Machines are taking over Wall Street.
BlackRock is the world’s largest money management firm, with more than $5 trillion in assets. Two years ago, the financial giant announced it would begin to rely more on machines than on humans to make its investment decisions…
Seven unlucky (human) stock pickers lost their jobs.
This month, Wall Street’s most prestigious bank, Goldman Sachs, launched five new exchange-traded funds (ETFs). Each relies exclusively on machine learning and artificial intelligence (AI).
Both BlackRock’s focus on robot investing and Goldman Sachs’ foray into machine-driven ETFs signify Wall Street’s growing obsession with AI.
Wall Street’s army of human financial analysts are rightfully worried for their jobs.
But the rise of AI in investing is good news for you, the small investor.
It signals an explosive increase in the range of investment offerings available to the little guy at a fraction of their previous cost.
Let me explain…
Picture a room full of financial analysts spending their days (and nights) sifting through company balance sheets and income statements, news stories and regulatory filings – all to unearth an as yet undiscovered investment opportunity.
Compare that image with lightning-fast computers sifting through millions of patent databases, academic journals and social media posts every single day.
It’s like comparing a human long-distance runner trying to break a two-hour marathon with a Bugatti sports car completing the same 26.2 mile stretch in one-tenth of the time.
We humans don’t have a prayer.
Garry Kasparov vs. Deep Blue
Of course, this is not the first time humans have lost out to machines.
A watershed moment occurred in 1997 when Garry Kasparov, the world’s top-ranked chess player at the time, lost to IBM supercomputer Deep Blue.
Many more such moments have happened since.
In 2011, IBM’s Watson beat two Jeopardy champions.
In 2017, Google’s AlphaGo computer defeated the world’s top player in Go, humankind’s most complicated board game.
In his book Deep Thinking: Where Machine Intelligence Ends and Human Creativity Begins, Kasparov concedes that human players have no chance against today’s powerful computers.
Computers don’t get tired. They are programmed to follow the rules. They can process vast swaths of information at the speed of light. They never make mistakes and are never “off their game.”
Meanwhile, a human chess player has to screw up only once to lose a match.
The same reasoning applies to trading the financial markets.
Fatigue, emotion and limited capacity to process information are all a trader’s enemies.
In contrast, AI-based algorithms are immune to both a trader’s and Mr. Market’s mood swings.
That’s why investing against machines is like playing chess against a computer.
Yes, you may beat the computer occasionally. But in the long term, it’s a loser’s game.
How AI Both Disrupts and Democratizes Investing
The rise of machines may scare you.
As with all disruptive technologies, the rise of AI-based investing can benefit you in unimaginable ways.
Say you are a “Boglehead” – a follower of the late John Bogle, the Vanguard Group founder – and believe in buying only traditional index funds.
That’s not a bad idea. In fact, you are likely to outperform active human managers over the long term.
But machines can do a lot better.
Twenty years ago, only the world’s top hedge funds – such as Renaissance Technologies and D.E. Shaw Group – had the computer power to generate consistent market-beating returns.
Today, smart beta ETFs replicate similar trading strategies for pennies on the dollar, and you can buy them with the click of a mouse.
These ETFs implement a wide range of strategies – such as investing in value, growth or high-quality companies, or even investing in companies that will “Make America Great Again.”
In my investment service Oxford Wealth Accelerator, I have assembled an entire portfolio of these market-beating strategies.
Each of these strategies has a long-term track record of outperforming the market by 1% to 2% per year. Thanks to the miracle of compound interest, this can add up to huge sums over time.
Focusing on ETFs with specific investment strategies eliminates the need to pick individual stocks.
Yet there is still a crucial role for us humans.
After all, investing is a game that is infinitely more complex than chess.
That’s why I agree with hedge fund icon Paul Tudor Jones that “No machine is better than a man with a machine.”
AI and computers are merely tools to improve human judgment.
So, yes, investing in smart beta ETFs can help you improve your investing results.
But you have to understand which strategies make sense, and for that, good old-fashioned human judgment remains essential.