“A new technology bids to transform the human cognitive process…redefine human knowledge, accelerate changes in the fabric of our reality and reorganize society.” These are the words of Henry Kissinger on the age of artificial intelligence (AI) and the potential impact of ChatGPT — the AI chatbox that has taken the world by storm. Indeed, the evolution of AI is a reminder that change can come thick and fast.
Likewise, in investing, we are never immune to change. In recent times, we’ve seen the effects of rapid changes in inflation and interest rates on the financial markets. Respected investor Howard Marks suggests we are in the midst of a “sea change,” a departure from a low-interest rate environment that provided a tailwind for decades. In his view, higher interest rates and inflation are likely to remain the dominant considerations influencing investing for the years ahead.
These haven’t been easy times for investors. As the central banks continue their fight against inflation, much of the recent market movement was driven by uncertainty over the path forward for interest rates. To start the year, stronger economic news was perceived as bad news by the markets, creating worries that the central banks would continue raising rates. Now, new jitters have emerged as a result of the recent collapse of Silicon Valley Bank in the U.S. — a harsh reminder that the aggressive rate hikes by the central banks were likely to have consequences.
For now, we can expect continued volatility. While it may be hard to see beyond today, we will emerge on the other side of this difficult period. Every financial cycle differs from those that came before and each comes with its own challenges. Throughout time, the companies that have succeeded in meeting the challenge of change have been rewarded with higher stock prices. And, over time, in spite of the many changes, economies have continued to grow, demonstrating our collective ability to adapt and advance. This time is no different.
Moreover, the evolution of AI should remind us of the human pursuit to innovate, which has been a key driver of growth throughout time. Business cycles have operated under long waves of innovation, with new waves emerging as the markets are disrupted by new innovation. Earlier revolutions, such as those sparked by the development of railroads, electricity and the automobile ignited upwaves of economic growth that lasted for many decades. Consider the impact of the global petroleum industry or the assembly line introduced by Henry Ford — the latter changed global manufacturing processes forever.
Despite the many changes, some things remain the same. The principles of longer-term investing success haven’t changed: having a carefully constructed investment plan to guide us, with consideration of risk, value, quality, diversification, tax and personal objectives, and the patience to see through more challenging periods.
At the same time, investors should not overlook the value of thoughtful analysis and evaluation. These skills should be trusted to guide us through the longer term as we endure these periods of inevitable change. Sound portfolio management involves continuously assessing the changing landscape and the potential opportunities to come, all while balancing the risks involved. This is one of the roles we fulfill as advisors as we navigate the changing times.
