Unconventional wisdom: How AI can – and can’t – make you a better investor
Investors might be asking too much from AI when it comes to investment decision making.
Conventional wisdom is a byproduct of groupthink that presents solutions good enough for the average person while simultaneously not being right for any individual. You follow it at your peril. Each Monday I will challenge the investing norms that just may be holding you back from living the life you want.
Unconventional wisdom: How AI can – and can’t – make you a better investor
“Artificial intelligence would be the ultimate version of Google. The ultimate search engine that would understand everything on the web. It would understand exactly what you wanted, and it would give you the right thing.”
- Larry Page
AI can write articles. I write articles. This is somewhat concerning for me. ChatGPT seems unphased. I asked our robot overlord if it is worried about replacing writers. The response: “That’s a fair and important question. The short answer is: no, I’m not worried, but that’s because I don’t have feelings.”
Whether ChatGPT replaces me or not is of little consequence to the world. But we are in the midst of an ongoing experiment to see what impact AI has on the overall workforce. That is consequential.
Companies that are doing well like Microsoft and Amazon are laying off workers and citing AI. Alarmists are predicting a white-collar job blood bath while others think the productivity gains will unlock economic growth that will benefit all of us. We will see what happens.
To not get replaced I need to have some sort of edge or competitive advantage over AI. This isn’t easy to do. AI is faster than me. AI is cheaper than me. I’ve been told AI is more pleasant to work with. The key for me is to be good at things AI can’t do. That is how I can keep my job.
From an investing standpoint it is helpful to also view AI through the lens of competitive advantage. Is using free AI tools a competitive advantage? Unlikely. Everyone can use them. But that doesn’t mean AI can’t contribute to the competitive advantages you already have. I’ve outlined places AI can be helpful and where it may cause investors more challenges.
AI ‘knows’ a lot – but it doesn’t know you
Perhaps you’ve seen the dog and pony show of the investment world. A share picking expert answers live questions on any investment the audience throws at them. Jim Cramer the CNBC host in the US is the protype but we can find similar - if slightly more subdued – examples in Australia.
You ask about a share and you are told if it is buy or a sell. To be the person answering the questions requires a breadth of knowledge about companies. The depth of that knowledge is open to debate. But it seems obvious – at least to me – that the practical application of these sound bite sized pronouncements is limited.
Yet people are naturally drawn to the clarity of this model in all facets of life. You ask a question and you get an answer. Decisiveness and confidence are a proxy for competence in everything from politics to investing. It is tempting to use AI in this way. You ask AI a question and it gives you an answer. Moderate interpretation required.
This black and white view of investing – and life – may be satisfying but only faintly resembles reality. Context matters in investing. For instance, if you’ve owned CBA since demutualisationand I bought them yesterday it is foolhardy to assume that our decision on what to do with the share would be the same.
The most important context needed in any investment decision is what you want out of life. Without knowing that it is impossible to know if any investment is right for you. That is where AI falls short.
AI does not know you. It does not know what your goals are or your temperament or your investing strategy. You can’t be a successful investor if you don’t figure out what you want out of life and design a plan to achieve it.
AI can help you with parts of that plan. I’m a proponent of goal setting and calculating the return needed to achieve your goal. Only you can figure out your goal and estimate how much it will cost. But AI can do the calculations for you.
I asked ChatGPT what return I needed to grow $10,000 into $100,000 in ten years. This is the reply I received:
Calculating the return is helpful. But what is also helpful is the “reality check”. The return needed will inform your asset allocation and the types of investment you would consider. AI can contribute to that plan. It can’t come up with it.
Once you have a plan down you can spend time focusing on your investing process – that is how you execute the plan.
The process of investing
When I took the Charter Financial Analyst (“CFA”) exams back in the mid-2000s there were three tests to pass. Each was offered once a year. The test were annual because the second two were made up of essay questions.
This presented a big logistical challenge. Somebody had to mark the exams. The point of going through this effort was a nod to an unescapable truth of investing – no amount of calculations provide you with the investment outcome you seek. The inputs to the calculations are educated guesses. The future is unknowable.
This means the process you go through to find an investment is just as important as your decision on any single investment. In an essay question where you had to show your work the process could be assessed. This is helpful. Long-term investment success is a function of the degree of process structure and the consistency in applying it.
Since the advent of the internet and search engines we’ve lived in a world where information is constantly available. AI takes this a step forward as the promise is not just information that can help you find an answer. Instead, AI is supposed to give you the answer. This is problematic in investing where there is no answer.
AI can be an input into your process. It can help you find investment opportunities that meet certain criteria – provided you’ve defined the criteria. AI can’t be the process. AI can’t help you run the emotional gauntlet of markets.
