A.I., DeepSeek and Investing Trends
A.I. (artificial intelligence) and DeepSeek have dominated the news cycle lately, and we have been asked what the technologies mean for our portfolios, especially in light of the DeepSeek-related plunge for Tech stocks earlier this year. In the 700th edition of The Prudent Speculator, which is available to Members here, we offered an overview in the Graphic Detail section and include a few highlights below.
A.I. and DeepSeek Background
In a major “aha moment” for artificial intelligence technology, DeepSeek, a Chinese A.I. laboratory, presented a new A.I. reasoning model called R1 that is fast, reasonably accurate and uses novel logic shortcuts that purportedly result in a 90% to 95% reduction in computing power consumption. R1 uses reinforcement learning to generate chains of complex thought autonomously and self-verifies the information, resulting in a scalable, ultra-efficient model like none before it.
The DeepSeek team actually released a research paper on DeepSeek-V3 December 27, explaining that it is “a strong Mixture-of-Experts (MoE) language model with 671B total parameters with 37B activated for each token…We pre-train DeepSeek-V3 on 14.8 trillion diverse and high-quality tokens, followed by Supervised Fine-Tuning and Reinforcement Learning stages to fully harness its capabilities. Comprehensive evaluations reveal that DeepSeek-V3 outperforms other open-source models and achieves performance comparable to leading closed-source models. Despite its excellent performance, DeepSeek-V3 requires only 2.788M H800 GPU hours for its full training.”
The Launch of DeepSeek R1
It did not get much attention outside the A.I. community until DeepSeek-R1 was posted to GitHub on January 20, a repository for open-source code. Instead of walling off the team’s contributions to A.I. and privatizing the model, R1 was made available to everyone (provided they had the hardware to run the code). Software engineer and early-stage investor Marc Andreessen called the release “a profound gift to the world,” but A.I.-related stocks tumbled on fears that A.I. investments were worth less if models could operate with a 90%+ reduction in cost.
We argue the knee-jerk dumping of many A.I.-related stocks ignored the fact that DeepSeek’s claims excluded the potentially hefty costs tied to “prior research and ablation experiments on architectures, algorithms or data.” That does not mean that DeepSeek is not a major step forward, but the billions of dollars headed toward A.I. investments, especially those related to hardware, are not likely to be undone. Projections for A.I. capital expenditures were never accomplishable given current constraints. There are plenty of instances where chip demand far exceeds available supply, power generation capacity is insufficient to fuel data centers (a single data center can consume as much energy as 50,000+ homes) and human interaction with models is inefficient.
A.I., DeepSeek and the Future
A.I., while groundbreaking, is still a costly and resource-intensive endeavor, particularly in its early stages of development and deployment. Ultimately, we don’t think that every A.I. model will survive. That’s not because the models won’t work…they might…but many won’t be efficient enough to outweigh the costs to run the models or the ability of a company to monetize their model won’t make financial sense because customers won’t pay up for the incremental functionality.
At the time of this writing, we have A.I. exposure in our portfolios and have had such exposure for quite some time. We believe there are significant gains to be had in the Tech space as models, both proprietary and open source, become more efficient. There are still underappreciated areas for A.I. to have a major impact, such as in Health Care (perhaps for drug trial analysis?) or Industrials (perhaps reliability and fault-finding before failure?).
Developments in the past few weeks have reaffirmed our position that artificial intelligence is here to stay and are glad to have selective exposure to the trend in our broadly diversified portfolios.
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Kovitz Investment Group Partners, LLC (“Kovitz”) is an investment adviser registered with the Securities and Exchange Commission. This report should only be considered as a tool in any investment decision and should not be used by itself to make investment decisions. Opinions expressed are only our current opinions or our opinions on the posting date. Any graphs, data, or information in this publication are considered reliably sourced, but no representation is made that it is accurate or complete and should not be relied upon as such. This information is subject to change without notice at any time, based on market and other conditions. Past performance is not indicative of future results, which may vary.
