How to Invest for the AI Trend.
You've no doubt caught wind of the Nvidia saga, where the worlds largest company took a significant hit, dropping 17% in a day and losing $589 billion in market value. This wasn't due to Nvidia's performance but rather the stunning rise of an AI upstart named DeepSeek, which developed a model that outperformed industry leaders like ChatGPT and Claude, but at a much lower cost, which has led to concerns that Nvidia’s processing chips will not be in as much demand as expected.
The DeepSeek Surprise:
DeepSeek's story is one of those rare, captivating tales in tech where a newcomer seemingly comes out of nowhere to challenge the titans. They've not only disrupted Nvidia but also overtaken established AI models in performance metrics, showing the world that in AI, the next big thing could be just around the corner, and the use of AI could disrupt the other Mega Cap tech companies that have looked invincible for decades.
The Common Query: Profiting from AI
Many of you have asked, "How do we profit from the AI boom?" Here's where the analogy of betting on a horse race comes into play. Investing directly in AI companies is speculative at best. History is littered with examples from the train era of the 1800s, the chaotic birth of the automotive industry in the early 1900s, and even the dot-com bubble where most direct investments in tech innovations led to losses and often complete wipeouts. It can be easy to pick the right theme but very difficult to pick the right companies.
A Strategy for All Seasons: Dimensional Investing
Instead of picking individual AI winners, we prefer the Dimensional fund approach to be sure to capture the benefits of AI:
Indirect AI Gains: Dimensional funds invest in a broad spectrum of companies, almost all of which will naturally harness AI to streamline operations, reduce expenses, and increase profits. This strategy ensures you're part of the AI wave without the risk of picking the wrong horse. This is enough!
Resilience Against Overvaluation: Dimensional provides a margin of safety by focusing on fundamental factors like cheapness and profitability. This approach contrasts sharply with basic trackers that allocate based solely on market capitalisation, leading to an ironically concentrated portfolio where the top 10 companies make up approximately 40% of the index, while the other 490 companies account for 60% of the S&P 500. Dimensional's method avoids this concentration risk, offering a more balanced exposure to market growth, based on fundamentals.
In essence, the Nvidia and DeepSeek stories are fresh reminders of how quickly the landscape can change in tech. The takeaway is not to shun innovation but to approach it with a strategy that captures the benefits of AI across industries, rather than in a single, speculative stock. We want to avoid “horse race” bets, and use smart tracker funds that will not becoming excessively concentrated and avoid you from being exposed to an "expensive market" when there is actually plenty of value outside of the top 10 US megacap companies. A fund allocation strategy based on fundamental analysis ensures both resilience and the potential for reward in a market where the largest companies are expensive and facing increased competitive pressures.
