A Practical Approach to AI Investing (Ft. Stoyan Petev)

Disclaimer And Quick Setup

Ed Beemiller: The financial huddle does not provide tax, legal, financial, or other professional advice. The stripes are encouraged to consult their own advisors in these areas.

SPEAKER_00: It is the financial huddle.

Ed Beemiller: Ready?

Meet The Guest And Why AI

SPEAKER_00: Hello, everybody. Welcome back to another episode of the Financial Huddle. My name is Brian Manier, and as always, I am here with my compadres to my left, Mr. Edward B. Miller. Hello, hello. And to my right, Mr. Ryan Fleming. Mr. Brian, Mr. Huddler out there, Mr. Ed. Good to be in your presence. That's right. It's always a good day. It's always a good day. And another great surprise we have is a guest. Occasionally, Huddlers, we we love to surprise you with guests. And today we have uh Mr. Stoyan Pedev, and I've had the pleasure of working with Stoyan for a few years now.

SPEAKER_00: He is the senior vice president for Advanced Markets and leads the advanced planning team at C2P Enterprises. In addition, he co-chairs the investment committee at Prosperity Capital Advisors. He brings extensive experience in advanced financial planning and risk management techniques involving investment and insurance products. Prior to joining C2P, Stoyan spent 29 years as a stock and bond trader, advisor, distributor, and financial product expert. He has helped hundreds of advisors as well as institutional and retail clients find, evaluate, and implement the best insurance and investment solutions for their unique needs.

SPEAKER_00: And I can tell you personally, he's been a huge help for myself and our practice. And Stoya, what I would say is you win the prize for the most letters after your name for Alphabet Soup. So congratulations on that. So with that, Stoya, welcome to our podcast. Thank you so much for joining us.

SPEAKER_03: Thanks. Thanks for having me, guys. So fun to be with you. Thank you for inviting me, and I hope I can make a meaningful contribution to the discussion that you guys are having today.

SPEAKER_00: Absolutely. And one of the things we want to talk about today is AI. Obviously, that's something that's a hot topic. A lot of our clients ask about it. I'm sure you get a lot of questions about it too. And this is something that a lot of people are trying to wrap their minds around. I think by the time we have this conversation, it may be obsolete and something new comes out. So with that, we we have some questions that we want to ask you, and hopefully you'll be able to shed some light on those.

SPEAKER_00: So, you know, we get a lot of questions from clients, and particularly regarding strategies that they could implement into their own portfolios. What could you tell us about strategies that either our clients or other investors and other advisors that you're helping that they could invest if they want to implement AI into their own strategies and portfolios?

Six AI Investment Themes Explained

SPEAKER_03: Absolutely. AI is a very hot topic right now. Obviously, everybody has heard about it. Everybody is constantly being bombarded with uh information from all sorts of media about it. Uh, if you haven't tested it, uh you are probably gonna try it at some point in your own life uh for whatever um whatever uh tool or reason you wanna uh you want to use it for. But from an investment standpoint, the way we think about AI at Prosperity Capital has been around basically uh six themes. And uh those six generic team themes have been uh basically the core AI, infrastructure, and intelligence.

SPEAKER_03: Those are going to be your uh generic uh AI models. Uh we also think about power generation and energy systems. So that's uh that's uh basically anything that you need to upgrade the grid, uh the electric grid to uh to support the data centers. That that is uh also one of the themes, the data centers. That's the the third theme that we usually go uh about in our uh investment uh construction. We also talk about uh critical materials and industrial metals. Uh we also look at the defense and natural security and national security applications and implications of uh AI.

SPEAKER_03: And we look at also one theme that not everybody's talking about, that's uh healthcare and AI-enabled diagnostics. And the way the way we reasoned uh through uh this uh this whole theme and thematic investing has been usually uh going back to the way people made money uh during the gold rush uh back uh back in the 1900s. And that's uh the people that are gonna make the most money are gonna be the the guys that makes the picks and shovels. And so uh not necessarily the the people that actually go out and and look for the gold and discover the gold, but actually the guys that that support uh that that uh that chase, that AI chase that uh we're all seeing all around us.

