Most investors can’t beat the market, but that doesn’t stop them from trying. Humans are driven by fear and greed, which can lead to impulsive and often poor investment decisions. So it’s no surprise that some are now turning to AI for help.
The latest AI use case, which is being marketed to both retail and institutional investors by companies like Danelfin and Boosted.ai, embraces the technology to sift through mounds of data in order to select stocks so that humans shouldn’t do it.
Some of these companies claim that their AI-powered platforms are capable of outperforming the S&P 500 Index, which is an impressive feat given the inability of novice and professional traders to do so. However, results so far have been mixed, and the risks of using AI to help pick stocks are often similar to the risks inherent in other short-term or speculative investment strategies.
Even stock professionals rarely beat the market
Because the average person cannot understand financial statements, technical analysis, or how macro trends affect industry performance, picking stocks can be a risky endeavor. That’s why Warren Buffett advocates for passive investors to buy shares of index funds like the SPDR S&P 500 ETF Trust, which has averaged an annual return of 10.54% over the past 30 years.
However, the inability to beat the market is not a specific characteristic of retail investors. A 2020 study by S&P Dow Jones Indices compared actively managed funds to the performance of S&P500noting that 89% of fund managers failed to beat the benchmark index.
More recently, BNP Paribas found that hedge funds returned an average of 6.67% in 2023 while the S&P 500 returned 24%. This, to some extent, explains the recovering popularity of index funds among both retail investors and hedge fund managers.
And while the set-it-and-forget-it alternatives are popular robo-advisor have demonstrated some success, even their algorithms can’t compete with the average annual returns of the S&P 500.
However, for investors who remain fascinated by the possibility of excessive earnings but don’t want to pick their own stocks, there’s a newcomer to the fintech block that’s attracting some attention.
Is AI good at picking stocks?
The AI technology used for stock selection is not your usual generative AI platform. ChatGPT and Gemini, which are large language models, are incredibly powerful tools but are limited in the financial advice they provide. Asking about title selection on these sites yields responses like: “I can’t recommend specific titles, but I can help you with resources to do your research” and “As an AI-based language model, I can’t offer stock recommendations.” personalized investment”. .”
On the other hand, AI-powered stock picking platforms are specifically designed to do just that: pick and evaluate stocks and ETFs for humans. Considering how they remove time-consuming and jargon-intensive research and analysis from the equation, it’s easy to see why both everyday investors and professional traders use technology in an attempt to beat the market.
That may be a stretch, according to Andrew J. Evans, CEO and founder of Rossby Financial, a platform that provides support on technology, regulation and resources to help financial advisors.
“It’s a little silly to say they will always beat the S&P 500,” Evans says. Artificial intelligence “cannot predict the future. It has better predictive capabilities, but individuals need to determine ‘Is this best for me?'”
According to Evans, the success or failure of these AI-based stock picking platforms will be determined by their performance during economic downturns. “If the market rages, everything works,” he says. “Where [AI] will prove its mettle in the next bear market.”
The S&P 500 has been firmly in a bull market since October 2023, and it may be a while before the next bear market arrives. But when that happens, if these AI-powered stock picking platforms outperform, it could help solidify their position as useful tools. Evans believes that within “three or four years it will become a very robust predictive technology.”
A company that aims to change retail investing with artificial intelligence
Danelfin, an AI-powered stock analytics platform, aims to improve investors’ chances of achieving big returns by leveraging AI’s ability to sift through massive amounts of data and provide retail investors with technology previously only available to funds professionally managed.
Founded in 2016 in Barcelona, Danelfin’s mission is to “democratize the use of artificial intelligence to help everyone make better investment decisions.” The company aims to do this by using its Explainable Artificial Intelligence, an analytics platform, to provide users with actions and ETFs ratings and an easy-to-understand AI-generated score ranging from 1 to 10.
