An important rule of investing is to invest in your area of competence. There is no point in investing in a business you do not understand. Warren Buffett did not invest in technology for a long time as he did not understand it. Yet he did just fine using the power of compounding. If you also are new to the technology industry but want to invest in artificial intelligence (AI) stocks, where can you begin?
How can new tech investors invest in AI?
AI is one of the most complex pieces of technology. But you don’t need to understand the algorithms to invest in technology. You need to see how AI can help a business make money. If you cannot see the opportunity, it is better not to invest. Why do I say so?
Only when you understand the business and the opportunity can you stay invested in the stock during difficult times. In August, the Nasdaq saw a sell-off after Amazon posted disappointing earnings despite a significant investment in AI. Even Microsoft’s share price fell on weak cloud revenue, although the company said that the revenue will pick up in the first half of 2025. Such short-term weakness does not affect the secular growth potential of AI.
As a new investor in the tech space, you can start with some obvious AI stocks for which the results of AI are visible. You can get exposure to the broader trend through an AI-themed ETF. In the meantime, reading about AI and its investing opportunities can build your understanding of the tech.
Obvious AI stocks
AI works at multiple levels. It has a supply chain of hardware, software, infrastructure, and end applications. Many companies are building AI capabilities, bringing revenue to hardware suppliers like Nvidia and Broadcom. The two companies reported strong growth in AI-chips revenue. Since they are leaders in their respective chips, you can invest with the logic that they are selling shovels in the gold rush.
They can give you immediate short-term growth from the growing capital spending by companies in AI capabilities. If they lose their moat of being the most advanced AI chip providers, you could consider booking profits. Individual stocks carry high business risk.
Unlike other sectors, the tech sector is more volatile. A new company can put an industry leader out of business with disruptive technology. Apple disrupted the button phone market leader BlackBerry in 2008 with its touch phone. Advanced Micro Devices overtook its rival Intel (more than 10 times its size) with its advanced 10-nanometer processors. Today it is at 3 nanometer chips.
To reduce this risk of disruptive technological trends, consider diversifying your AI investment into ETFs.
AI-themed ETFs
The Global X Artificial Intelligence & Technology ETF (NASDAQ:AIQ) invests in stocks of companies that provide hardware or are using artificial intelligence to enhance their products and services. The ETF has holdings in 84 AI stocks selected by fund managers. By buying a unit of the ETF, you get a share in the ETF’s AI portfolio. You benefit from the change in the overall portfolio value as the price of underlying stocks changes. The ETF charges 0.68% of the portfolio value as an expense ratio to cover its brokerage and fund manager costs.
The AIQ ETF has holdings in companies like Netflix, Adobe, and Salesforce, which use artificial intelligence to improve their service offerings and stay relevant to the changing technological trends.
Investor takeaway
AI is a new technology with several grey areas, which brings risk and volatility. Despite the risk, new technologies develop and drive down costs. We have examples of electric vehicles and renewable energy that saw widespread adoption after many trials and failures. Those who succeeded made their investors millionaires.
When you approach investing in new technology, be prepared for the risk. Nine out of ten AI stocks may not perform. But you need one stock that becomes the next Apple or AMD. That one investment will offset the losses of the remaining nine and grow your overall portfolio.
