, with each spike pretty much marked by a movie on a rogue computer. In 1968, it was HAL in 2001: A Space Odyssey, and in 1984 it was Skynet in Terminator. This time around, the technology has hit exhaust speed, for three reasons. First, the world is full of valuable data. By 2030, humanity will amass enough bits to fill 610 iPhones, each with 128 gigabytes of storage, for every person on earth. Second, advances in data center chips allow machines to sift through that information in search of information.

Third, businesses are already benefiting. AI powers Google search results, Alexa speech recognition and


You’re here
‘s

autonomous cars.


Netflix

uses it not only to recommend movies and shows, but also to adjust data speed on the fly, and guess which thumbnail image makes a user most likely to click on a title, and even decide on the most likely recipes to create new hits.

UBS expects AI revenues to grow 20% annually to $ 90 billion by 2025. The good news for S&P 500 investors is that they are already charged with key beneficiaries, including


Amazon.com

(AMZN),


Microsoft

(MSFT), Alphabet, and perhaps the clearest of all,


Nvidia

(NVDA), whose chips dominate in the training process for machine learning.

Schmidt, the former CEO of Google, says the big players have an advantage in their wealth of data, while the small ones will benefit from a free flow of capital to AI start-ups. “These waves are coming and everyone is boosted,” he says. “Not all win, but a few win enormously.”

But UBS says investors had better look past the biggest names in AI to avoid regulatory risks. Many small names are private, or spoken for, like


Xilinx
,

who is bought by


Advanced micro-systems

(AMD). A rising chip is


Marvell technology

(MRVL), valued at $ 69 billion. Bank of America recently called him the next $ 100 billion cloud leader. It is trading at over 43 times the expected free cash flow for next year. Marvell and larger


Broadcom

(AVGO) helps cloud giants create their own application-specific chips. There are exchange traded funds out there that sort of focus on AI. The


Global X Robotics & Artificial Intelligence

ETF (BOTZ) owns many manufacturers of industrial robots, such as Switzerland


ABB

(ABB) and Japan


Fanuc

(FANUY).

Schmidt says AI could be 10 to 15 years away from beating the stock market. Chris Natividad, Chief Investment Officer at EquBot, is trying it out today with the


AI-powered actions

ETF (AIEQ). It allows a machine to look among the standard financial measures,


Twitter

feeds, Reddit discussion boards and more and decides their own mix of clues to go for. The performance of the four-year fund has been unremarkable, but Natividad believes the machine is getting smarter and smarter.

There’s a lot of potential for AI chaos, says Schmidt, who has advised the Department of Defense on its use. The technology can monitor hypersonic missiles, which can arrive with little warning. “Imagine if he learns something wrong and he actually makes the wrong recommendation and starts a war,” Schmidt says. He called on China and Russia to renounce the use of self-launching nuclear weapons.

Tools for creating allegedly deep fakes, or videos that can make eminent people appear to be doing or saying anything, are open source or widely available. “The power of video is extraordinary,” says Schmidt. “If you make a fake video and tell people it’s fake, and then show it to them, they still believe it more or less. It is a human problem.

And of course, AI doesn’t need to kill or destabilize to make us miserable. Schmidt says that outrage is shared seven times more than reason. “Why are we surprised we’re all mad at social media? ” he says. He wrote a book with Henry Kissinger, the former secretary of state, and Daniel Huttenlocher, dean of MIT Schwarzman College of Computing. It is called The age of AI and our human future.

Schmidt compares AI to electricity and the telephone in its scope and capacity for both good and evil. AI will discover drugs that will save millions of lives, he says.

“People always say, ‘Oh, robots are going to take over the world,’” he says. “Not without our watching. And remember, we can always unplug them if we’re really worried.

Write to Jack Hough at [email protected] Follow him on twitter and subscribe to his Barron’s Streetwise podcast.



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