Ryan Fleming: Super interesting.

401(k) Basics For New Investors

Ryan Fleming: So, you know, I just had a college graduate uh stoy on, Brian did as well. Um, Ed's had his uh two children already graduate, but uh he's currently looking for a job, and it made me think about a lot of these young people that are uh entering into the workforce that have the availability to invest into like 401ks or 403bs. And I'm curious, are you seeing more and more AI opportunities within those qualified plans? And and if so, like maybe uh with those six different types of uh sectors that you talked about, I don't know if you could just maybe educate our listeners to like the landscape of traditional 401k, though those types of uh qualified plans.

Ryan Fleming: Um, because my son keeps asking me questions all the time, like what should I invest in when I get my first job?

SPEAKER_03: Well, uh for from a college graduate perspective, I will start with the basics, uh, right? Build a habit first. That's uh that's the number one. Uh you need to start contributing consistently to to your 401k, your your Roth IRA, if you have the ability or IRA, whatever, whatever that uh that uh uh those limits are and those opportunities are for you in in your current job, or um uh if you if you go out and start your own business, uh take the employer match and uh keep the costs low as much as possible.

SPEAKER_03: As far as the AI theme, that's gonna be uh very individualistic. So if you if you decide to to go explore that, um let your core portfolio be the boring and diversified uh anchor. Uh, and then you can go out and if you have any any extra cash or if you have uh the ability to to take additional risk, then then you go out and explore those those themes because there's gonna be a lot of volatility in all of uh all of the AI themed investments that I mentioned. Um they're gonna they're gonna ebb and flow based on on what's the the hottest and newest trend.

SPEAKER_03: And um a lot of those companies have gone uh quite a bit high uh from a valuation standpoint. So they had they're very rich uh as far as valuations go. So if you have a consistent and um and basically a plan um in your investment process, uh just uh either contribute on a on a monthly or uh bi-weekly basis, depending on on how your job lines up, or just uh uh just wait for for dips in the market and take the opportunities as they come. But I would probably put it as a because I'm a big uh fan and I favor the core plus satellite approach.

SPEAKER_03: So have your core portfolio and then and then put your satellites around that, depending on the theme that you like and the theme that you that you want to invest in.

SPEAKER_00: So still treat them as the tip of the financial pyramid, like we would be. Yeah, that makes sense.

Ed Beemiller: So in that case, it's it's really not something that's been adopted within just more general 401k plans. You're you're looking for this, you know, AI investing probably would be outside of that.

SPEAKER_03: Yeah, and uh, I mean, obviously in the 401k, um, you you're probably gonna own a ton of uh very diversified uh funds and uh or index funds uh for that matter. And those uh those funds are gonna have exposure to some of those underlying AI companies to begin with. And uh and that may be large or small. So first first order of businesses uh know what you own and then decide uh how much more exposure do I want to have to a particular particular theme, uh whether it's gonna be through their 401k at work, uh, if they have those options, or uh maybe uh set up set up uh uh an investment account or have uh have that discussion with you guys and and uh have that help and assistance uh when when you have those discussions with those uh recent graduates.

Ed Beemiller: All right.

AI Research Gains And Hallucinations

Ed Beemiller: Yeah next next question here. So it's it's more of a general question, uh but but when we're discussing with clients, and and a lot of times you hear about, you know, with the advancements in AI being able to take on a lot more task and potentially uh making things more efficient. Where do you do you feel that AI has has had an impact on making the whole investment process easier or more efficient? And if so, in in what areas are you seeing this?

SPEAKER_03: Uh the the biggest impact that I have seen so far has been in the uh in the research aspect of it. And um my opinion is that AI can make investors faster, but it doesn't automatically make them wiser. And what do I mean by that? You still have to interpret the information that that your AI tool is coming back with. Uh and depending on the question that you ask, and depending on the prompting that you do, and how you set up that question and what you're trying to get out of it, you still have to interpret that answer.

