Implementing data, cultivating outlook
By Kyle Tetting
In a 2021 interview, a John Deere executive disclosed that the farming equipment manufacturer employed more software engineers than mechanical engineers. It was a throwaway line in a broader discussion of farmers’ rights to repair their own equipment. Fast-forward a couple of years to an Artificial Intelligence revolution, and the 1837 company’s transformation to a technology business makes sense.
With such a swift transition, it came as no surprise when I saw the recent headline from the Wall Street Journal that “America’s Farmers Are Bogged Down by Data.” It’s not that the basics of farming have changed drastically, it’s that we’ve created equipment capable of precisely measuring the minutiae of critical tasks. Learning to employ all that information takes time.
Before I go too far into the weeds on farming, the issue isn’t limited to agriculture. Medicine, advertising and many other industries have more information than they know what to do with. Data scientists have done a good job parsing the relevant from the irrelevant, but applying information is an area where computers may be able to offer more through the implementation of artificial intelligence.
None of this is new, but it’s especially relevant given the swift rise we saw in a handful of technology stocks through the first eight months of 2023. While there’s plenty to be sorted out about the regulation and monetization of artificial intelligence, there’s already been heavy investment in the biggest names, with investors counting on the profits they hope eventually follow.
In a nutshell, these technological shifts are why we invest. Improving crop yields in farming, better evaluating medical data to diagnose and treat disease, helping businesses better understand who their customers are — all the above lead to economic growth. Such transformations can be stressful and sometimes even painful, but investors benefit as new and existing businesses continually problem-solve.
The challenge for investors is identifying those companies poised to advance the conversation. What was once a debate between value and growth or a focus on just a particular industry, like technology, must now go deeper. Manufacturers of farming equipment don’t neatly fit into the technology bucket.
Instead, the path forward for investors will focus more on the strength of a business’s balance sheet, the defensibility of existing earnings and achieving a fair price. Such an emphasis seems obvious, but it comes on the heels of a growth-at-all-costs market and a history with too much emphasis on valuations alone. Some stocks are cheap for a reason, and others are unlikely to hit their lofty growth ambitions.
Practically speaking, we may very well remain in a market that supports higher price-to-earnings multiples for some time. In part, such measures are a poor approximation of opportunity beyond the next 12 months. But more importantly, we remain in the early innings of solving problems created by big data. The outlook is opportunistic, to be sure, but some of the most rewarding periods for investors have come alongside the need for meaningful problem solving.
Importantly, there is always a risk to these kinds of technological shifts. Businesses will be cut out of their markets, workers may be replaced by technologies in certain areas and investors may see added volatility as the markets digest all the change.
Even as the futurist in me sees the potential in these opportunities, the realist in me sees the current rate environment as a gift to balanced investors. Rather than overextend ourselves in the certainty of the next big thing, we can allow a more balanced approach to moderate the risk of uncertainty while still capturing the attractive returns now offered to us from less volatile assets like bonds and cash. There’s plenty of field left to plow, but investors should be encouraged by the opportunities that lie ahead.
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(initially posted Aug. 31, 2023)