Market Commentary Second Quarter 2023

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Does it seem as if the pace of technological change continues to gather speed? Technology entrepreneur, investor, and author Azeem Azhar, in The Exponential Age: How Accelerating Technology is Transforming Business, Politics, and Society, states that this era will bring many benefits. However, such rapid change also means that some “…corporations, employees, politics, and wider social norms … get left behind” because they fail to adapt.¹

I see evidence of this today as companies talk about artificial intelligence (AI) but do little to adapt to or leverage it. I’m reminded of the Blockbuster Video chain, which ignored threats to its model of renting video cassettes or DVDs to customers and charging hefty late fees. Reportedly, Blockbuster’s over-confident executives came close to laughing when Netflix asked the company to consider investing $50 million in a partnership with Netflix.² If only Blockbuster had seized the opportunity! Instead, Blockbuster stuck to its model, while Netflix introduced video delivery by mail, followed by a video streaming service. Growing from one store in 1985 to a peak of 7,700 stores in 2000, Blockbuster filed for bankruptcy in 2010 and currently has only one store.³ Today Netflix is a globally dominant provider of video content with 232.5 million subscribers.⁴

Similarly, most people don’t see the impact that AI will have on financial markets. They are still focused on a slowing economy. Many companies and investors fail to recognize that we are on the threshold of a new age, what Klaus Schwab, founder and executive chairman of the World Economic Forum, called the Fourth Industrial Revolution.⁵

Overall, AI “… has the potential to transform entire industries,” as Goldman Sachs Asset Management Brook Dane has stated.⁶  “The proliferation of AI should enable industries to become much more efficient, allowing for businesses to further enhance their processes.”⁷

With the exponential advancement of AI, a key component of the Fourth Industrial Revolution, there will be fewer big winners, and those winners will be bigger. We see signs of this now with the dominance of Google in online search, Android and Apple iOS operating systems in smartphones, and Uber in ridesharing.⁸ Big companies will get bigger as they benefit from “…rapidly declining costs of exponential technology…” and “…a positive feedback loop that turns market leaders into a kind of perpetual motion machine.”⁹ This positive feedback loop is driven by the network effect, “…in which the addition of every new member of the network increases the value of the network for everyone.”¹⁰

The power of AI also makes it easier for companies to take advantage of the data that they glean from network members. For example, consider the case of an institution with vast quantities of data about patients who are taking drugs for a targeted disease plus drugs for other diseases. AI can search these troves of data to find patterns that indicate that some of the drugs used for the other diseases also help to treat the targeted disease. Thus, AI could identify new uses for existing drugs.

Applications using AI offer enhancements to human capabilities. In former Pentagon policy analyst Paul Scharre’s book, Four Battlegrounds: Power in the Age of Artificial Intelligence, I read that AI may improve the skills of the military’s fighter pilots because AI simulations can consider situations for which human pilots don’t train.

I was also intrigued by the documentary Artificial Gamer, which looks at the attempt by OpenAI to develop an AI bot that could win at a specific video game,¹¹ making moves that the human players had never seen before. For example, AI showed its strength by choosing short-term sacrifices that led to long-term gains. That strategy worked really well. However, OpenAI also noted that AI can make catastrophic mistakes—which is why it’s often best to give humans the final say over acting on AI’s recommendations.

The significance of human intervention is why it’s important to follow developments in the regulation of AI. When I watched last month’s Senate hearings with Sam Altman, the CEO of OpenAI, I was struck by the thoughtfulness of the conversations about regulating AI. That seems to bode well for regulations keeping up with AI and for regulations’ impact on competition and AI’s applications. However, regulation does introduce some uncertainty into the future of AI.

Speaking of human interventions, I’m looking at potentially integrating AI into the investment process at 7Summit. I think that AI may help us combat our biases as human beings. It could help to enhance our investment framework and identify ideas we haven’t previously considered.

Given my conviction in the value of AI, we’ve invested in companies that are positioned to benefit from its growing role. I’m also taking advantage of opportunities in 6G, the sixth-generation wireless technology that will increase connection speeds and make high-speed internet available even in rural and remote areas that have missed out on 5G’s advances.

It seems as if investors are currently too pessimistic, much as they were following the collapse of Long-Term Capital in 1998. In this environment, we’ve shifted 7Summit’s investment orientation over the past few quarters from value to growth. We see a significant opportunity for price appreciation in some of our investments.

In terms of bonds, we’re sticking with the municipal bonds that we bought earlier this year at depressed prices. We plan to continue to hold them and enjoy the income they produce.

As always, thank you for the trust you have placed in me and in 7Summit Advisors. We work hard to earn that trust each day.

Sincerely yours,

Li Chang