Will Machines Eat Your Investing Lunch?
Artificial Intelligence (“AI”) is developing fast and experiencing rapid technological advancements with many industries are being disrupted.
Manual labour is being increasingly replaced by computers and machines. In the last five years alone, many workers have been displaced by technology which has automated factory floors. Meanwhile, increased levels of computing power have enabled broader and deeper analyses which was not possible ten years ago. While these developments point to greater progress and efficiency, the question arises as to whether investing can be completely delegated to machines.
Let’s explore this concept.
The Science And Art of Investing
Traditionally, investing has been recognized as a purely “human” field, an endeavour which combines both art and science.
The “science” part involves numerical analysis and financial modelling which is done by teams of analysts working under the direction of a chief investment officer. Meanwhile, the “art” part of investing is the qualitative assessment of a company, which can include studying its prospects, plans, industry, and risks.
The best fund managers have been able to consistently beat the market. Often times, they bring with them a unique way of looking at investments and a knack of thinking independently and avoid following the herd. In a nutshell, the best managers have superior insight, effective emotional control and also skill in deploying capital efficiently.
A Machine That Learns
The question now arises as to whether machines can replicate the skill-sets of the best fund managers so that computer, too, can be taught to consistently beat the market.
For the science aspect, computers are able to crunch much more data and at a much faster speed than human analysts, therefore the financial modelling aspect should be a piece of cake for the machines. In fact, computational power is increasing as we speak and shows no signs of slowing down.
As a famous example, a computer program was able to beat the best chess player in the world 20 years ago!
However, it is debatable as to whether a computer is able to have the “soft skills” to master the “art” aspect of investing. While computers are obviously unemotional – a necessary trait for investing logically and rationally – the machine may end up being too methodical and rules-based. The flaw with machines and AI is that they are still far from being able to detect nuances in human speech to tell if a person may be lying, or pick up subtle cues from language to suggest a CEO may not be as confident as he tries to sound. On these aspects, I think that humans still trump computers hands down.
Based on the above, I conclude that machines still have a long way to go before they are able to perform investment decisions and stock selection to generate consistent investment results.