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How will AI affect your investments?

May 12, 2023

Greetings from 35,000 feet as I wing my way to our son’s graduation!

Now that I have a few hours free of phones, the internet, and the markets, I thought I’d take a moment to share my thinking about a question I’m getting a lot lately…

How will AI impact investing?

First and foremost, it won’t be a bad thing like many believe.

The opposite is true.

AI is going to be great when it comes to investing.

Paradigm shifts usually are.

Here are five breakthrough benefits I see ahead:

AI Investing Impact #1: How We Think About the Markets

You and I both know the markets are rigged. Wall Street’s insiders and dark pools can manipulate short-term pricing practically at will. Computers trade so fast that humans can’t keep up.

Sadly, nearly every publicly available stock screener, website, and app that I’m aware of leaves investors with more questions than answers.

AI will even the odds by helping savvy investors make smarter decisions, many for the first time in their financial lives.

AI Investing Impact #2: Predictive Analysis

Unfortunately, many financial advisors are great at looking in the rearview mirror, which is why they provide very little proactive guidance and are often late to the big trends we talk about months or, in some cases, years in advance.

AI will shift that balance by allowing even the most casual investors to make connections between otherwise invisible data points in real time. That, in turn, will help them look forward.

AI Investing Impact #3: Better Execution

One of the biggest single advantages Wall Street enjoys is almost completely invisible to the average retail investor: order execution.

Contrary to what most retail investors are thinking, knowing what to buy is only half the battle. You’ve got to know how if you really want to get the job done.

That’s one of the reasons why I constantly talk about using tactics to shift the odds of success back to your side of the table. But that’s a story we’ll save for another time.

What you need to understand is that Wall Street’s best traders and biggest investors have very, very sophisticated order entry algorithms that can make a huge difference in how things get done.

Warren Buffett, for instance, doesn’t just walk in and buy a few million shares of his favourite companies because he knows he’ll move the markets if he does. So, Berkshire Hathaway undoubtedly uses sophisticated trading routines to accumulate shares without tipping its hand.

AI will help individual investors plan, execute, and evaluate their trades more efficiently than they’ve ever dreamed.

Not for nothing, but AI will also help individual investors adapt their strategies in ways that will make even the most grizzled veteran traders green with envy.

You’ll be at the table instead of on the menu.

AI Investing Impact #4: Risk Management

Today’s markets are highly computerized, which is why they’re also considerably more volatile than they used to be. Risk has been effectively arbitraged out of the system. That’s why the VIX doesn’t work the way it used to.

At the same time, Wall Street has learned to use the headlines as a weapon, which, predictably, causes skittish individual investors to sell when they should be buying and buy when they should be selling.

People think that they’ve got to speed up to keep up, but the reverse is true. To a point I make often... when in doubt, zoom out.

AI will help individual investors gain newfound insight into risk management tactics that are presently beyond their imagination. This will help mitigate the risk of loss while increasing the probability of profits.

AI Investing Impact #5: A More Accurate BS Meter

One of the biggest challenges facing individual investors today is knowing how to line up their money with where the world’s going as opposed to where it’s been.

Diversification, for example, is a failed theory based on statistical analysis of what’s already happening. Insider trading, political gamesmanship, dark pools, and options are all forward-looking tools intended to separate the unsuspecting from their money.

AI will help individual investors develop a razor-thin BS meter. That, in turn, will boost desperately needed confidence while increasing transparency that weeds a lot of bad actors out of the system.

Imagine waking up every morning ready to crush the day, confident that you own the right stocks…

ALL because you have a consistent approach that allows you to control your destiny. That’s the kind of confidence AI will give you when it comes to fruition.

And when, exactly, might that be?

My take is it’s imminent.

I do have one word of caution, though.

Most data scientists are approaching the issue with the computing equivalent of a sledgehammer. They’re trying to attack the problem by throwing more data at everything.

Too much AI data is already causing decision-making paralysis.

For example, Oracle recently reported that “a stunning 72% [of more than 14,000 business leaders surveyed] admitted that there are times when the sheer volume of data, and lack of trust in that data, prevents them from making any decision at all.” Worse, 86% of respondents also said that the sheet volume of data is making personal and professional decisions more complicated, not less.

The point I want you to understand, and that I want to get across as forcefully as I can, is simple.

All the AI in the world won’t do you any good without focus, especially when it comes to money.

There is NO doubt in my mind that Wall Street will do everything it can to keep you off balance, perhaps even going so far as to create new AI-powered screeners, tools, and analytics under the guise of helping you.

Sadly, many investors will fall for it.

The way around that is to develop a rock-solid investing approach that stands on its own and helps you move towards your goals.

Keith 😊

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