AI investing: Dos and don’ts for small investors

Microsoft has offered voluntary exit packages to 60,000 employees, approximately one-quarter of their workforce. This isn't a dismissal of a quarter of their employees; when the company made similar offers earlier this year to 9,000 employees, around 30% accepted. This development comes in the same year that Microsoft is investing approximately $175 billion (or Rs.15 lakh crore) into building artificial intelligence (AI) infrastructure.

Social media commentary on this subject presents two contrasting views. One camp believes that AI is making a significant impact in big companies, particularly in the software industry, leading to a reduced need for human resources. The other perspective argues that the substantial investments in AI are financially detrimental to these companies and that the investments are far from being profitable, potentially leading to disaster.

Both of these viewpoints cannot be accurate simultaneously, and the strong inclination people have to side with one or the other suggests that no one truly knows the answer. To put this into perspective, let's consider a similar situation from the past. In the late 1990s, as the internet began to dominate the global landscape, some companies decided to invest heavily in laying fiber-optic cables across oceans and continents.

One such company was Global Crossing, which spent over $10 billion on this project and reached a valuation of $50 billion during the dotcom boom in early 2000. However, the timing was unfortunate as the demand for bandwidth arrived years after the loans had to be repaid. In early 2002, just two years after its peak valuation, Global Crossing filed for one of the largest bankruptcies in history.

While the promise of the internet was realized, the company's financial woes led to its bankruptcy. Its fiber-optic cables, which were initially considered valuable, have since been repurposed and are still in use today.

The lesson from this historical example is clear: while the assets being developed today may eventually prove valuable, it's impossible to predict whether AI will be a boon, a disaster, or a bubble in the short term. Hence, for small investors, the prudent course of action is to remain cautious and avoid making impulsive investment decisions based on the latest news.

Instead, focus on understanding the businesses you invest in and maintain a long-term perspective. Investing in broad, low-cost options remains a reliable strategy, and utilizing AI as a tool to enhance your investment decisions can be beneficial rather than a standalone investment.