AI could turn the investment herd into ‘turbo sheep’

Artificial intelligence may give investors access to more information and greater processing power than ever before. But it could also amplify herd behaviour and make markets less efficient.

Technology has transformed how investors access and analyse information, but the human behaviours that drive markets have not changed. AI could accelerate those behaviours by allowing investors using similar tools and data to reach the same conclusions faster.

Our hypothesis is that AI is more likely to be the greatest narrative transmission engine ever built, by throwing orders of magnitude more computational power at prevailing narratives and entrenched human behaviours.

If investors have behaved like sheep in the past, AI may simply create herds of “turbo sheep” that form faster and run harder than ever in the same direction.

AI has the potential to be genuinely transformative, but if investors are using similar tools trained on similar data, their conclusions may increasingly converge. Instead of making markets more rational, AI might just make the herd move faster.

Despite decades of improvements in investment technology, the dispersion between the most and least expensive stocks remains close to some of its widest historical extremes. This challenges the assumption that better technology and more information will necessarily make markets more efficient.

Getting the technology right is not enough

The key investment question is not whether AI will be transformative, but whether investors are paying the right price for the companies expected to benefit from it.

The experience of Zoom during the pandemic provides a useful example of where the herd moves quickly in the same direction. In 2020, the videoconferencing company was briefly worth more than ExxonMobil as lockdowns transformed the way people across the world worked and oil markets collapsed. In the years that followed, Zoom’s shares lost 90 per cent of their value, while ExxonMobil rose more than five-fold.

For investors, the mistake was allowing an irresistible narrative about the future to become detached from what investors were actually paying for it. AI may change the world, but that does not mean every price attached to the AI story will prove justified.

The question today with AI is who ultimately captures the value it creates and what price investors must pay to participate.

The opportunity may be away from the herd

AI is also arriving at a time when global equity markets are increasingly concentrated, with a handful of mega-cap companies dominating headlines and benchmark weights.

This makes independent thinking particularly important. For investors prepared to take genuinely differentiated positions, there may be greater opportunity away from the most crowded parts of the market, including ex-US developed markets and emerging markets, where indices can be less efficient proxies and analyst coverage thinner.

When everyone is looking in the same place, the competition for an investment insight is naturally much greater.

The payoff to skill and judgement can be greatest where fewer investors are exercising it. That does not guarantee success, but it can provide a more favourable starting point.

Independent thinking becomes more valuable

As AI tools become more widely available, the technology itself will become less of an investment edge. Independent thinking will matter more.

At Orbis Investments, we are using AI to interrogate more than three decades of proprietary investment research and decision-making data. But investment decisions remain firmly in the hands of our investment professionals.

When everyone has access to increasingly powerful tools, simply having the technology is not an edge.

AI can make investors more productive, but if everyone has access to similar tools, that advantage quickly becomes table stakes. The enduring edge is the ability to challenge your own conclusions, think independently and recognise when the herd might be wrong.

This article draws on Orbis Investments’ whitepaper, “New Tools, Old Habits: Investing in the Age of AI”. General information only. This article is suitable for financial advisers and institutional/professional investors only. This is general informational only and is not personal financial product, tax, legal, or investment advice. This article is not an opinion or a recommendation to buy, sell or hold any security or fund, or to adopt any investment strategy. Past performance is not a reliable indicator of future results. This article represents Orbis' view at a point in time and provides reasoning or rationale on why we bought or sold a particular security for the Orbis Funds. We may take the opposite view/position from that stated, as circumstances change. Equity Trustees Ltd AFSL No. 240975 (EQT) is the issuer of units in the Orbis Funds domiciled in Australia. You should read and consider such funds’ Product Disclosure Statement (PDS) or Information Memorandum (IM), as applicable, and Target Market Determination (TMD) before acquiring or disposing units in such funds. The PDS, IM and TMDs can be obtained from (VIEW LINK).