We initially had another topic in mind for this note but will save it for a future edition. As the saying goes: when life gives you lemons you make lemonade and sell it at a healthy gross margin (or something like that). Our most recent note discussed examples of why a security’s price can move without a corresponding change in company fundamentals. Last week we got a real-world display of one of those scenarios when a photo[1] of an explosion near the US Pentagon was widely circulated online. The photo appeared to show smoke in close proximity to the defense headquarters and was quickly posted, retweeted, and shared online, and was initially reported on by multiple news outlets as if it were an authentic photograph. Of course, after a brief investigation it was found that the photo was fabricated, and based on characteristics of the photo the most likely culprit was generative AI.
Despite the general and investing public quickly debunking the authenticity of the photo, the broader market traded sharply down for a period of twenty minutes with the S&P 500 losing over $100 billion of value from its constituents’ market capitalization. Eventually, the S&P 500 did recover back above its pre-photo value, but the volatility created by artificial intelligence provided a glimpse of how AI digests publicly available media and how quickly the programs can indiscriminately affect broad portions of the market.
At MIAM, we continue to see the benefits that AI can have on productivity within the companies we hold in client portfolios as well those we consider for future investment. At the same time, we are also mindful of the impact that unchecked automation can have on enterprise risk management and continue to learn more from management teams we speak to about the benefits and drawbacks of utilizing AI in operations. As we detailed in our last note, we welcome short-term price variability because it provides us with opportunities to transact in securities at attractive prices. Our team of six research analysts continues to make investment decisions driven by our individual, human interpretation of a security’s investment merits, a process that we believe produces attractive returns for clients. However, we enjoy the challenges and opportunities presented by new technology and look forward to monitoring how AI develops over time and how it might best be integrated into our research process.
As always, feel free to reach out to MIAM if you would like to learn more or discuss a particular company or idea in more detail.
Sincerely,
The MIAM Research Team
[1] https://www.bloomberg.com/news/articles/2023-05-22/fake-ai-photo-of-pentagon-blast-goes-viral-trips-stocks-briefly