How To (Hopefully) Make Money Off AGI

[ed. Standard disclaimer: none of this should be construed as investment advice, just an interesting thought experiment/speculative discussion on portfolio managment post-AGI (assuming AGI - artificial general intelligence - doesn't immediately wipe out most of civilization). Some topics I found interesting: 1) intuitively, it would seem tech stocks are most likely to benefit, at least in the short term; 2) there may be other sectors that will take off where bottlenecks exist - eg. mining/refining/materials processing, etc.; 3) knowledge work in all forms will likely experience substantial devaluation, which means industries and cities and real estate that rely on well paid knowledge workers could be significantly impacted; 4) advanced schooling (eg. grad school and beyond) might not provide a good cost/benefit return; 5) a large proportion of wealth is career capital, ie. what one acquires over the course of a career (which may be quite truncated once AGI renders whole careers/classes of expertise irrelevant); 6) interest rates and inflation could potentially skyrocket (for various reasons you can read in the discussion); and 7) generally it just seems too early to tell how this will all play out but having reserve capital to take advantages of sectors/industries that do eventually explode will be a good thing (ie. lots of cash to exploit opportunities when they present themselves, and when overall direction is clearer). Upshot: BIG changes are on the way that will likely upend national and global economies in ways and at scales we can only guess at for the moment.] 

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My basic view is that in a slow AGI takeoff - and really, it's slow takeoffs where how you invest is likely to matter - you want to construct a portfolio that is long growth, especially stocks with idiosyncratic exposure to AI, long volatility, long rates-going-up (short bonds), and long "real estate that is cheap in 2023". You probably want to avoid real estate that is being supported by a strong knowledge based labor market (e.g. NYC).

Also, for most readers I imagine that career capital is their most important asset. A consequence of AGI is that discount rates should be high and you can't necessarily rely on having a long career. So people who are on the margin of e.g. attending grad school should definitely avoid it.

My current portfolio is a mix of single name equities, long dated call options on indices, long-ish dated calls on a few specific stocks (e.g. MSFT), and short long dated bonds. I also hold a lot of cash. If I could easily get a cheap mortgage in some less bougie part of the US, I probably would, but logistically its annoying.

One other general piece of advice I would offer - and this dovetails with both "hold cash" and "get some equity beta via options" - is to "preserve optionality". The value of being nimble in a broad sense over the next decade is likely to be high. (...)

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For the future reader, some attempts at paraphrasing what Noah is saying for non-enlightened mortals:

I would not trade short dated options based on AI theses: "I think it is a bad idea to buy financial instruments that only pay out when the price of certain stocks changes in the near future. Presumably because timing price movements is quite tricky and even big changes can be hard to time in the stock market (remember the difficulty of timing the 2020 pandemic stock movements despite obviously large effects of the pandemic on stock prices), and because the high volatility of this kind of instrument means that risk-averse counter-parties often ask you to pay a high additional premium"

If you buy calls with expirations several years out, this is long enough to receive long term capital gains tax treatment: "In the U.S. you pay substantially higher taxes when you hold a financial instrument for less than one year (short term capital gains vs. long term capital gains). This means if you want to bet on price movements (via options), it's tax beneficial to bet on price movements at least a year out."

The reasons to do this are cheap, non recourse leverage (you can get quite a lot of equity exposure for little money down): "If you bet on long term price movements instead of just holding stock this way you can capture a lot of upside without tying up a lot of your capital in holding stock (high leverage) and without risking your unrelated assets being liquidated and possessed (non-recourse)"

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Broad market effects of AGI

Under basically any AGI scenario, the economy will begin to accelerate and grow very rapidly. Several assets closely reflect the growth rate in the economy, particularly real interest rates, and others are imperfect proxies, like public equities (stocks). It's worth noting that several leading AI companies cannot be invested in by the general public currently (eg OpenAI, Anthropic, etc) as they are privately held, so it may be difficult to invest exactly and precisely in an AI scenario. My argument is that while it will be tricky to get perfect exposure, and any portfolio will be an imperfect proxy, the rapidly accelerating growth will mean that lots of value is created in unexpected places and captured in different ways - for example one of those booming private companies being acquired by a public company, which you can now invest in - such that the boring old strategy of "invest in index funds" still might capture much/most of the value from AGI :)

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As for my current portfolio, I have a mix of different things, which includes individual stocks I expect to benefit from AI (e.g. MSFT and GOOG), and various other investments including other individual stocks, and also a very favorable fixed-rate mortgage - which is an example of a trade that was good anyway, but which AI made better.

