Artificial Intelligence: 2nd Quarter 2023 Commentary

Artificial Intelligence

My grandfather, John Frank Bragg, Sr., cried the day my father, Frank Jr., was born. As the story goes, when my grandmother asked him why he was crying, Grandad said he worried he wouldn’t live long enough to see his young son grow up. Having married later in life (for those times), he was already 40 years old at the time of my father’s birth. Grandad was born in 1898, when lifespans were shorter; fifty years of smoking and a daily diet that included eggs, bacon and biscuits didn’t exactly stack the deck in his favor either. But against these odds, Grandad lived another 61 years, enjoying his children, grandchildren, and even some great-grandchildren before finally passing on in the year 2000 at age 101.

Grandad was a walking history book and fortunately for my cousins and me, he had a great memory and was a wonderful storyteller. I recall many a Thanksgiving afternoon with Grandad. Over-served with turkey, dressing, cranberry sauce (I just love homemade cranberry sauce) and my grandmother’s scrumptious homemade rolls, my cousins, siblings and I would lie semi-conscious in food comas on the den floor of my grandparents’ home in Oxford, North Carolina, as Grandad told us stories about working the tobacco fields of Granville County, riding his favorite horse to court girls in the nearby towns of Creedmoor, Dabney, Stovall and Stem, or sweating through an endless sermon in the Tally Ho Missionary Baptist Church on Sunday mornings in the summertime.

As my father described in an article he wrote 23 years ago, Daddy Missed the Tech Boom, my grandfather witnessed a lot of change during his lifetime, including the arrival of the automobile, electricity, the radio, television, telephone, airplanes (although he never flew), air conditioning, the computer, and the internet. That’s a lot of change and progress for one lifetime, isn’t it? Of the technological milestones that occurred during his lifetime, Grandad insisted that the best invention was central heat! Raised on a farm, he was the oldest of eight children (Frank, Leo, Blanche, Cleveland, Musette, Ewell, Fannie and Bernard) and despised chopping wood, building fires, and shivering through cold winter nights.

When Grandad reached the age of 100, our extended family had a big birthday party for him. His health had begun to decline and we decided a reunion of sorts was in order. After enjoying homemade pound cake (my grandmother’s recipe) and homemade peach ice cream, my cousins, parents, aunts and uncles all gathered around Grandad to hear the old stories we’d heard so many times. He always launched a story by pointing to one of his grandchildren and saying, “When I was about your age…” But on this day, one of my cousins asked Grandad an interesting question: “Grandad, if you could turn back the clock, how old would you want to be?” As he pondered the question, I tried to guess what age he might choose; maybe 18, 25, or 30? Relive his youth? Finally, Grandad answered, “I’d go back to age 90. My health was better then. That was a good age.” Not 25, not 30, but age 90! We laughed and laughed.

My cousin then asked a follow-up question. “Grandad, if you could turn back the clock, what is one thing you would do differently in life.” This time, with little hesitation, he answered, “I would love more people. Yep, I would love more people.” My cousins and I didn’t laugh this time. My grandfather—a tough, conservative, competitive, straight shooter who left school after the eighth grade to go to work and who believed in and regularly extolled the virtues of honesty, hard work, and accountability—had just reminded us in a few simple words that our relationships with family and friends are our greatest treasure.

J. Frank Bragg, Sr.

I wonder what my grandfather would think about artificial intelligence. What do you think about artificial intelligence? What should we think about it?

An April 2023 paper by consulting firm McKinsey defines artificial intelligence, or AI, as a machine’s ability to perform the cognitive functions we associate with human minds, such as perceiving, reasoning, learning, interacting with an environment, and even exercising creativity. Perhaps you’ve read about AI and large language models; maybe you have tried out ChatGPT, Google Bard, or Microsoft’s new Bing, all examples of large language models, each embodying, deploying, and sharing with users more knowledge than any human has ever possessed. If so, you know that these software tools are in essence a vast extension of auto-correct or auto-fill.

ChatGPT, responding to a user’s query or prompt, can rely on its extensive “training” in predictive language techniques and its access to tremendously vast data sets to knowledgeably “discuss” in a conversational way almost any imaginable topic. It will engage in back and forth “conversation” about the four corners offense used by UNC Tarheels men’s basketball coach Dean Smith to slow (stall) the pace of the game and (annoyingly) protect a small lead; it will carefully describe seasonal temperature variations and the resulting impact on winged insect populations in the Amazon rain forest; it will compare, contrast and rank the contributions of Socrates, Plato and Aristotle to Western civilization; it will offer travel suggestions and trip planning ideas for your upcoming jaunt to the Galápagos Islands; it will quickly scratch out a ten-verse poem (that rhymes!) about your first time playing pickleball; it will draw a picture of your dog scaling the Empire State Building; it will create a fake but authentic-looking photograph of Pope Francis wearing a stylish white puffer jacket and it will write a song about the weeds growing in your flower bed.

