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Artificial intelligence and investment

Despite the technological disruptions to the asset management sector, in the world of value investing it will be difficult to replace an experienced manager who is able to find value in a sea of opportunities.

07 · 03 · 2019
ALFREDO Martín

3 minutes

Ever since I was a child I’ve really loved science fiction films (and war films, but that has nothing to do with this post). I remember being totally absorbed while watching the first Star Wars films or Blade Runner (the original version from 1982). These films depicted impossible worlds in which the mere sight of vehicles hovering a metre above the ground aroused a thrill of expectation in me.

Now that I’m a little older I still find this genre attractive, but I can see that the world it describes is not so distant or so impossible. Films like AI, Minority Report or Ex-machina are based on scenarios in which the details and the special effects are plausible in the near future. The unease this possibility arouses in us stems not only from physical phenomena (like spaceships or strange galactic animals), but because it associates intelligence with machines. I’m reminded of Skynet becoming aware of itself and triggering a nuclear armageddon in Terminator. Remember 2001: A Space Odyssey by Stanley Kubrick? In my view, the most disturbing scene in this cinematographic treasure occurs when HAL 9000, the spaceship’s artificial intelligence, begins to display behaviour that is unmistakeably human, and a priori incompatible with AI: the capacity to lie.

Something similar is taking place in the real world today. Artificial intelligence (AI) is present in our everyday media, and we’re constantly seeing the appearance of new technological advances that surprise, and – let’s be honest – worry us.

Do you believe you’ll lose your job in a few years because of machines? Do you feel threatened by artificial intelligence?

It’s totally legitimate to feel somewhat worried about the future of employment and threatened by the way machines are gaining ground from humans in all productive sectors. Machines and AI are becoming increasingly capable of performing ever more complex tasks, both mechanically and in the world of information, knowledge and intelligence, a realm that was until recently reserved for human beings.

Should we be worried by the advance of artificial intelligence and machine learning?

Technology is what has raised human beings to the top of the evolutionary pyramid. Technological disruption has been inherent to human beings throughout our whole history, and has brought us to where we are today. However, it has also caused a kind of natural selection in many productive sectors. We only need to look at what has happened in the last two decades in sectors like taxis, travel agencies, music, video rental, books, newspapers…

Robo-advisors are the order of the day

Nor has the asset management sector been untouched by technological disruption – in fact, technological disruption is a constant feature of this sector. The use of AI and big data for selecting securities or configuring personalised portfolios is already a fact. Robo-advisors are the order of the day.

It’s no secret that Merrill Lynch is developing an artificial intelligence algorithm to select small-caps securities that traditional analytical tools have been unable to identify as opportunities.

As more information becomes available and technological advances generate (theoretically) market efficiencies, achieving the alpha is an ever more complicated task.

There are already ETFs that use artificial intelligence to choose securities based on an analysis that combines historical values with new market conditions to select securities with a high upside potential.

But although the new technologies are highly sophisticated, they don’t (yet) have the ability to combine the computing capacity –however colossal it may be – with emotional intelligence or instinct, which for the time being are attributes that belong exclusively to the human race.

Let the cobbler stick to his last. There are clearly many tasks that will be performed with more precision and with fewer mistakes by AI, but there are many others in which our humanity is a determining factor and can contribute significant value to investment processes, for example, by combining knowledge derived from experience with a talent for making investment decisions.

In my opinion, we should welcome the technological disruptions in the field of asset management, just as in any other sector. It will allow us to make the services we provide to our investors more efficient and less costly to produce, while enabling the appearance of new services that we cannot even imagine today. What will be practically irreplaceable in our way of investing, value investing, is the contribution of an experienced manager who is able to find value in a sea of opportunities.

 

 

Glossary:

AI: Artificial Intelligence. A system’s ability to correctly interpret external data, to learn from such data, and to use those learnings to achieve specific goals and tasks through flexible adaptation. Kaplan & Haenlein.

Big Data: Set of data that is too large or complex for traditional database processing programs. This concept is intrinsically associated to three key factors: speed (of access), variety (of the data) and volume (of data).

Robo-advisor: This is a type of financial advisory service or investment management that operates with only limited or no human intervention using automatic algorithms to manage and optimise its clients’ assets.

Machine learning: Set of algorithms and statistical models used by IT systems to progressively improve performance in specific tasks.

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