AI Will Create Enormous Value. What Investments Will Retain It?
Electricity, automobiles, radio, and mass production moved rapidly into American life during the 1920s. The share of homes with electricity rose from 35 percent in 1920 to 68 percent in 1930. The automobile created demand for mechanics, service stations, road construction, and businesses that had barely existed a decade earlier. Radio connected a national audience, while electric appliances began saving households time and labor.
Artificial intelligence has similar potential to spread across the economy. Like those earlier breakthroughs, AI is not confined to one industry or type of business. It can change how nearly every company operates and how nearly every consumer lives.
There is also an important investment lesson from earlier periods of innovation. Technology can create enormous value without allowing every company that uses it to earn a higher return. In many cases, the largest and most lasting benefits eventually flow to the consumer.
More productive does not always mean more profitable
Charlie Munger described this problem in a 1994 speech at the University of Southern California. He recalled managers at Berkshire Hathaway’s textile operation presenting a new loom that could perform twice as much work as the old equipment.
On a spreadsheet, the investment looked compelling. The loom would reduce production costs and appeared likely to pay for itself quickly. The problem was that Berkshire produced a commodity product, and its competitors could purchase the same equipment.
Once enough textile companies installed the more productive machinery, the industry’s lower cost structure became the basis for lower prices. The machines worked exactly as promised, but the economic benefit did not remain with the companies that bought them. Customers received much of the gain through price reductions.
Munger noted that capital projects repeatedly arrived with projections showing they would “pay for themselves in three years.” Yet after 20 years of making such investments, he said the textile business had earned only about 4% annually. The flaw was not in calculating the cost savings. The assumption was that selling prices would remain unchanged after every competitor achieved similar savings.
For many businesses, AI may become the new loom. The technology may be necessary to control costs and remain competitive, but that does not mean the resulting savings will translate into lasting profit growth.
Who can retain the benefits?
Companies are more likely to retain the value created by AI when they possess something competitors cannot easily reproduce. That might include differentiated proprietary data, deeply integrated internal processes, a trusted brand, a strong distribution network, high switching costs or a product that becomes more valuable as more people use it.
AI may also create more lasting gains when it changes an entire workflow rather than automating a few isolated tasks. A competitor can often purchase the same software tool. It is much harder to copy years of specialized data, redesign several connected business processes, and build an organization that consistently learns how to use the technology more effectively.
Some providers of AI infrastructure and specialized tools may capture a significant share of the economy, particularly when they control scarce computing capacity, advanced chips, proprietary models, or critical distribution. Even then, a company can benefit from AI and still produce disappointing investment returns if its stock price already assumes too much future growth.
What this means for investors
The 1920s remind us that transformative technologies can reshape society, create new industries, and raise living standards. Munger’s textile example reminds us that broad economic progress does not automatically translate into higher returns for every company adopting the newest technology.
In managing client portfolios, Compass will look beyond which companies spend the most on AI or talk about it most frequently. We will focus on which businesses own assets that competitors cannot easily reproduce and which have the pricing power, customer relationships, and operating structure needed to retain a meaningful share of the benefits.
Historical comparisons cannot identify every future winner, but they can help us distinguish genuine competitive advantages from improvements that will eventually become standard across an industry.
Have questions or want to speak with our team directly? Contact us.
Robert Amato, CFP®, CIMA®
Principal
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