Artificial intelligence is transforming just about every industry. So surely AI-powered computers must have a huge advantage when it comes to investing? A video on the Bloomsbury Wealth YouTube Channel.
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Transcript: Robin Powell & Larry Swedroe/ Investment author
Robin Powell: Artificial intelligence is transforming just about every industry. So surely AI-powered computers must have a huge advantage when it comes to investing? Investment author Larry Swedroe has spent decades studying what works in financial markets — and what doesn’t. He says the case for AI in investing has some serious flaws.
Larry Swedroe: “The problem with AI is this. When I went to college, I’m gonna date myself. If you had a hypothesis that, say, value stocks could outperform, you had to have that theory. You would then hand in your cards, your coding cards, into the machine, and overnight it would come out and show you where value stocks had outperformed. And you may have also had to decide on what metric you were going to use. Were you going to use price-to-book or price-to-earnings? You couldn’t run 15 or 20 different things to try to figure out what would outperform. AI, with the data available today, can run thousands and thousands of possibilities, and it will find a correlation, but it doesn’t mean there’s any causation there.”
RP: So just because AI can find a pattern doesn’t mean that pattern is real or useful. But even setting that problem aside, there’s a bigger question. If AI does give investors an edge, who’s most likely to benefit?
LS: “ I know for example, that AQR and Avantis they’re all using AI to try and gain these micro advantages and study the data. They have people overriding it, if you will, in a sense, to make sure that the output makes sense. So the question you ask yourself: am I going to be able to use AI better than these firms with trillion dollars in assets, 70 to 100 world-class PhDs? I don’t think so.”
RP: So the firms best placed to use AI are the ones with vast resources and world-class expertise. But even when those firms do find an edge, it rarely lasts.
LS: “It’s exactly the way the world works, and I think that’s exactly what happened with AI. So let’s use Renaissance Technology or Citadel as an example. They hire world-class scientists. They pay them huge salaries. They hire the best AI scientists to help them figure this out, more than you’ll ever be able to do. And they figure out that there’s a little niche here that they can exploit, a micro inefficiency. They could trade ahead of this and that, and they do it. Now somebody else observes Citadel doing it, or they’re there for three years and they say, hey, I’m gonna go start my own firm, and they leave and copy the strategy.”
RP: So any advantage gets copied, and then it disappears. And this isn’t just an AI story. It’s a pattern that repeats with every wave of new technology.
LS: “The best thing is to know your financial history, and we’ve gone through massive technological innovations. You could think of in the twenties, airline stocks. Airlines clearly changed the way we travel. And yet airlines have generally been a godawful investment. Nvidia looked like a great winner. Maybe it will continue to be, but maybe some startup will get ahead of them. We just don’t know. So I think the best thing to do is stop reading all the headlines. Just have a widely diversified portfolio.”
RP: AI may well change the world. But that doesn’t mean it will help you pick winning investments. The smartest response to any new technology is not to guess who the winners will be, but to own a broadly diversified portfolio — and stay the course.
Disclaimer — The information in this video does not constitute advice or a recommendation, and you should not make any investment decisions on the basis of it. If you do however require advice please do not hesitate to contact Bloomsbury Wealth.