SPEAKER_03: So uh it it is it does give some great ideas if you use it as a as a thought partner, and uh it could actually uh bring some additional ideas to the table and maybe actually uh get you to think a little bit differently in some cases, but uh you still have to have the the human interpret the results and decide basically on the individual circumstances uh does this make sense? And um and you have to always challenge it and think of it critically because uh AI does hallucinate, and I have seen it hallucinate many a time before.

SPEAKER_03: And uh it will it it will give you uh uh an answer. If you prompt it, it's gonna give you an answer. The question is, is that the right answer? And uh and you have to have your misinformation filter uh high up when you when you interpret those results. Yeah, that that critical thinking is it's hard to overcome.

Ed Beemiller: Yeah, it's AI's not quite there yet. Not quite.

SPEAKER_03: No, uh, and you and you have to understand that uh over time, uh with uh with all the people asking AI different types of investment questions, uh AI usually learns from all these uh questions, and it constantly kind of updates its uh body of knowledge, and that's that body of knowledge continues to grow. So over time it gets uh smarter and smarter and smarter, but it's still uh right, garbage in, garbage out. Right. So you need to learn how to prompt it, and you need to understand how to interpret and critically think about the answers that it gives you.

SPEAKER_00: Yeah, the interpretation is key. You still have to be able to interpret it. Yeah. So I'm gonna ask a question that that you kind of answered already, but I know our listeners and and working with clients, they're gonna want specifics. And so this is gonna be a very difficult question to ask. So just do the best you can with it.

Ed Beemiller: More difficult to answer, potentially.

SPEAKER_00: We're gonna need some AI to help us uh answer it. Um, how much exposure? It'd be fun to ask AI this question, actually. How much exposure to AI should an investor have? Now, you you talked a little bit about the the core in satellite, which is is how we would approach that as well. But I know enough of our clients and people that are listening are going, okay, but what percentage would that be? I know that's really hard depending on the age and your risk tolerance and all of that. But and there's also even within the S P 500, you have companies like NVIDIA that are you know primarily AI, so you're already exposed to that.

SPEAKER_00: So if I were to just ask that question, I know it's a hard question to answer, how what kind of exposure, especially if you're younger, should you have in your portfolio?

SPEAKER_03: And um, there's no specific answer to that question.

How Much AI Exposure Makes Sense

SPEAKER_03: Uh the answer to that question, and I'm gonna answer uh answer as uh as kind of an attorney, it will depend on age goals, I figured you'd tolerance, right? Yeah, time horizon, uh, income stability, for example, um, and what you currently already have in your portfolio, because uh you have to understand what you own in your portfolio today in order to kind of uh uh guide the answer to that question going forward. And there has been a lot of froth in the market uh from an AI perspective, because uh you've seen companies that just mentioning AI in their uh in their mission statement, or as their company description, or putting up a pro uh putting out a press release and their and their price starts moving.

SPEAKER_03: So um I would necessarily wouldn't necessarily have a specific percentage in mind. Um I would just uh bring it back to to the basics and and just uh have a plan and stick to that plan. And first understand what you own as part of your other investments, uh, whether it's going to be through uh funds that you hold in a 401k or funds you have uh in an investment account someplace, uh, or in a Roth IRA, how much do you do you have exposure to that in those uh in those accounts? And that's where your expertise uh comes into play because you can analyze those things and kind of uh um uh have have that background before they venture out and decide how much additional do I need to uh do I need to allocate to AI.

SPEAKER_03: Um if uh if you're a young investor setting out um and you have a very long time horizon, uh AI is going to be fundamentally changing the way we think, the way we live, and and the way our jobs evolve over time. So uh having that consistency and kind of have that, if you will, going back to uh uh an old Wall Street term, dollar cost average, into some of these uh themes uh could actually prove to be very beneficial because, for example, the infrastructure theme around AI is gonna be a very long-term uh investment theme.