I asked ChatGPT to write a poem about the delicious peanuts taken home by clients of Bragg Financial after meetings at the Bragg office. In no more than three seconds, it produced the following:

When clients visit Bragg Financial’s abode,
A treat awaits, a culinary ode.
Jars of roasted salted peanuts, a delight,
To savor and enjoy, with all their might.
Cracking shells, revealing treasures within,
The aroma dances, a tempting spin.
Each nut, a burst of savory delight,
A humble gesture, bringing pure delight.
As they crunch and munch, discussions unfold,
Financial goals and dreams, boldly told.
The peanuts serve as a symbol, you see,
Of nourishing growth and prosperity.
With every visit, Bragg Financial’s aim,
To leave a lasting memory, like this nutty acclaim.
For in these humble jars, a bond is formed,
A gesture of appreciation, warmly performed.
So when clients leave, peanuts in hand,
They depart with gratitude, feeling grand.
Bragg Financial, peanuts, and clients unite,
Creating memories, oh, what a delight!
—By ChatGPT

Granted, the software, at this stage, is no William Wordsworth, Maya Angelou or Lord Byron. But that poem got your attention, didn’t it? Three seconds! This technology is here now; future versions will be even better at seeming super-human. For an example of how quickly improvements are happening, GPT3, released last November, wasn’t able to pass the bar exam (required for lawyers to practice law). GPT4, released several months later, passed the exam in the 90th percentile.

Interesting? Exciting? Scary? Yes! Imagine the uses. Experts say it will speed up medical innovation and scientific discovery, and will help solve intractable problems related to disease, climate, education, safety, and the scarcity of natural resources. It can write software code, create documents, write emails and draft contracts. Today, it helped me write this commentary. That poem, while winning no awards, would have taken me hours to write! Experts also worry about the downside risks. With access to the world’s information, what damage can it do in the wrong hands? With the ability to autonomously learn and improve, who controls it? Many questions remain unanswered. Obviously, this technology will eliminate a lot of jobs. Likewise, it will create a lot of jobs. We’ll all be reading about it in the coming months and years. Like the computer, the internet, and the long list of technological advancements my grandfather witnessed, this technology will change our lives.

Will AI be a good investment? Yes. As Matt DeVries describes in his Market & Economy commentary, the vast majority of the gain in the market indices this year can be attributed to those companies with significant investments in AI, including Microsoft, Alphabet (Google parent), Nvidia and Meta (Facebook parent). But a word of caution is warranted. There, of course, will be direct winners like those mentioned above. But this technology is more like the internet; it will serve every company, every government, every organization and every individual. Just as it made my poetic efforts a breeze today, it will impact (good and bad) everyone and everything. Those who chased “dotcom” companies in the late nineties lost a lot of money before realizing what the internet really meant. Likewise, it will be important for investors of today to avoid chasing those hot AI ETFs that Wall Street is frantically assembling for you to purchase.

I’ll add one other note (and a chart) about resisting the temptation to chase what has been hot lately. The chart below of historical P/E ratios illustrates how investors sometimes grow overly optimistic about certain companies or sectors. It shows a 26-year history of the average P/E ratio of the ten largest (by market capitalization) stocks in the S&P 500 as well as the average P/E ratio of the remaining stocks in the index. As in the late-nineties tech boom, today, the ten largest companies in the index are predominantly mega-cap technology companies. While valuations for the market as a whole are slightly above the 26-year average, the valuations for the top ten companies are quite lofty. Bragg portfolios have positions in many of these large companies. As always, we are maintaining a disciplined approach as we rebalance the portfolio.

At age 100, my grandfather said if he could go back in time, he would love more people. Now we’re learning about a technology that promises to be better than people. Something tells me my grandfather would be skeptical. I’m skeptical too. But at the same time, I’m excited to learn more and I’m optimistic about these remarkable times in which we live. We can enjoy our electricity, our airplanes, the internet, artificial intelligence and even central heat! But even as we ride the technological wave, we will cherish our relationships. That includes our relationship with you. Thank you for trusting Bragg.

This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.