It feels like we’ll be talking about Artificial Intelligence for a long time to come – or perhaps not if AI destroys humanity or decides that we’re not responsible enough to have access to the internet. But, if we take a more optimistic perspective on the future of humanity with AI, then we should consider what impact AI might have on investing. Inevitably these are some preliminary thoughts that will change and develop over time.
There are a few points worth making. First, investing is a discipline that already attracts a huge amount of money and computer power. In the case of high-frequency traders, so the story goes, they were vying to get their computers as close as possible to the stock exchange computers to gain even the tiniest advantage in their speed of execution. If professional investors believe that there is any advantage to be had from the latest wave of Artificial Intelligence, you can be sure that they will have the capital available to try to exploit that.
The second point comes back to the idea of financial markets as a zero sum game. It’s not quite that simple (equity markets have historically risen over time), but it’s still fair to say that if there’s a buyer and a seller of stock, one of them will likely be wrong. If both of those investors see a step-change in their insights driven by AI will that change that equation? Theoretically, no. They both may win out against investors without the benefit of AI-driven insights, but if AI permeates across society in a significant way, then you’d expect the majority of investors to have access to those tools in the future. In that case, one role of AI might just be to raise the bar for all professional traders. Historically we’ve seen that the fact of publishing research on what factors matter for stock market returns makes those factors less effective.
The third, related, point is around what the limitations of AI might be. Our starting point is that AI might improve forecasting of company results or economic variables (or maybe not – has additional computer power improved forecasting so far?), but that’s not the same as providing certainty. And, to reiterate the point, forecasting company results is not the same as forecasting the share price. Understanding what expectations are embedded in the price of a financial asset is still critical, and likely still unknowable.
There are lots of important questions for investors to answer about AI – could it prompt faster growth, the disruption of profit pools, another wave of deflation? We’ll share our thoughts on that in a future article. For now, we’d guess that AI will be another step in the technological arms race that investors have engaged in for the past few decades – looking for every advantage they can find and, in the process, often cancelling each other out.
Richard Flax: Richard is the Chief Investment Officer at Moneyfarm. He joined the company in 2016. He is responsible for all aspects of portfolio management and portfolio construction. Prior to joining Moneyfarm, Richard worked in London as an equity analyst and portfolio manager at PIMCO and Goldman Sachs Asset Management, and as a fixed income analyst at Fleming Asset Management. Richard began his career in finance in the mid-1990s in the global economics team at Morgan Stanley in New York. He has a BA from Cambridge University in History, an MA from Johns Hopkins University in International Relations and Economics, and an MBA from Columbia University Graduate School of Business. He is a CFA charterholder.
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