SPEAKER_03: And um it's gonna be it's gonna be ups and downs along the way, but if you if you have persistent and consistent with how you approach it, uh you should be successful at the end.

SPEAKER_00: And this is the point of having a a human, an advisor to be able to get through those things versus just asking the question of how much should I do that? I I find that helpful. Some people are probably gonna be irritated with that because they're gonna go just tell me the answer in Canada.

SPEAKER_03: So there's no there's no one one answer. I wish it were that simple. You're right.

Stock Picks Versus Thematic Indexes

SPEAKER_00: You're right.

Ryan Fleming: Now, Stoyan, I I love the I love your um statement about you gotta know what you own. And so my question is really centered around like in the Columbus, Ohio area, we we see some of that AI infrastructure stuff going up all around us. Yeah, you know, the the data storage warehouses and things of that nature are going up everywhere uh around our town. But I was just curious, so in those different sectors that you mentioned, would there be any uh specific AI companies worth educating and reading about that our listeners might, you know, outside of maybe NVIDIA and things of that nature, are there any specific companies that you would tout uh as worth looking into and educating and having a better understanding of what we might own or not own?

Ed Beemiller: And these would be like top performers that are gonna, it's kind of difficult to determine are they gonna withstand the test of time. But yeah, and it's tough giving individual stock or companies.

SPEAKER_00: I don't think he wants to go invest in these companies. Right. So let's just get that disclosure out there, right? That's that's funny. Right.

SPEAKER_03: That's right. Yeah, so so give you give you the the the juices stock picks. Uh yeah, I see I see how that where that question question is going, yes. Um so um I typically when when people ask me that question, I typically go back to uh to a very kind of uh tried and true answer. If uh if you're willing to put in the work and the research of uh of researching those individual stocks uh every single uh week, let's not say every single day, but kind of uh willing to put in uh at least at least an hour of research uh per week per stock that you own, uh then it may be worth uh investing in in individual stocks.

SPEAKER_03: Because things do change and they do change fast. I mean, um, for example, NVIDIA, which was the the darling of uh that AI trade last year, uh, has been um anything but a darling this year. So things do change and companies do run up in price quite a bit and quite fast, but then eventually they reach a point where um I call it a saturation point, and you have to uh kind of uh wait and sit and absorb all that gain on that particular stock. And and certainly NVIDIA is in that camp. And um and many many companies that follow that particular pattern uh are gonna they're gonna be are gonna be going through that exact cycle.

SPEAKER_03: Um they become darlings and then they have to basically sit in the penalty corner for for a little bit until until the valuation catches up to that price level. So uh as far as individual companies, I mean you have uh you have a ton of uh depending on which part of the AI trade you want to participate in. Um the chips have been very, very hot this year. Um also some of the uh infrastructure plays, uh especially the power um uh around power generation have been very um very, very hot. I I try not to give specific company examples because as soon as I give you one, I I saw a meme on uh I think on on Twitter or well, I should say X, that uh if I if I buy a stock, it immediately goes down 90%.

SPEAKER_03: Of course how that works. Yeah, or or if I uh if I decide to sell, it immediately goes up 50%. Yeah, so so it's uh it I I hate to give specific examples examples because of that reason, but follow the themes. And when you when you have, if you don't want to put in the time to research each individual security or stock, uh just buy the the underlying index, the underlying theme. And whether it's gonna be the semiconductors, uh, which is gonna give you enough exposure to uh all of them, whether it's gonna be Nvidia or uh or AMD or um Samsung or some of some of the companies that that have front uh seat to that trade, uh just uh just by the underlying index and um it's gonna average all of those exposures into one uh specific diversified, even though it's themed, but exposure.

SPEAKER_03: Yeah.

Ed Beemiller: Yeah.

SPEAKER_03: Yeah, thank you for that. Yeah.

Ed Beemiller: I think we got out of that what what we thought we would. You know, I don't think we were hoping for the top ten. Well, we were hoping, but well, you know, you know, we you you well done. Well played. Well played.