It offers three floors. The free option includes a daily and monthly newsletter with the top 10 AI-generated stocks and ETF picks. Danelfin’s Plus plan ($19/month) provides unlimited choices, reports, rankings, and alpha signals that can be used to place trades, while its Pro plan ($52/month) includes all of the above plus tracked trading parameters purchase records and the ability to export data as a CSV file.
The platform uses 600 technical indicators, 150 fundamental indicators and 150 sentiment indicators for each stock and ETF evaluated. According to Danelfin, the higher the score assigned by its artificial intelligence, the greater the probability that a stock will outperform the market in the next three months.
Does Danelfin work?
While companies like Danelfin promise to improve returns for investors, users should not rely solely on technology to make investment decisions, but rather use it as a tool to better inform their choices.
“The burden is on the [AI] company,” says Evans. “Did they teach their machine to distill information correctly?” The next question the individual investor should ask himself is: “Do I understand how this machine produced this result and am I comfortable with that result?”
To demonstrate its capabilities, Danelfin performed a backtest of its predictive AI compared to the S&P 500 from January 3, 2017 to August 15, 2023. In its modeling, the company’s AI-powered equity strategy generated a return of 191% versus 118% for the S&P 500 over the same period.
However, the recommendations generated by the company’s AI are almost not guaranteed. Take, for example, his price targets for 3M, a conglomerate with a market capitalization of $51 billion. Between January 2023 and April 2023, the company’s AI issued dozens of “buy” signals for 3M, generating high expectations.
On April 5, 2023, when 3M shares were trading for around $104, the platform generated price targets of between $145 and $208, which it expected the stock to reach by July 25.
In fact, 3M stock hit a high of just under $110 on July 25. This represented a respectable 5% gain over the previous three months, but failed to reach Danelfin’s platform-generated lower price target.
The platform aims to project viable trades within three-month windows. Buy-and-hold investors who bought 3M as suggested on April 5, 2023, would be down nearly -11% a year later.
It’s also important to keep in mind that while these services offer a form of assistive technology, AI-powered stock picking platforms still require human decision-making. Evans, a firm believer in machine learning, argues that ultimately it is the investor – not AI – who dictates what is and is not relevant to him.
“Time after time, this will make them enjoy the process more,” he says. “You can teach [predictive AI]but you still need a human to make the decision.
An expanding tool for institutional investors
Another company, Boosted.ai, uses artificial intelligence specifically to assist professional traders. Co-founded in 2017 by Joshua Pantony, a former principal machine learning engineer at Bloomberg, and Nicholas Abe, a certified financial analyst, Boosted.ai holds 11 patents in the AI and fintech spaces.
Since its inception, the company has helped dozens of investment managers, whose assets under management exceed $1 trillion, implement machine learning in their portfolios. Its software, Boosted Insights, relies on artificial intelligence to help institutional investors make more informed decisions.
According to the company, Boosted Insights “helps asset managers energize their equity portfolios with artificial intelligence… to find ways to reduce hours of their research process, improve portfolio metrics, and get a holistic view of what it affects their portfolios.”
While public information about the Boosted.ai platform is limited, the company’s website shows that it rated Waste Connections a “Strong Buy” on November 29, 2023. Since then, shares have risen an impressive 27%. However, the company’s AI-generated stock picks are only available to financial advisors and institutional investors.
But Evans believes it’s only a matter of time before these advanced tools are widely available to the general public. “Once the big banks start putting their data into a machine… wait another two or three years and we will have it.”
Are AI stock picks reliable?
The use of artificial intelligence for stock selection is still in its infancy, but it is evolving rapidly. While the technology may be more robust than relying on social media action tipsFor example, AI-assisted investment tools have so far shown mixed results and seem more suitable for experienced and professional traders. And while this technology can be used by beginners, it is unlikely to provide the desired long-term results on its own.
Simply put, Evans says of artificial intelligence: “It will not turn the general public into Warren Buffett.”
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