To conclude the Systems Thinking series, I wanted to draw attention to another book I finished reading titled A Random Walk Down Wall Street by Burton Malkiel. In it, Malkiel suggests that stocks are unpredictable in the short term and that passive investing, i.e., index funds, provide more stability in their holdings by diversifying risk across many different sectors. If, as Burton suggests, the market efficiently accounts for all known information available in stock prices, then attempting to pick stocks or “beat the market” is a futile effort for most investors as the market has already accounted for all knowable knowledge (this being especially true in our digitally connected world). Several historical examples are provided in his book that illustrate how financial bubbles, largely driven by speculation rather than value, caused great angst in society as reality caused many “castles in the sky” to come crashing down to earth (Tulip Mania, South Sea Company, Dot-Com, etc.). “How could we have been so foolish,” cried many an investor? “It seemed like a can’t miss investment,” exclaimed another! Well, as with many shiny objects and bright lights, the euphoria fades once the curtain is drawn back and we see a company’s fakeness for all it’s worth. Bernie Madoff, a classic example discussed by Malkiel, convinced investors that his returns held steady during turbulent times, even when the market was turning downwards (cue the 2008 financial crisis and we all saw his scheme for what it was).
My purpose in writing this article is due to the vast amount of attention that AI is garnering in many sectors as a transformative technology, but also in the financial markets as analysts and gurus attempt to monetize its present and future value. Generative AI is capturing our attention as more businesses are advertising its capabilities and as technology companies promote its benefits in the form of free services for consumers. We recently saw another massive investment in the US ($500 billion to be exact) as Apple seeks to “produce servers to power Apple Intelligence, its suite of AI features” (AP News). Similarly, Taiwan Semiconductor Manufacturing Company (TSMC) announced “it will build three new chip fabrication plants, two advanced packaging facilities, and a research and development center at its complex in Arizona, growing the company’s total investment at the site to $165 billion” (Investopedia). It seems that everywhere we look, news of AI is being reported as companies position themselves for what seems to be an AI race between nations. The US was thought to have a clear advantage with this technology, only to be surprised by China’s DeepSeek V3 and R1 models (see Systems Thinking, pt. II for my thoughts on it). In short, AI has shifted from a purely business opportunity to a geopolitical priority, with governments aggressively securing their national interests. And, as history has taught us, various companies looking to take advantage of the AI train will undoubtedly begin to market their goods and services as “AI powered” or some similar variant. In this scenario, there will undoubtedly be losers whose business will fail. As described in Malkiel’s book, stay diversified, avoid speculation, and think long-term. AI will surely be a rising tide that lifts all boats. So, rather than picking the single best option, invest in broad index funds to ensure you rise with the tide. In doing so, you limit your risk of choosing incorrectly while maintaining your peace of mind.
Lastly, harkening back to Kahneman’s thoughts pertaining to System 1 and 2, if ever there were a time to invoke our System 2 process, that time is now. As nations, businesses, and consumers try to get a leg up on their deemed competition, bubbles will form as companies with no background in technology begin advertising how they are “harnessing AI” to its full potential… Just play it smart, don’t give in to FOMO, and continue investing a set dollar amount (bi-monthly or monthly preferably) into your broad market index fund and watch as your investment grows via compound interest.
AI is a technology that will surely change how we do business. However, along its path to embed itself within our markets, bubbles will form and pop.