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Machines can do it better – but they won’t win outright


I had an interesting conversation with a good friend of mine last week about the introduction of AI and how it is becoming a significant factor for investors and traders. As part of our meanderings, he told me about a conference session he attended recently that was designed to foster thought leadership for the professional trading community.

He told me he wasn’t expecting to come away with quite the vision that he did, but it’s clear that the concept of self-directed trading or investing as we know it today is on the verge of dramatic change.

Machines can do it better

At this point, it’s worth remembering that the advent of managed funds came about around a century ago when a small amount of effort could help unearth significant financial return, owing largely to market inefficiency and lags in information dissemination.

The lure of bumper returns meant that more analysts flocked into the market, with investors keen to hunt out abnormal returns.

Efficiencies were finally realised and the more recent realisation has been that managed funds perform no better than trackers in the long term. The machines can do it better, but what does that tell us about what might happen next?

Looking ahead

Now, the conference wasn’t short of talk about cutting edge concepts, I’m told. Be that “next generation”, “artificial intelligence”, “quantum computing”, “understanding investor psychology” and the like.

The message from the conference, it seems, is that these themes in their various guises are likely to become the norm as technology allows businesses to provide more sophisticated solutions, build some clever tools and enable traders and investors to make their strategies smarter and more successful.

Another step further

Now that all sounds great. Anyone who knows me will understand how passionate I am about ensuring traders and investors are given the best possible chance to succeed. The Armchair Trader was founded on the principle of education for that very reason. These developments are likely to be a significant step forward for many.

However, I can’t help but feel that there is more to come. Another step that will make efficiencies even greater. The combination of extra costs and the technology enhancing intelligence is still, in fact, an extra cog in the wheel. Surely the most efficient returns will eventually be derived entirely by machine or robot?

There seems to be some parallel with the evolution of the managed funds industry here – an array of Exchange Traded Funds track assets such as indexes, regions and sectors, with many providing returns that match or even in some cases, exceed managed funds at a much lower cost.

Whether you are day trading or investing for the long term, we’re approaching the point where you give the machine your risk metrics and let it churn away. Assuming you don’t have any inside information, the machine is always going to generate a better return than you could manage. It knows more than you do and can work quicker. There’s a factor of scale here which could present liquidity issues and give individuals an edge, but on the basis an individual trader will always be slower than the machine, that’s an irrelevance. The price has already moved by the time you try to get in.

In the pursuit of financial gain alone, the machine will ultimately win out.

But where’s the fun in that?

Trading offers us a chance to immerse ourselves in another world, to entertain us, to feel the excitement that comes from making the right choices. Having a flutter on an asset price movement is at its core little different to betting on a horse race, taking a trip to a casino or buying a ticket for the latest Euromillions draw. Mathematically it’s not always going to deliver the best outcome, but there’s a side benefit to be had from the emotional response the activity derives. It remains an engaging distraction which could have a positive upside.

What about investing?

Arguably this has the potential to result in a wholesale societal shift. No longer will the obsession be with achieving market beating risk adjusted returns. The machine will do that for you, better than you ever could. Instead investors will have the benefit or privilege of pursuing alternative targets designed to suit their own lifestyle. That could be supporting a company delivering below market financial returns whilst providing a solution to climate change, the small cap local enterprise that will deliver useful services but might otherwise struggle with capital formation or buying into a zero coupon bond to back the work of a charity.

For decades, finding how to align investors with mission-based impact businesses has confounded the wider market.

A resignation to the fact everyone is playing on a level field when it comes to our traditional view of outperformance might yet prove to be the proverbial silver bullet.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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