Here come the Robots

Jeffrey Gundlach is the chief executive officer of DoubleLine Capital whom I quote often in my blog. The other day in his introduction to the Fixed Income Analyst Hall of Fame, he singled out so-called robo-advisers, which provide online portfolio management using little human intervention, as a dangerous bet.

“It’s a one-size-fits-all financial solution,” he said. “Everybody gets the same portfolio, which means everybody owns the same stock, which means when they all decide to get out it causes a crash.”

Gundlach is worried about investors’ herd mentality. There has been a surge into passive investing. As an active manager who believes in fundamental analysis, I share his concern. Artificial intelligence is not only disrupting the investment management business, it’s disrupting ALL businesses. Even the cashiers job at McDonald’s isn’t safe. McDonalds has plans of replacing 2,500 human cashiers with digital kiosks.

This week on “Mad Money” Jim Cramer interviewed IBM CEO Ginni Rometty and much of the conversation was about artificial intelligence in the technology world. IBM is pushing the boundaries in AI and has bet it’s future on a computer named after its first CEO, Thomas Watson. Your life or a family members might one day depend on Watson diagnosing how to treat a major illness such as cancer.

My top investment opportunity for 2017 was investing in companies that are innovating in AI. There have been tremendous gains in technology companies this year and the pace of change is much faster than I even anticipated. Technology companies have been the best performing and many have been leading the charge into AI. The worst performing sector of the market this year is the Energy Select Sector SPDR® Fund, which is down -14%, and the PowerShares QQQ ETF is up almost 20%. In the past six months, the 34% difference in return between sectors is extraordinary.

The energy industry is a capital-intensive business and is much less profitable at lower energy prices. On the other hand, the digital kiosk at McDonald’s has no labor and limited capital costs. The cash flows for technology companies have shown the most growth. The drop in oil prices and the capital appreciation in technology have been the major market trends for the first half of the year. At some point, the pendulum will swing the other way, but for the moment, the growth has been investing in technology companies.

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