Why Humans Still Beat AI

Ed Beemiller: The next question I think we've talked a lot about through the first four or five questions, which is you know, where do you where do we, where do actual human interaction have an edge over AI in the area of finances, financial planning? And it's kind of the the the rumor or the thought process that, oh my God, at some point AI is just going to take over. We won't even need to be here. You know, every they could just ask AI, construct a uh a well-diverse portfolio for me, and I have 20 years to retirement, and it will spit it all out, and then AI becomes the financial planner.

Ed Beemiller: You know, I I think you've stated is AI receives input, basically throws out output, but you still need that you need the critical thinking, you need the human element.

Ryan Fleming: I think it's they both can complement each other. I think I think the takeaway would be is it's humans plus AI can make it more efficient and better if it's used utilized properly. What do you think about that, Stoyan?

SPEAKER_03: I completely agree with that. I mean, AI can go go through the mathematical portion, and uh AI doesn't carry uh any emotion. And so uh you give it a specific task, it's gonna produce uh the output that that you basically prompt it for. So it it's very, very calculating and specific in that uh input-output type of a of a setting. Uh the humans where the humans come in and where uh I've seen a lot of financial advisors have success like you guys have is uh is basically adding the emotional component.

SPEAKER_03: Um what do I mean by that? Well, uh you need to understand the family dynamics, right? Every single human is different, every single uh client that you work with is different, every single family has its own dynamics, internal dynamics, that not not a lot of AI tools can understand, and you have to have a ton of prompting uh before you get uh even close uh to AI understanding what what that family dynamic might be. Um AI is not going to be good at interpreting emotions and fears. So uh when you when you talk to clients and you talk to humans on a on a on a daily basis, um you can you can see their faces, you can see their emotions, you can uh you can talk to them and in and elicit specific responses, um, and you can uh read the tone of their voices, and that's not where AI is today.

SPEAKER_03: Um and also uh I mean especially in the business that we're in, uh, we can prioritize trade-offs. So um you have your uh needs and wants, for example, and uh you can you can sometimes prioritize within the needs section uh what's uh what's important, uh what can come as a trade-off down. Um and also one of the biggest uh uh one of the biggest benefits uh for us as humans is uh during a period of volatility. And AI can give you all the all the responses you want it to give uh to give you, uh, but it's not gonna coach you through that emotional component.

SPEAKER_03: And that's that's where I see the biggest benefit of us as humans. Because I mean um AI is uh now more intelligent than uh than than humans, and it's it's gonna become exponentially more intelligent than us. But the interpretation, that human, that human connection, that's that uh that prioritization of trade-offs, understanding that family dynamic and coaching people through that, um that's that's the part that AI is gonna struggle at. Yeah, it'll never go away.

Wrap Up And Listener Requests

Ed Beemiller: All right, so our jobs are safe, man.

SPEAKER_00: Yeah, we're all right, all right. I I think that's a great place to end, and I think that's really important as as we work with our clients as understanding, and Ryan and Ed, we all say this, like it's a relationship business. And so even though there are facts and figures and quantitative and qualitative data that we ought we want to make sure that we we siphon through that connection with the with that person or that client is really what makes what we do very unique. So I think that was really, really helpful.

SPEAKER_00: So thank you so much for for coming on our podcast. This was really helpful. I got a lot out of it. Hopefully, Huddlers, you got a lot out of it. Um, anything else you guys want to do?

Ed Beemiller: I was just trying to take some notes here. Yeah, did you get that stuff? Well, I I I kind of was looking in his eyes, yeah. I think I saw something there when he when he mentioned a specific idea.

SPEAKER_03: Right, I got you. That's right. That's right. That's exactly right. I'm glad you caught that.

SPEAKER_00: I caught it. I got it. Well, with that, Huddlers, thank you very much. Uh, appreciate your time. Uh, make sure that you like and subscribe. And if you have something in particular you want to talk about, send that to us. We'll make sure we cover that in the future episode. With that, everybody. Thank you. Stay tuned.

SPEAKER_03: Thank you very much.