Artificial is the term that best describes the era we live in. We have artificial sweeteners, artificial turf, artificial flowers that seem ever so real, artificial satellites, artificial nails, artificial eyelashes, artificial hair, the list is endless and growing. One area that remained unadulterated up until recently was the area of Investing and Investment Management. Recent developments, or advancements, as they are referred to these days, appear to alter that perception, and interestingly so.
The year was 1999. That year, the world was awakened to the startling fact that an Investment Manager returned 213% and was ranked 22nd in the list of the best Fund Managers in the USA. The Fund Manager created an Index of Stocks and managed to outperform over 6,000 professional fund managers on Wall Street. This fund manager chose a list of 133 stocks by throwing darts at a list of internet companies. What is amazing is that this Fund Manager is a chimpanzee named Raven, and the index she created is called the MonkeyDex! Was the Chimpanzee intelligent or just plain lucky?
This incident is an extension of the blindfolded monkey theory, suggested by Burton Malkiel (Princeton University) in 1973. Burton Malkiel suggested that a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one chosen by experts. Buffet’s famous stock experiment is one where a monkey is given 50 darts and a list of stocks that comprise the S & P 500 index. The monkey throws the darts at the list and then purchases the stocks picked, resulting in a completely random portfolio. The Financial Times newspaper in 2013 carried an interesting article carried out by academics at the Cass Business School, London. They calculated 10 million “monkey” portfolios to determine how well smart beta analysis and conventional analysis compared with an approach based solely on luck.
The Researchers at Cass used computers to choose a thousand stocks at random from among the largest companies in the USA to build a monkey portfolio. This process was repeated 10 million times for each year between 1968 and 2011, thus creating an army of monkey investors. Andrew Clare, the professor of Asset Management at Cass, described the results as “shocking”! A $100 investment in the US stock market at the start of 1968 would have grown to about $5,000 by December 2011. However, half the monkeys generated $8,700, 25% returned over $9,100, and 10% returned over $9,500! Was fortune favoring the brave, or was it intelligent investing?
How many of us would be easily persuaded to rely on a chimpanzee to manage our investment strategy based on the outcomes described above? Realizing the futility of this, Cass analyzed the Sharpe Ratio (risk-adjusted returns) of randomly generated portfolios. The results favored the monkeys again, with over 50% of the ten million monkey portfolios producing better risk-adjusted returns than the conventional market index!
Over the years, investment strategy has remained a mystery to many. What constitutes the basis for being a successful money manager? Experience, luck, research, intelligence, the ability to forecast, or a combination of all of them? If a combination, then what would be the ideal ratio? Is there a formula at all?
The Holy Grail of Investing is yet to be discovered, or so it appears. While the limitations of natural intelligence in drawing up an Investment strategy confound many, the misplaced perception of the complexity involved is a stumbling block for others. Fear of failure defined by a loss and the inability to assume the risks involved appear to be the common denominators that cause folks to shy away from even making an attempt. But then, think again.
And here is when the artificial realm opens up a whole new space. Trusting a chimpanzee is out of the question for obvious reasons, no matter how superior the results. Finding a trustworthy investment strategist is equally challenging. Remember where we started—the concept of the Artificial era—and, in that vein, attempt to configure Artificial Intelligence for drawing up and managing Investment strategies.
The emergence and growing popularity of tools such as Chat GPT and Bard have caused investors to heave a sigh of relief. There are 10 possible reasons that come to mind easily:
- Analysis of Market news and trends
- Technical Analysis
- Portfolio Management assistance
- Risk Management
- Market Sentiment Analysis
- Fundamental Analysis
- Trade Execution
- Market Research
- Investment Strategy
- Real-time support.
Does this make life easier from the perspective of managing investments? It probably does. My experiments with this cause me to favor such tools because, for one, they help eliminate the bias associated with investing and never tire. Auto GPT is a deep learning algorithm that uses NLP (natural language processing) to generate code! Simply stated, AutoGPT works by analyzing large amounts of historical data and identifying patterns that can be used to predict future market trends. Once a model has been generated, it can be used to execute trades automatically based on preset conditions. Chat GPT, on the other hand, is a language model that can be used to interact with trading platforms using natural language. It allows traders to use conversational interfaces to execute trades without the need for complex programming or technical knowledge. Chat GPT can be used to interpret market data, provide insights into market trends, and execute trades based on predefined rules.
This makes it all so simple, isn’t it? For example, Bard, when sought for a price target that can be assigned to Reliance Industries, came up with a target of Rs. 3000 and cited reasons as well to support its view. Although still in its experimental stage, it is believed that disruption in Investment Management is already underway, with Artificial Intelligence poised to take over sooner rather than later.
