songs my portfolio manager taught me (part 7)

Just realised I hadn’t done one of these for a while, and it fits the theme of “summer reruns”. Previous episodes in this series: 6, 5, 4, 3, 2, 1 and a related series – it’s where I reminisce about things people said to me when I was an equity analyst, which have stuck in my mind and which might have more general applicability. This time round, I am actually applying them, to a problem which is currently on my mind.

The proverbs this time round are in a family, based on something a client said to me when we were discussing the question of which global banks were actually winning market share and which losing. As he put it, “Guidance is an opinion. Provisions for risks are an opinion. Even revenue is surprisingly often an opinion. Headcount is a fact and real estate is a fact”.

I later plagiarised this and adapted it for when I did training on fraud prevention. My spin was something like “It’s easy to create fake sales. It’s easy to create fake profits. It’s pretty easy to create fake cash. But it’s difficult to create fake buildings, and it’s very difficult to create fake people”.

These all relate to the concept of “ground truth”, the idea that in order to interpret “data” (in the sense of processed and systematised information) correctly, you often need to have unprocessed and unsystematised information to hand. And that the value of ground truth is not that it’s a more accurate picture of something, because it usually isn’t. It’s precisely that it’s unstructured, it doesn’t have any assumptions going into its creation. Something similar is behind my own “golden rule for fraud detection” from the last chapter of Lying for Money, which is “anything which is growing fast needs to be checked out, in a way in which it hasn’t been checked out before”.

All these could arguably be summarised as “listen to what they say, but look at what they do”. Actions speak louder than words.

And this is what’s on my mind at the moment. I think it’s really quite interesting that two of the big “hyperscalers” (SpaceX and Meta) are currently signing deals to sell their “excess compute”. Whatever they say, this looks to me like the sort of thing you’d do if you had basically given up on winning whatever the equivalent is of an arms race for frontier AI. Meanwhile, OpenAI and Anthropic are on the other side of the deal^[1].

There are two reasons why someone might give up. One would be that they don’t think their skills are up to the competition, and the other might be that they think that the prize isn’t worth winning. I have my own theories about which might be which, but in the meantime, and related to the “sensible scepticism” project, it does strike me that the scenario that things like “Europe 2031” are focusing on is one in which AI is hugely transformative to the economy, in which the rewards are captured by the developers of frontier models, but in which these rewards are not sufficiently tempting to Elon Musk and Mark Zuckerberg to stay at the table. That in turn would seem to imply an assessment of Meta and Grok’s technology which is quite negative, but also an assessment of both CEOs’ ego and ability to stop chasing a lost race which is quite positive. I would say that’s a possible scenario, but it’s quite a specific scenario.

^[1] For completeness, Google is buying compute while Amazon is selling it. I am less inclined to draw conclusions from these players because I think Google is probably a forced buyer in order to defend its existing monopoly, while Amazon has been a seller of all kinds of compute for a long time and hasn’t really been close to the game in frontier models anyway. Also Microsoft, where I’m not even able to work out if they are a net seller or a net buyer.