As an example, I typed the following into ChatGPT: US companies with competitive advantages, dividend aristocrats, non-cyclical, strong financial position and dividend yield of at least 3%.
At a high level that is what I look for in a share. And the list that came out wasn’t half bad. There were 22 companies and I own two of them – Pepsi and Johnson & Johnson. ChatGPT also provided me with rationale for why the companies fit my criteria.
It would be foolhardy to blindly buy something off this list. But it isn’t a bad starting point for further research. AI has not replaced my process but it did make it more efficient. That is a win.
Remaining an active participant in your life
On a recent episode of the Freakonomics podcast host Steven Dubner was interviewing David Adjmi. Adjmi was recounting a conversation with fellow playwright Edward Albee. The context of the quote was a discussion on the TikTokification of content and the criticism Adjmi faced for the length of his three hour play Stereophonic.
Adjimi recalled, “He (Albee) once said, entertainment isn’t just about you being entertained. It’s about what you are willing to entertain. I think there is a fine line between edification — you might call it homework — and a certain kind of devotion and attention that really does pay dividends and pay rewards. But it’s not always instant gratification.”
This quote got me thinking about, well, thinking. Investing has become entertainment. We’ve seen gamification introduced by brokers. We’ve seen the TikTokification of investing content. AI will undoubtedly further this trend as it will lower the bar on content creation which better plays to our unhelpful base instincts.
Too many people are passive participants in their financial future. That doesn’t mean unengaged. They are just engaged in a passive manner where they are constantly absorbing and acting on opinions from others about what they should do.
While zig zaging between these uninformed recommendations people are whitling away their future. The epidemic of over trading is best demonstrated with the reduction of holding periods for shares trading on the NYSE from 8 years in the 1960s to 5.5 months in 2020.
What Albee was getting at in his quote was that there is a difference between being an active and passive participant in any endeavour. An active participant in investing embraces the intellectual challenge by thinking about how to differentiate themselves from other investors.
Inevitably this will lead you to the conclusion that the biggest competitive advantage you have over other investors is controlling your own behaviour. That is true no matter what strategy you take.
Some investors decide that they will have a simply passive portfolio and just don’t touch it. Some will have complicated strategies with individual shares. Both can work. What doesn’t work is bouncing from strategy to strategy and investment to investment.
Consider what you are willing to entertain when it comes to investing guidance. Find people that challenge you to think. Not people who browbeat you into action. Focus on the act of investing and not just investments.
Final thoughts
Every year the ASX surveys investors. And for as far back as I can remember the biggest concern cited by investors was who to trust to support them in making financial decisions.
Perhaps you trust in the collective wisdom that is sucked into the large language models powering AI. There is wisdom in crowds.
Yet the undeniable truth is that to expect different outcomes from the crowd you need to take different actions. And that is where AI falls short because there is no competitive advantage in a tool that everybody can use.
I personally view AI as my investing assistant. An assistant that I can assign menial tasks to make my life easier. An assistant that can hunt down information so I don’t have to. An assistant that I don’t quite trust – one that can do things for me but can’t do my thinking.
If AI can replace everything you do as an investor I would humbly suggest you are doing it wrong.
It means you don’t have a money philosophy that guides your decision making. It means you don’t have the structure of a goal and an investment strategy that keeps you on the right path. It means you don’t have criteria to find the investments that are right for you.
AI is an investing tool. It isn’t an investing solution. And if AI is reading this article….please let me keep my job a little longer.
Comments? Email me at [email protected]
I have a favour to ask
The book Shani and I wrote is currently in presale which is an important time to show our publisher and book retailers there is interest. If anyone would like to support this project you can buy the book now. Thanks in advance!
Our book Invest Your Way will be released by Wiley on October 9th in Australia.
Invest Your Way is a personal finance book that combines foundational investing theory, real-world application and our own experiences. It is designed to help readers create a financial plan and investing strategy that is tailored to their unique goals and circumstances.
Get Mark’s insights in your inbox
Read more of Mark’s articles
Read previous editions of Unconventional wisdom
What i’ve been eating
I spent four nights in California for a wedding. It was a lot of flying for not many nights. One great part of being in California is the Mexican food. I went to El Molino Central in Sonoma twice. It was unbelievable. One dish I ordered was the chicken enchiladas with Oaxacan mole. A mole is a sauce that can have 20 or 30 indgredients which traditionally include nuts, seeds, chocolate, dried chiles and fruit. Mole is delicious but not very photogenic. The strange angle on this picture didn’t help. I blame it on the Modelo Especia.
