How to Beat the Machines

The Australian Financial Review today had a great interview with Blackrock CEO Larry Fink.

He waxed lyrical on all the usual hot topics. Housing, banking and investing.

But it was his comments on income equality that really resonated with me.

Here’s what he had to day:

If you read Thomas Piketty, if you read some of the progressive economists some of the problems that we see is that as we substitute humans for machines the people who own the capital are the big beneficiaries.

So you see the wealthy getting wealthier, which is a common problem worldwide right now.

We can narrow that divide though if we finally can get all these savings into investing

Because the average company most of the companies have a payout ratio at least 70 per cent between stock repurchases and dividends. In fact, in Australia most of the banks have a 70 per cent dividend policy.

But if you own equities and you’re participating in the growth of the company you don’t have that problem, as I just suggested. If capital is the winner and if we had greater participation in equities worldwide instead of sitting in bank accounts over a long horizon we would have less of this problem.

Now of course as a fund manager, he would say this.

Just as a real estate agent would tell you to buy a house.

But I think he’s got a very valid point. It’s like this…

The NASDAQ technology index in the US just closed at record highs overnight.

Technology stocks are the clear growth area in the economy.

The competition is fierce, and the risks for investors are high, but for those companies that succeed the rewards are astronomical.

Now tech stocks are clearly all about re-designing systems and processes in a more efficient way.

And that usually means getting robots and computers to do things at ridiculously high speeds. Far faster than any human could do.

Naturally this causes a fear that a certain segment of the population are going to have their skills made redundant.

The machines will literally take your job.

This is not a new fear. 

Ever since the industrial revolution, people have feared this. And indeed, some jobs in manufacturing and agriculture were lost.

But new jobs sprung up in their place. Factory jobs, assembly line jobs, and all manner of new jobs that didn’t previously exist.

In the end the result was economic growth and better living conditions for most, if not eventually all.

So will the new round of technological innovation in artificial intelligence and machine learning cause a similar shift?

Or will it be different this time?

Experts are divided.

There are of course those that point to the past experience and say it’ll be fine.

But others believe that the jobs that do emerge will be so specialised and small in number that large swathes of the working population will find themselves obsolete.

As always, no one knows the future.

What can you do about it then?

Well as Larry Fink said at the start, there’s one thing anyone can do…

Invest in growth

I’m sure you know the old saying, if you can’t beat them join them.

This could be the best strategy for you and I.

By investing in companies that are part of this technological advance, you essentially hedge your life against its consequences.

If AI, machine learning and robots do indeed take your job, at least you will be an owner of the companies that are benefitting financially.

And if the fears are overblown and history repeats itself, well, you still stand to gain. If you choose the right stocks and invest intelligently, hopefully a few of your companies will go on to create great advances for humanity. And huge gains for shareholders.

That’s the way I look at it, anyway.

Hedging your bets is a concept that is used every day by the rich and powerful. That’s the very basis for the invention of hedge funds.

But you can think like this too, if you use a bit of creativity when looking at your personal situation. Weigh up the risks, and look for opportunities to win no matter what happens.

Good investing,

Ryan Dinse,
Editor, Money Morning

PS: Today there’s something massive happening in the world of technology. It could accelerate the rise of the machines, and change the future in the blink of an eye. You can read about it here.

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

Money Morning Australia