As we close out 2023, I wanted to share my thoughts on what the year’s most consequential developments mean for the years (and, perhaps decades) ahead. Of course, I am talking about the advent of AI and the adoption of GLP-1s. Then, to conclude, I will leave you with the best piece of advice I have for individuals managing their own portfolios. 

The Advent of AI

Over the next 5-10 years, I anticipate the real money in AI will be found in less conspicuous places. 

Take commercial refrigeration, for instance. While refrigerator manufacturers naturally experienced the initial wave of profits, the enduring winners were those who leveraged the technology to minimize waste and improve efficiency. Notably, pharmaceutical companies utilized refrigeration to transport and store temperature-sensitive medicines in previously inaccessible markets. Similarly, grocery stores and restaurants optimized their supply chains and reduced waste. 

I believe AI will follow a similar analog. 

The semiconductor companies – the refrigerator manufacturers – have already realized the initial wave of gains. Although these critical manufacturers will likely remain sound investments for the foreseeable future, now is the time to start identifying the enduring winners that will leverage the AI-technology brought to the market. 

Two promising sectors come to mind: software and financials. With AI-enhanced products, software companies can justify higher fees while also cutting costs. By employing AI to streamline underwriting, banks and insurance companies will be able to decrease the risk profile and increase the profitability of their loan and policy books, all while reducing the time and costs required to process them.

In summary, the initial gains in the AI revolution have been driven by attention-grabbing products and services like ChatGPT, DALL-E, Edge, Bard, Firefly, etc. I anticipate that the next wave of substantial returns will be discovered in comparatively less remarkable places. Put another way, the next wave of outsized returns will be driven by attention-grabbing earnings, not necessarily attention-grabbing products.

Adoption of GLP-1s

The adoption of GLP-1s (weight-loss medication) has been one of the most talked about stories in 2023. Most of the discussion has focused on predicting which sectors will benefit and which will face challenges. While this analysis is reasonable, it overlooks the bigger picture, missing the forest for the trees.

Investors should focus on the profound impact GLP-1s will have on society: an increase in life expectancy.

Traditional portfolio management strategies increase bond exposure and decrease stock exposure as retirement approaches. The idea is to minimize risk and prioritize guaranteed returns in one’s later years. However, with longer lifespans delaying retirement and increasing the amount of resources required to retire comfortably, portfolios will remain skewed toward stocks for a prolonged period.

As a result, an immense amount of passively managed funds, operating under labels like “age-based”, “life-cycle”, or “target date retirement”, will create a more enduring demand for stocks than ever before. Higher demand means higher prices. This doesn’t even factor in actively managed portfolios, where managers must adapt to their clients’ extended life expectancies. 

Concisely, stocks as an asset class are the biggest beneficiary of the adoption of GLP-1s, likely to the detriment of bonds. Distinguishing between GLP-1 winners and losers in the stock market ignores the larger point. 

My Best Advice

Don’t put yourself under a specific investment label or style. 

Many professional investors label themselves: bond, stock, alternative, growth, value, emerging markets, etc. Professionals do this to leverage marketing engines such as Morningstar to attract clients and raise capital. As an individual investor, you aren’t concerned with attracting clients. You can afford to be style-agnostic.

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That’s not to say every opportunity is for everyone: human and financial capital varies from person to person. I have something called the “too hard bucket”. I put the opportunities I don’t understand in it and move on. That being said, I think we all can agree that missing wealth-generating opportunities solely because they do not align with an arbitrary “style” is untenable.    

Furthermore, restricting yourself can be detrimental because certain asset classes and sectors undergo periods of underperformance. Perma-bulls had a tough 2022; perma-bears are having a regrettable second half of 2023. With exception of the last couple months, bond-only investors struggled over the last two years as the Fed devalued bond holdings by raising interest rates.

Bottom line, you possess a unique advantage as an individual investor. Your agility and nimbleness allow you to be bearish when it makes sense to be bearish and bullish when it makes sense to be bullish. You can buy what works and fade what isn’t. You can choose your spots wherever they appear. This flexibility is a luxury not often afforded to many institutional managers. There is no good reason to give up this luxury when you don’t have to.