Generative AI 101: What You Need to Know Before Investing

GenAI basics, investing opportunities and risks, valuation, and lessons from previous tech revolutions

Stephen Foerster
19 min readJul 4, 2023

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Photo of a robot
Photo by Owen Beard on Unsplash

We’re in the early stages of an exciting technology revolution. In the fall of 2022 OpenAI introduced an artificial intelligence (AI) chatbot, known as ChatGPT, to the masses. ChatGPT follows an instruction in a prompt and provides a fluent answer, seemingly as if a human were responding. The prompt can be frivolous, like “Create a limerick about Donald Trump” (see below for ChatGPT’s clever rhyme).[i] Or it can be practical, like “Create a Python program to read five years of monthly price data from Yahoo!Finance for twenty stocks to find optimal weights for stock portfolio risk-return optimization.” Marvelous stuff! This latest iteration of AI, known as generative AI or GenAI, is truly a game changer. But as an investor, you might be wondering, “How can I make money by investing in stocks that will benefit from this revolution?”

This isn’t a new question. Investors have considered such a question for almost two centuries, whenever a new technology has appeared — from railroads to planes to automobiles, and just a generation ago, the internet. The answer is never a simple one. And I’d be very leery of anyone who provides a simple answer, such as “10 Generative AI Stocks You Should Own.” Before you even consider investing to capitalize on the AI revolution, you need to understand what GenAI is, how it’s a major disruptor with enormous opportunities as well as huge risks, how these opportunities and risks might impact on stock valuations, and what cautionary tales there are from previous technology revolutions. Oh, and a new disclaimer for this blog: this article was written (for better or worse) by me, a real person.

What is ChatGPT, and why all the hype?
On November 30, 2022 OpenAI, a San Francisco-based research laboratory, made headlines around the world with the public introduction of ChatGPT. The chatbot model was trained using a natural language process to follow an instruction and provide an answer. OpenAI Incorporated began in 2015 as a non-profit entity with donations from CEO Sam Altman, as well as Elon Musk, Peter Theil, and others. In 2019 it created OpenAI Limited Partnership, a “capped-profit”…

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Stephen Foerster

I’m a Finance prof, CFA, and author of In Pursuit of the Perfect Portfolio (with Andrew Lo). I write stories about investing. (I don’t give financial advice.)