Over the years, I have written multiple times about how the odds are against individual investors in the stock market. Other than the Warren Buffett strategy of buying and holding for an extended amount of time, most small investors lose money trying to trade stocks. Now, with AI powered investing, individual stock investors are in an even worse position.
Although AI powered investing is relatively new, individual investors really lost their edge when high frequency trading (HFT) was introduced.
A decade ago, a company called Spread Networks spent about $300 million to lay fiber-optic cable in a straight line from Chicago to New York, so traders could send data back and forth along the route in just 13 milliseconds, or thousandths of a second. Within a few years the link was superseded by microwave networks that reduced transmission times along the route to less than nine milliseconds. –WSJ
Today, in 2023, HFTs use hollow core fiber to transmit trading information at the speed of light. Transacting information at just a billionth of a second faster than a competitor can literally be the difference between a profit and a loss.
But these highly technical and expensive tools that HFTs use are more about the speed of a transaction rather than the sophistication of a transaction. Now, with AI powered investing, HFTs and other professional investors are going to be far ahead of individual investors when it comes to advantage.
How AI Powered Investing Works
Of course, I am not going to explain how AI works. That’s because I’m not an expert, but also because it’s an entire rabbit hole that I’ve gotten lost in many times… and I don’t want to lose you either.
To put it simply, AI works by combining large data sets with intuitive processing algorithms. AI can manipulate these algorithms by learning behavior patterns within the data set.
It’s important to understand that AI is not just one algorithm. Instead, it is an entire machine learning system that can solve problems and suggest outcomes. –HubSpot
As we all know, the world of investing is overflowing with data, which AI thrives on. There are multiple different datasets that we can look at for an investment that range from internal company financials all the way to external economic indicators.
When these datasets are cross correlated, new insights can be created, which can then lead to different investing clues. Depending on the specific design and insights of an AI system, an investor can have a range of conviction for particular investment opportunities.
Really, it comes down to how the AI system is designed and built, and how an investor wants to follow the AI’s outputs.
The ChatGPT Fund
Released in November of last year by OpenAI, ChatGPT has been disrupting everything from blogs posts (ugh) to the workforce. If you haven’t yet explored this incredible tool, put it at the top of your to-do list. It may change the way you view the future, and possibly make your life a little easier. (Seriously. Go check it out and start using it. Now.)
Developers around the world have been making all kinds of interesting tools, based on OpenAI’s products. These tools range from travel planning, to debugging code, all the way to acing the “bar exam with score nearing 90th percentile.”
In the investing world, Autopilot seems to be one of the first companies that have released a product based on ChatGPT. Although it was only released yesterday, it is already out performing the S&P 500 ETF, $SPY.
https://twitter.com/chatgpttrader/status/1658193474708213760?s=20
Equally amazing is that this tool, which is called “The ChatGPT Fund,” is available to the public and is seeing AUM tick up by the second. (Literally, as I write this post, I can see AUM about to surpass $5 million, up from just $2 million yesterday.)
You can find out more and invest in The ChatGPT Fund here, which is available as an app on both iOS and Android.
Is AI Powered Investing the Future?
I can’t imagine a world where investors won’t be using AI to assist in their future decisions. That said, I doubt that individual investors will be able to leverage AI to outperform other investors. That’s because if everyone has access to the same tools and information, then no one has an advantage.
Of course there will be different iterations of AI systems that use proprietary algorithms and custom data sets… but just like HFT, serious advantages will likely go to the professional level investors. Those professional investors will then charge a fee to their clients to access their AI powered investing platforms.
Where I do see AI helping individual investors, is in unique and opaque markets. Most of the best investing opportunities in the world are hidden in strange situations that the majority of people have trouble accessing or simply don’t know about.
It can pay to be an explorer.
