David Booth: AI may change the world. It just won’t change how you invest
· Fortune
At one point, you could make a living by sawing off a block of frozen river, transporting it to the city, storing it in straw and selling it to people to keep their food cold.
Now we have bluetooth refrigerators.
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This is an example of what I like to call human ingenuity – the collective capability of people all over the world to solve problems and make the future better.
Artificial intelligence may represent an “ice block to refrigerator” level of advancement. It already helps people complete everyday tasks more efficiently – from creating a workout routine to planning a vacation – and it could ultimately lead to breakthroughs in health care, transportation, and even the nature of work.
But one thing I’m confident it won’t do is change how prices get set in stock and bond markets.
I constantly hear speculation about how AI will impact the financial industry. Can I use AI to pick stocks? Should I invest all my money in the stocks of AI giants? Will AI change everything we know about markets?
To me these types of questions reveal the importance of appreciating how public markets function.
Think of the stock market as the world’s largest information processing machine. It’s where buyers and sellers come together and agree to a trade; both sides have to believe the price is fair. If stock prices are too high, people won’t buy (they want a fair return). If they’re too low, people won’t sell. When this process is repeated millions of times a day, the result is that stocks seem to settle at a reasonable price.
During my graduate school days at the University of Chicago, I was fortunate enough to be a part of the data revolution that helped the investing world understand that markets were efficient.
Before 1960, no one knew what a market wide portfolio typically returned. Now that we have 100 years of data, we know that number has been about 10% a year on average for US stocks over the last century. Most professional stock pickers can’t compete. There’s no compelling evidence money managers can reliably pick winners over time.
A better assumption is that the stock market reflects all available information and it can do so more quickly than any human or model ever could. To believe an AI agent can help you beat the market, you’d have to believe it can know which stocks are mispriced and when. But returns are uncertain, no one (not even an AI agent) knows what’s coming. And it’s unrealistic to think that one particular AI model will systematically outperform the competition over the long haul.
Even if AI helps with the accumulation of information, that benefit would be shared by all market participants. Using AI to buy and sell stocks, then, only adds anxiety and random noise to individual investors.
Similarly, putting all your portfolio into “AI stocks” could lead to disappointment.
It’ll likely be the case that most companies will use AI to improve efficiency and increase productivity. I’m optimistic about the future in that regard. Though, history suggests that targeting the companies you’d expect to outperform from an AI revolution may not lead to a successful investing experience.
Many have compared today’s investing environment to telecom companies building out the infrastructure of the internet during the Dot Com boom. Take a look at the top telecom stocks from 1999 (Lucent Technologies and Nextel Comms led the pack). Twenty-five years later, only 1 of the top 20 stocks was able to survive in its corporate structure from that time.
Some of today’s market leaders will thrive. Others won’t. Entirely new winners will emerge that no one is talking about now. (Google didn’t go public until 2004.) After all, who would have guessed Levi Strauss would be one of the big winners from the Gold Rush?
No one knows who will win. So why make the bet? Trying to pick a big winner could turn you into a big loser.
The good news is that you don’t have to gamble on who wins to do well. You can own public markets through a broadly diversified portfolio that includes AI stocks and lots of others and participate in whatever the future becomes instead of betting on what you think it will become.
Public markets help finance thousands of competing ideas, some of which will result in spectacular failures, while moving capital rapidly toward what works. With more than $1.2 trillion in expected capital spending in 2027 on everything from data centers to chips, that might be Big Tech. Or it could be another sector entirely.
By buying and holding a diversified portfolio of stocks, you can pursue their financial goals without wasting your time trying to guess which company will be the next big thing. You’ll own it regardless.
This investing mindset allows you to manage the uncertainty of tomorrow, rather than feeling anxious about it.
Open public markets have expanded the beneficiaries of innovation. Ordinary people—not just founders, venture capitalists and insiders—can enjoy the long-term wealth creation and on aggregate benefit without running the risk of overconcentration.
I’m hopeful AI will help people solve big problems and improve millions of lives. It may even make a better fridge. But it’s unlikely it will help you beat the market.
David Booth is Founder and Chairman of Dimensional Fund Advisors. He’s the author of the book Stay Calm: Learn to Embrace Uncertainty in Investing and Life.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
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