I agree with NoahK that preserving optionality is a good idea here. You should treat illiquidity as costing a larger premium than usual.

In general, I think that 'construct a perfect portfolio' is not worthwhile unless you value the intellectual exercise. There isn't enough alpha in getting it exactly right, and tax considerations often dominate when considering things like rebalances. You want to be sure you are directionally right and are expressing your opinions, but not go too crazy.

I strongly agree with Will that accelerating AGI will create a lot of value in different places, so a broad range of productive assets could appreciate, or at least a portion of them, such that it is reasonable to predict that SPY (S&P 500 ETF) would do well. One worry there is that rising interest rates is not so great for stock prices, so you'd want to consider whether to cover that base.

For things like options, you pay a premium in that you have to cross a wider spread when you trade them, worry about various edge cases in market structure, and then face tax implications. It is clearly the right move in certain focused spots (think Feb 2020) but I would hesitate to use them for AI unless you expect things to escalate rather quickly. (...)

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Career capital in an AGI world

Also, for most readers I imagine that career capital is their most important asset.

This point Noah made is worth considering, though I think we need to be honest about what skills we have / which ones we can develop. In a full AGI scenario, where all humans are exceeded in all skills by AIs, it seems unlikely that even the best programmers etc will be able to make significant returns. In the lead up to that period, there's still an open question about which jobs exactly get replaced in what order.

For example, everyone seemed very surprised when art got automated first - it was always assumed that creative tasks would be the last ones to go! (This still could be true if we place a huge premium on human-created art.) It seems reasonable that anyone working directly on improving AI could still earn a large premium for many years, and so relying on that career/human capital seems like a good strategy. But if you expect both 1) AGI soon, and 2) many/most jobs replaced, then I think people shouldn't assume they'll be able to earn any income in future periods. (Social implications of that are massive, expect taxation of AGI + universal basic income, mass charity, etc, etc - but the point stands.)

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Completely agree with Will about most people's careers not necessarily being worth all that much once AGI is here. I think it's an argument for trying to grab money via your career now, instead of doing things that supposedly build human career capital but take a while to pay off. Do quant trading over consulting, don't go to grad school, try to front-load earnings as much as possible. (EDIT: to Zvi's point, human and career capital are different. I'm really just talking about career capital here - broader social connections and reputation are likely to be exceedingly important in many futures).

I do expect the transitional period around AGI to create a lot of high value entrepreneurial opportunities for those with that skillset. Unclear how long to expect it to take for things to reach a new equilibrium.

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A point I have not seen made so far, that is worth considering, is in which worlds is the value of having money high rather than low for you?

In the extreme, in the world where doom occurs and everyone dies, dying with the most toys is still dead. Or there is a regime change or revolution or confiscatory taxation regime or other transformation where old resources stop having meaning. Or if we get into a post-scarcity utopia situation of some kind somehow, perhaps you did not need money.

Whereas there are other scenarios where having funds in the right place at the right time could be hugely impactful - which I would guess are often exactly the scenarios where interest rates are very high. Or worlds in which those without capital get left behind. So you'd want trades and investments that pay off in the worlds where wealth is valuable, and to worry less about when wealth is not so valuable. 

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Yeah you kind of have to assume that things will get weird but not too weird. It's not really possible to hedge either the apocalypse or a global revolution, so you can ignore those states of the worlds when pricing assets (more or less).

by habryka, Zvi, Cosmos, NoahK, Less Wrong | Read more: