By Julie Cazzin with Andrew Dobson
Both Warren Buffett and Cathie Wood invest heavily in artificial intelligence (AI). All of their largest tech plays — and some of their non-tech stocks — use AI in some form.
But this success was despite radically different investment approaches. Buffett’s team at Berkshire Hathaway made its biggest AI bet on Apple (AAPL -0.76%), while Cathie Wood and her associates at Ark Invest chose Tesla (TSLA 1.24%) as its biggest AI investment. Although both stocks have outperformed the market by a wide margin, one approach holds a deeper potential for AI-driven success than the other.
As mentioned before, both Buffett and Wood hold extensive AI investments. Buffett’s investments such as Amazon and banks like Bank of America use AI extensively. By comparison, Wood’s investments are more tech-heavy portfolios consisting mostly of smaller large caps. Her fund holds AI stocks like UiPath, Zoom, and numerous others.
But despite owning several AI stocks, Buffett has said relatively little about the technology. He stated at his 2017 shareholders meeting that it could bring notable productivity gains and significant job losses.
Still, he has typically avoided smaller, money-losing stocks built on cutting-edge technologies such as AI. His team has given no indication that it owns Apple or any other AI stock specifically because of artificial intelligence.
Wood takes a more direct approach. She believes AI will be one of the major pillars of innovation over the next few years, calling the potential productivity gains “astounding and shocking.” Such a prediction might have led her team to place a price target of about $1,500 on Tesla by 2026.
Apple does not publicly discuss which of its products and services use AI. Nonetheless, virtually all of its products, especially the iPhone, appear to integrate AI on numerous levels. Functions such as Siri, texting, Face ID, Apple Maps, and Apple Photos reportedly use AI functionality in some form.
Apple has also reached out to the academic community. Programs such as Apple Scholars and its AIML Residency Program tap into knowledge from numerous disciplines to develop new AI applications.
In contrast, Tesla has addressed AI more directly. For one, it developed semiconductors to power AI. Among these is the FSD chip to control autonomous driving features, and the Dojo chip, Tesla’s semiconductor designed for deep learning. And the automaker develops AI software to improve the driving experience.
While both companies will likely excel in AI development, Tesla might have a slight advantage as an investment. Its market cap is under $600 billion, compared with Apple’s market cap of nearly $2.6 trillion. Thus, Tesla will have an easier time achieving higher-percentage growth.
In 2022, Tesla grew revenue by 51% year over year. In contrast, Apple’s revenue fell slightly in its fiscal first quarter of 2023 (ended Dec. 31, 2022), and in fiscal 2022, it grew revenue by only 8%.
Although Apple’s revenue increases could return to double-digit levels, it is unlikely to match a monster growth stock like Tesla. But Apple will probably remain cheaper from an earnings perspective, as Tesla’s faster growth led to a premium valuation in the stock.
Although both companies should continue to excel with AI development, the financials probably make Tesla the potentially more profitable stock. Not only is it smaller, but its revenue also grows at a considerably faster pace. Even at nearly double the price-to-earnings ratio, the difference in growth probably gives Tesla stock more growth potential.
Investors should not count out Buffett or Apple stock, and more-conservative shareholders might prefer his approach. But when it comes to AI-driven success, following Wood into Tesla stock is probably the more lucrative choice for growth investors.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Will Healy has positions in Berkshire Hathaway and Zoom Video Communications. The Motley Fool has positions in and recommends Amazon.com, Apple, Bank of America, Berkshire Hathaway, Tesla, UiPath, and Zoom Video Communications. The Motley Fool has a disclosure policy.
By Julie Cazzin with Andrew Dobson
Q: After 30 years of being a DIY investor, I have built up a $1.5-million stock portfolio by reinvesting the dividends for many years. If I open a joint account with my son Lenny, who is 19 years old, and he receives the dividends in cash, who pays the tax? Is this a good way to reduce taxes in our household? If not, can you recommend a better option? — Thanks, Nicholas P.
FP Answers: To understand the potential benefits of income splitting in this case, we should first review the income attribution rules, which discourage income splitting to avoid paying higher taxes. However, there is no income attribution on gifts to adult children, which means that if you give money to an adult child to invest, any income earned would be taxable to that child, not back to you.
By comparison, income earned on money gifted to a minor child is attributed back to a parent. That is, the income is taxable to a parent. However, capital gains are not considered income in this case, just dividends and interest from investments.
If you gave your son money to invest, your family may be able to save tax if his tax rate is lower than yours. It would need to be an outright gift, though. Putting investments in his name just to save tax and then using the money as if it were your own may be offside.
It also bears consideration, Nicholas, that gifting some of your existing investments to your son may trigger capital gains tax if you sell investments for a profit. Even if you gifted half the account to him and added his name jointly onto the existing account, deferred capital gains would be triggered. You would be considered to have sold half the investments — a deemed disposition — and this would trigger any accrued capital gains.
You could lose control over the money, though, and this would allow him to access 100 per cent of the investments as if he held them solely as his own. This could also expose your hard-earned savings to his creditors or to a family law dispute with a spouse or common-law partner.
If you wanted to put some money in your son’s name, but maintain full control over the capital amount, you could set up a discretionary family trust. This essentially protects the money from his unimpaired access because you would be the trustee in charge of the money, and be making the investment and distribution decisions. But a trust has costs. Upfront legal fees may be $5,000 or more, and annual accounting and legal fees could be $1,000 or more.
There may be an advantage to being joint owners on the investment account for estate-planning purposes. The assets in a joint account may be transferred to your son upon your death rather than forming part of your estate. That said, some or all of a jointly held account may be considered an estate asset for purposes of calculating the estate administration tax.
There are other opportunities for income splitting that may be much easier and less risky. For example, you can gift your son money to contribute to his tax-free savings account (TFSA). He will have started to accrue TFSA room as of the year he turned 18. You could also help him put money towards his registered retirement savings plan (RRSP) contributions, but this requires earned income to create RRSP room. You could even start funding a first home savings account.
All three accounts would be in his name, but would legitimately save tax for you and your family, while helping your son get a head start on building his own stock portfolio to follow in his father’s footsteps.
Andrew Dobson is a fee-only, advice-only certified financial planner and chartered investment manager at Objective Financial Partners Inc. in London, Ont. He does not sell any financial products whatsoever. He can be reached at firstname.lastname@example.org.
The promise was clear. And it was prominent.
At Labour’s 2021 conference, shadow chancellor Rachel Reeves announced her ambition to be the UK’s first “green” chancellor.
To stress her bona fides, she pledged to invest £28bn a year, every year to 2030 to “green” the economy.
Labour’s Green Prosperity Plan was one of its defining policies. It gave the party a clear dividing line with government.
Ms Reeves said there would be “no dither, and no delay” in tackling the climate crisis.
It was also an answer to the government’s “levelling up” pledge.
The borrowed cash would underpin well-paid jobs in every corner of the UK in the energy sector.
So why has Ms Reeves kicked the pledge into the second half of the next Parliament, if Labour wins?
The first reason is obvious.
Ms Reeves now says she was “green” – in a different sense of the word – in 2021, in that she hadn’t foreseen what then-Prime Minister Liz Truss would do to the economy.
With interest rates up, the cost of borrowing rises too, making the £28bn pledge more expensive to deliver.
And Ms Reeves wants to emphasise that if any spending commitments clash with her fiscal rules, the rules would win every time.
But did the £28bn green pledge really clash with her rules?
In their own detailed briefing on their fiscal rules, Labour said: “It is essential that for our future prosperity that we retain the ability to borrow for investing in capital projects which over time will pay for themselves.
“And that is why our target for eliminating the deficit excludes investment.”
So borrowing to invest in the future technology and jobs shouldn’t fall foul of that fiscal rule.
But there is another rule which Ms Reeves cited this morning – to have debt falling as a percentage of GDP or Gross Domestic Product, a measure of economic activity.
Meeting that rule may have contributed to putting the £28bn on the backburner – though I remember at the 2021 conference some senior Labour figures questioning the wisdom of borrowing the equivalent of half the defence budget every year even then.
And some senior figures in Labour are far less convinced that £28bn would necessarily bust the debt rule – economic forecasts can change by far greater margins.
One of the other justifications for the change of position is that £28bn shouldn’t be poured in to the economy straight away.
That’s because it will take time to train workers, to create and bolster supply chains. Hence “ramping up” to £28bn.
One shadow minister said that while today’s announcement felt like a bit of a handbrake turn, it was nonetheless inevitable and sensible.
The scale of the ambition remained the same, but pragmatically the shadow chancellor was simply not committing to spending which would be difficult to deliver.
But all this must have been known in 2021, too.
So why announce the U-turn today?
The change of position was discussed within Labour’s Treasury team for some time.
Engagement with investors convinced them the government itself may not need to pump in a huge amount of cash straight away – the private sector would provide green jobs without state help.
And while Ms Reeves has ditched the £28bn pledge in the first half of the Parliament, this doesn’t mean that a Labour government would spend nothing on its Green Prosperity Plan.
I understand cash will be prioritised for projects where the private sector would not commit without state assistance – nuclear and hydrogen for example.
But it seems clear that politics and not just economics played a role in today’s announcement.
There have been grumbles and growls over how the policy has landed over the past two years within Labour’s ranks and internal criticism has increased, not receded.
One concern was that the amount to be borrowed – the £28bn – was better known than what the money would buy – from home insulation and heat pumps to new carbon capture technology.
But it was crystal clear this week that the Conservatives felt that they had seen a vulnerability that could be exploited.
The front page of the Daily Mail blared this week about the alleged dangers of the policy – the extra borrowing would put up interest and therefore mortgage costs.
The independent Institute for Fiscal Studies was also being cited by Conservative ministers.
Its director Paul Johnson had warned that while additional borrowing would pump money in to the economy, it also drives up interest rates.
As Labour has been attacking the Conservatives for their handling of the economy, and the “mortgage premium” they claim the government has caused, it was understandable that they did not want the same attack to be aimed at them, and Ms Reeves this morning sought to eliminate a potential negative.
As one Labour shadow minister put it: “They [the Conservatives] will be pulling their hair out that one of their attack lines has failed.”
Some in Labour’s ranks, though, believe the party should have insulated (no pun intended) itself from attack by making the case more stridently that borrowing to invest is different from borrowing to meet day-to-day spending.
Labour’s opinion poll lead is wide but pessimists in their ranks fear it is shallow.
Establishing economic credibility is seen as key.
But while it may have been the lesser of two evils, today’s change of tack isn’t cost-free.
The party has committed to achieve a net-zero power system by 2030.
But with potentially significantly less investment, is this target in danger too?
And unlike many of the left-wing commitments that have been ditched – where the leadership don’t really mind the backlash – this was the shadow chancellor watering down her own highest-profile pledge.
That in itself has allowed the Conservatives to shout about Labour’s economic plans being “in tatters”.
As Labour is still committed to its Green Prosperity Plan – just not the original timescale – they will still claim they have clear dividing lines with the government.
But one of their key arguments has been this: With the US pouring subsidies in to domestic green industries, the UK will get left behind if it doesn’t follow suit. And fast.
A delay doesn’t destroy – but it does potentially weaken – the Labour case.
But there is another concern amongst those who are most certainly not on the Corbyn left.
Emphasising competence and fiscal credibility over climate change commitments could leave some target voters cold.
Though disgraced former FTX CEO Sam Bankman-Fried generally didn’t exactly handle his customers’ money well — or, according to some former coworkers, legally — there may actually be one very bright spot on the defunct crypto exchange’s balance sheet: a massive investment into a buzzy AI startup which, according to new reporting from Semafor, may ultimately spell good news for former FTX customers.
Per Semafor, FTX appears to have made a $500 million dollar investment into Anthropic, an OpenAI rival that made waves back in January when its model was reported to have passed a blindly-graded George Mason University law and economics exam with flying colors (a claim, it’s worth noting, that was made weeks before the OpenAI-built GPT-4’s test-taking prowess was publicly known.)
And FTX isn’t the only high-profile Anthropic investor. Seemingly in a move to level the playing field in its battle with the financially tethered Microsoft and OpenAI, a little company known as Google, among other investors, invested $300 million into the AI firm back in February.
As a result of those cash infusions, in addition to the buzz around the AI market, Anthropic’s stock has been headed way up. As it stands, the AI firm is reportedly valued at a staggering $4.6 billion – and per Semafor, FTX’s major stake in the high-dollar firm could ultimately provide bankruptcy trustees with a way to pay FTX’s slighted customers back.
But that said, as Semafor points out, it might not be that simple.
When more traditional companies, which tend to have more traditional-slash-real assets — real estate, bonds, and more of the like — go bankrupt, there’s a fairly standardized, precedented rulebook for bankruptcy proceedings. Those proceedings often include some kind of “prepackaged” bankruptcy strategy designed to eke as much worth out of an asset’s value as possible while also attempting to make customers whole.
FTX, alternatively, as an unregulated business within an unregulated industry, reportedly didn’t have any such plan, and its assets are generally pretty far from traditional. And to that end, it’s also worth noting that the AI industry is still at the beginning of a gold rush. Anthropic has a stronger footing in the market than most, but whether it can stick it out with a multi-billion dollar valuation in the long run remains to be seen.
Still, FTX customers haven’t had good news in a while — and maybe, just this one time, a Bankman-Fried financial decision could actually pay off for them. Or at the very least, pay them back.
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