Artificial Intelligence and Investment: What Should Small Investors Do Right Now?

According to a report by The Economic Times, Microsoft has offered a voluntary exit to its 60,000 employees, which is approximately a quarter of its total workforce. This does not mean that the company is laying off a fourth of its employees. Earlier this year when the company made a similar offer to 9,000 employees, about 30 percent of the employees accepted it. Interestingly, these offers are coming in the same year when the company is spending approximately 175 billion dollars, or ₹15 lakh crore, to build artificial intelligence (AI) capabilities.

Discussions on social media regarding this business show two contradictory opinions. One section believes that AI is performing so effectively in large companies that they now need far fewer people and in the near future there will be almost no need for employees. While the second section believes that the massive investment breaking the bank happening in AI is ruining the financial position of these companies and these investments are so far from yielding returns that companies are heading towards destruction.

To understand this situation, an event from about 30 years ago comes to mind. In the late 1990s, when it became clear that the internet would become a major global trend, some companies decided that in the future a massive global network of fiber-optic cables would be needed. These companies borrowed heavily to lay this fiber across oceans and continents. The leading company of that era was Global Crossing, founded in 1997. Global Crossing spent over 10 billion dollars to lay fiber worldwide and at the peak of the dot-com boom in the early 2000s, its valuation reached approximately 50 billion dollars.

During that period, bandwidth was called the 'new oil' and everyone was certain that its demand would be unlimited and whoever owned the data pipes would rule the future. But as time went on, while the demand was unlimited, the timing was wrong. Data traffic arrived years after the loans matured, so in early 2002, just two years after its peak price, Global Crossing filed for one of the largest bankruptcies in history. A large and proper portion of the fiber-optic cables it laid remained unused for years.

However, others bought that fiber at cheap prices after filing for bankruptcy and it is still in use today. The foundation of the modern internet was built, the people who made it went bankrupt, but those assets eventually did their job. Something similar happened earlier in the 1840 British railway mania, where investors were ruined, but they funded the first generation of railway lines that propelled that economy for decades.

While these stories sound good, they do not help people trying to invest today. The massive money being poured into AI data centers and other assets will eventually become useful and indispensable, but that does not mean the benefit will go only to those spending with borrowed money today. So what should a small investor do about this future revolution?

The simple answer to this question is, do nothing right now. You, I, or perhaps anyone in the world cannot say with certainty whether AI is a boon, a disaster, or a bubble. It is probably all of these, but saying when or in what sequence it will happen is impossible. The temptation to invest by watching the news is always there, but from an investment perspective, our job is to ignore the machine generating this chatter.

As always, a boring and simple policy will protect us. We should own businesses (through equity or equity funds) that we can hold onto amidst years of noise or sell if the need arises. Instead of trying to predict the future, we should let our savings rate and patience work. We should have faith in broad, low-cost investments because they have always worked. Use AI to become a better investor, not as something to invest behind.