April 2024
IN THIS ISSUE
Nonsensical valuation
Hindsight bias
Remembering AIEQ
Soon after ChatGPT was released (November 30, 2022 - seems just like yesterday…) investors wondered whether AI would mean the end of active investing. If AI can distill thousands of company 10-Ks into actionable buy/sell recommendations in the time it takes a human to read just one, and if AI can detect fifth degree market inefficiencies that are far beyond humans’ limited capacities of complexity, how can human investors possibly compete with AI?
Of course Artificial Intelligence is not new. Indeed, AI has been an investable theme long before ChatGPT, including ETFs like AIEQ, which analyzes companies “based on the results of a proprietary, quantitative model developed by EquBot Inc. (the “index provider”) that runs on the IBM Watson™ platform. EquBot is a technology-based company focused on applying artificial intelligence based solutions to investment analyses.” (AIEQ, Morningstar).
Here’s from Amplify ETFs, asking Why Invest in AIEQ?
Harnesses The Power of AI: Strategy uses IBM Watson for machine learning, sentiment analysis and natural language processing to select securities for the EquBot index.
Quantum Computing: Analyzing more than 1 million data points every day, across news, social media, industry and analyst reports, financial statements on over 6,000 U.S. companies, technical, macro, market data and more.
Institutional Capability For Everyone: Previously only available to hedge funds and professional trading firms, this method of stock selection is now accessible as an efficient solution in an ETF.
Sounds great! Indeed, soon after January 31, 2023 AIEQ’s January performance (yes, based on just one month of performance) was picked up by a number of news outlets. Here’s how AIEQ outperformed the S&P 500 index in January 2023:
Source: TradingView
Yes, that narrow rectangle for January 2023’s performance shows AIEQ beating VOO that one month. Business Insider, for one, suggested that readers Forget ChatGPT - an AI-driven investment fund powered by IBM's Watson supercomputer is quietly beating the market by nearly 100% .
And investors listened(!) As noted in April 2023’s Likelyhoods, check out AIEQ’s fund flows following the January publicity:
Source: ETF Database
Prudent investors employ a process to identify and properly discount the many stories like these that financial media throws our way. Identifying these cases in-the-moment, then tracking long-term performance outcomes, provides an objective assessment of the consequences of performance chasing over-active management.
With just over one year behind us, here the updated performance chart for VOO vs AIEQ since January 31, 2023, reflecting the consequences of performance-chasing media darlings like AIEQ:
This is a performance business, and managers can add value by steering clear of performance-sapping traps. Systematically learning from the past, as the foundation of a reliable investment process, is a core component of what we call Thinking in Likelyhoods.
So, remember AIEQ.
Remembering Munger and Kahneman
What will you do with the lifetimes of wisdom that Charlie Munger and Daniel Kahneman have left behind? Will you let their insights flitter away like the countless other news stories that live for a few days then are forgotten?
Instead, set a yearly calendar reminder to reread some of their essential quotes at a minimum. Rereading their books is even better. The kicker is that their varied insights will resonate differently with us as we gain experiences of our own that will not make sense to us right now.
Charlie and Daniel, we will miss you… but we will not forget you:
ONE MORE THING…
Nonsensical valuation. If you're trying to make sense of the DJT listing, start here: Trump Media’s Business Doesn’t Matter (Bloomberg)
Hindsight bias. Debatable claim about Buffett. But Swedroe is right about active management. 'Buffett really was not a great stock picker': Financial researcher Larry Swedroe on how investors can emulate the billionaire investor
The information and opinions contained in this newsletter are for background and informational/educational purposes only. The information herein is not personalized investment advice nor an investment recommendation on the part of Likely Capital Management, LLC (“Likely Capital”). No portion of the commentary included herein is to be construed as an offer or a solicitation to effect any transaction in securities. No representation, warranty, or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained herein, and no liability is accepted as to the accuracy or completeness of any such information or opinions.
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