In his latest memo to clients, the co-founder and co-chairman of Oaktree Capital Management said that he receives a lot of questions on whether AI puts his job at risk. He highlighted that Anthropic’s coding-model business has been growing at warp speed for a year or two. “So why didn’t investors recognize and price in AI’s potential to impact the software industry prior to February 3, a day when many software stocks declined 7% or so, kicking off a serious rout?” he asked.
This question highlights the recurring failure by humans to incorporate new information into their thinking, Marks said, stating that the plausible reasons can be “cognitive dissonance, anchoring bias, or downright IQ limitations”.
Why and why not AI can be a good investor
Listing qualities that he believes AI needs to be a good investor, the billionaire said that AI can absorb more data than any investor, remember it better, and do a better job at recognizing the past patterns that preceded success. The new technology doesn’t feel fear or greed, and is hopefully less likely to have an optimistic or pessimistic bias, anchor to preexisting beliefs, or overemphasize the most recent information, unless it picks up those things from the material it has been trained on, he added. “It isn’t swayed by the fads that are exciting everyone else, and it isn’t afraid of missing out on the trend others are chasing.”
But Marks is not fully convinced, as he believes that AI does miss a few things. He asked AI chatbot Claude about this, and it replied that the nascent technology is indeed weakest in dealing with novel developments where there is not enough prior experience for dependable patterns to have been compiled. Humans also sometimes have to make subjective decisions regarding qualitative factors and exercise taste and discernment.
Additionally, AI has “hallucinations” that make it believe that it knows all the answers. Marks noted that although AI reliability has improved significantly, its work is still not free of mistakes.
AI doesn’t have ‘skin in the game’
Another important factor that Marks pointed out was that artificial intelligence doesn’t have “skin in the game”. “It doesn’t feel the weight of concentrated positions or the fear of capital loss. Its willingness to take risk might not be constrained by humans’ normal risk aversion,” he said, adding that the best investors sense potential risk intuitively, and this contributes greatly to their success.
AI’s quantitative information about the present is not the key as investment superiority has to be found in practices like correctly judging the source and the impact of that information, assessing qualitative factors like management effectiveness and more, according to Marks.
“By definition, few people are highly superior at performing these non-quantitative tasks – put simply, few possess exceptional insight,” the billionaire investor said. He explained that just like indexation eliminated the job of several active investors, AI is likely to raise the bar higher and push people out of the game who do not exercise the above practices.
The billionaire believes there will continue to be human investors who are superior to AI, as he doesn’t think that AI will be able to do an unbeatable job.
To invest or not to invest in AI?
However, Marks noted that AI is very real and capable of doing a lot of work, and not simply a bubble ready to be popped. He remains inconclusive regarding whether investing in AI will be profitable.
Marks noted that what we see today in terms of rapidly advancing AI technology is only the beginning. “I would say its potential is more likely underestimated today rather than overestimated. However, that’s not the same as saying AI investments are on the bargain counter or even fairly priced,” he said in his latest memo to Oaktree clients.
However, the markets expert said that no one can definitely say whether this is a bubble. That is why, he would advise people not to go all-in without acknowledging that they face the risk of ruin if things go badly.
But this doesn’t mean that one should stay all-out and risk missing out on one of the great technological steps forward, according to Marks. “A moderate position, applied with selectivity and prudence, seems like the best approach,” he said.
Marks explained that his interaction with the Claude chatbot showed how quickly AI is advancing. He said the chatbot’s response read like a personal note from a friend or a colleague. It argued logically, anticipated points I might make in response, injected humour, and bolstered its credibility by candidly acknowledging AI’s limitations, just as I might do. I’ve asked AI questions before and gotten answers back, but I’ve never received a personalised explanation like I did in this case,” he said.
This comes amid worries about disruption in the tech sector, which has been pushing global tech stocks down. Back home, IT stocks have plunged up to 20% on Dalal Street this month.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)