Mastering AI-Driven Investments for Novices
Mastering AI-Driven Investments for Novices
Currently, there's a lot of excitement surrounding artificial intelligence (AI) these days. Investors are actively purchasing AI stocks, and AI has become the newest buzzword in corporate America. You'll find mentions of AI on earnings calls, and analysts are frequently questioning CEOs about their use of new AI tools like ChatGPT.
If you're a starting investor who's interested in investing in AI but isn't sure where to begin, you're not alone. As with any emerging technology, there's a considerable amount of noise surrounding AI. It can be challenging to distinguish the crucial signals.
In this piece, we'll explore the concept of AI investing for beginners. We'll deliver a definition of artificial intelligence, discuss the four types of AI, introduce some AI investing opportunities, and assess the pros and cons of AI investing to help determine if it's the right move for you.
Four Types
Four prevalent types of AI
Artificial intelligence generally refers to computers and machines executing tasks, such as machine learning, that normally necessitate human intelligence or the computers' capacity to learn from patterns and draw conclusions by being educated with data.
Artificial Intelligence
Artificial intelligence involves employing machines to replicate human intelligence. Today's classification system categorizes four primary types of AI: reactive, limited memory, theory of mind, and self-aware.
1. Reactive AI
Reactive AI constitutes the most basic form of AI. As the name implies, it refers to an AI that offers a consistent response to the information it receives. Unlike other forms of AI, reactive AI can't learn from its previous actions. Representative examples include IBM's (IBM 1.23%) chess-playing supercomputer Deep Blue and spam filters that categorize emails.
2. Limited memory AI
Limited memory AI represents the next-most advanced form of AI. It can engage in learning from experience and combine it with pre-programmed information to accomplish complex tasks. It is the most popular form of AI currently in existence.
Autonomous vehicles use limited memory AI to interpret the actions of other vehicles and react accordingly. The information is not stored in the car's long-term memory as it isn't required.
3. Theory of mind AI
Theory of mind AI refers to an AI with advanced decision-making capabilities similar to humans. These AIs can comprehend and remember emotions, and subsequently adjust their behavior. Researchers are still developing theory of mind AI.
4. Self-aware AI
Self-aware AI constitutes the most sophisticated form of AI; it refers to machines that are aware of their emotions and those of the individuals around them.
This type of AI might still be in the distant future and is concerned by technologists and others who have stated that AI could pose a threat to humanity.
Investing in AI
AI is a disruptive technology expected to add trillions in economic value.
Diving into AI Investing
There are various ways to acquire exposure to AI stocks, but they generally fall into two categories. You can invest in AI exchange-traded funds (ETFs) or AI stocks. Let's investigate some options in both categories.
Global X Robotics & Artificial Intelligence ETF
It's hard to pick winners with an emerging technology.
The Global X Robotics & Artificial Intelligence ETF (BOTZ 1.92%) stands as the largest AI ETF currently available on the market, holding net assets of $2.7 billion. The ETF's size lends it more stability than smaller funds and lessens the risk of redemptions (i.e., when investors withdraw their money from an ETF).
Global X Robotics includes top holdings like Intuitive Surgical (ISRG 2.15%), the manufacturer of the Da Vinci surgical robot; Nvidia (NVDA 4.45%), the most prominent AI chipmaker; and ABB (ABBN.Y 0.18%), a Swiss manufacturer of automation and robotics, including electric vehicle charging infrastructure.
The fund boasts an expense ratio of 0.68%, placing it within reach of investors seeking effortless exposure to a diversified group of AI stocks.
ROBO Global Robotics and Automation Index ETF
The ROBO Global Robotics and Automation Index ETF (ROBO 1.64%) ranks as moderately smaller than the Global X Robotics ETF, with net assets of $1.08 billion. ROBO shares some holdings with Global X Robotics but offers a more varied portfolio, ensuring no single stock exceeds 2.5% of the fund while Global X's holdings peak at 10%.
Celestica (CLS 4.14%) – a manufacturer of complex electronic components for various industries – tops the ETF's list, followed by Symbiotic (SYM 3.76%), which specializes in warehouse automation systems and robotics. ROBO's third-largest holding is Ambarella (AMBA 4.64%), a semiconductor company known for its high-performance video technology and AI chips.
Most companies are trying to leverage the power of AI.
ROBO features an expense ratio of 0.95%, placing it slightly more expensive than Global X Robotics.
Nvidia
If you're considering investing in AI stocks, Nvidia is a worthwhile starting point. Nvidia is the leading AI chipmaker, having pioneered the graphics processing unit (GPU), which is widely utilized in applications such as gaming and cryptocurrency mining. Its GPUs are also suitable for handling AI algorithms like those required for autonomous vehicles.
The hype is palpable, and AI stocks could already be in a bubble.
Nvidia recently surpassed the $3 trillion market cap threshold after several quarters boasting impressive growth. The company continues to impress Wall Street with the level of demand it's experiencing for AI chips, including the new Blackwell platform, which CEO Jensen Huang characterized as "crazy."
Another AI stock that's garnered plenty of attention is Palantir (PLTR 6.25%).
Palantir began by providing in-depth data analytics to counterterrorism agencies in the federal government post-9/11. Its software, now famously known as data fusion, aids government agencies and businesses in connecting disparate data points to derive valuable insights.
Palantir leveraged the AI boom by introducing its AI platform in 2023, resulting in five consecutive quarters of revenue growth since then.
Moreover, the firm's profit margins have grown rapidly as it gained traction with businesses and demonstrated the demand for its AI applications.
Pros and cons of investing in AI
The winners from the AI revolution could see huge stock gains.
| Advantages | Disadvantages || --- | --- || AI is an anticipated disruptive technology, projected to contribute trillions in economic value. | It's challenging to identify winners with an emerging technology. || Most companies are trying to employ AI's power. | The buzz is intense, and AI stocks might already be in a bubble. || Potential winners from the AI era may experience significant stock growth. | There's apprehension around AI, particularly in relation to regulations. |
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Should AI investing be suitable for you?
AI investing might not be for everyone, and as a novice, investing only a small portion of your portfolio in AI stocks is advisable, given that this is a high-risk sector. Regardless, the upside potential could be substantial, making it worthwhile to have some investment in AI stocks.
Consider the aforementioned names and focus on stocks with lasting competitive advantages, both within artificial intelligence and beyond it.
Jeremy Bowman holds no stake in any of the mentioned stocks. Our Website holds positions in and recommends Abbott Labs, Intuitive Surgical, Nvidia, and Palantir Technologies. Our Website recommends International Business Machines. Our Website has a disclosure policy.
If you're interested in diversifying your investment portfolio and exploring the potential of artificial intelligence, you might consider investing in AI stocks or AI-focused exchange-traded funds (ETFs). For instance, the Global X Robotics & Artificial Intelligence ETF is a popular choice, offering exposure to a diversified group of AI stocks with a manageable expense ratio. However, it's important to note that AI is an emerging technology and comes with inherent risks and uncertainties, such as the potential for tightening regulations. Therefore, it's wise to allocate only a portion of your investment portfolio to AI stocks and carefully research potential investments.