WHY HASN’T AI DISPLACED WARREN BUFFETT YET?

There’s a global industry out there devoted to predicting stock prices; the evidence shows that human traders rarely beat index funds or the S&P. Is AI going to finally figure out how to do that? Don’t bet on it, but we have a way.

Is AI Expert?

Whither AI? The pundits all see it taking over the world. I’m not so sure. The oldies reading this might remember the era of the so-called expert systems. These were the equivalent of today’s AI. At the time they were white hot. Then they all collapsed to be revived in today’s hot markets as AI. Let’s hope they do better this time around.

I don’t see anything out there that shows that AI can predict company earnings. So, what earthly use is it to traders, investors, widows and orphans, even you yourself?

Let me ask you a question. Do you think AI can beat the S&P on a regular sustainable basis? If you do I imagine that you’re more than fully invested in OpenAI, Anthropic and all the other current hot names. You’re not invested?

Well, well, so you don’t believe AI has solved this riddle yet either.

The Big Short - Behavioralized

Now of course I’ve got an axe to grind. To wit, we (than means me and us privately) do have a way. To the Wall Street guys this is impossible, no matter what they profess to their hapless clients. But there is a way, and it follows new advances in economics and finance.

That particular way is to behavioralize fundamental analysis. That means throwing out Ben Grham and replacing him (or at least complementing him) with Tversky and Kahneman, the inventors of modern behavioral finance.

We now know that people are not as rational aa we used to think. Actually, we’ve all got these nasty little cognitive biases of which few of us are aware but unconsciously drive our behaviors. Figure those out and you’ll be able to assess if you’re going to make money by investing. And you’ll also be able to divine whether those big-name CEOs are going to make money for their stockholders. Or not.

You Have a Financial Style? Financy That!

If you want the skinny see my book on the subject The Three Financial Styles of Very Successful Leaders or my article in MIT Sloan Management ”The Fiscal Behaviors of CEOs”. The idea is that every one of us have what I call financial signatures. Most financial signatures lose money. A small number make money. If you can identify who has the money-making financial signatures are the ones who are going to make the moolah.

Of course, this has never been taught in universities or Wall Street, so the professionals don’t get it. Except for the old-time guys like Warren Buffett who understand that it isn’t about economics, its all about management and people. If you understand that piece of the equation, you got it nailed.

But human analysis isn’t the strong part of the toolkit of financial professionals, economics or AI. For the most part it isn’t any part. Hence, we can be pretty sure that they will continue to screw up most of the time.

So, the true answer is what we might want to call with the French “cherchez la femme”. Oh well, “find the human”. Once AI figures this out it will be able to do better than the (few)Warren Buffett’s out there. Until then, don’t hold your breath.

So, we’ve now got to teach AI how to to learn about humans and their foibles otherwise it will never make it. That kind of falls to the rare behavioralists out there including my humble company Perth Leadership Institute, together with our esteemed partner DNA Behavior led by Founder Hugh Massie, which has also developed mind-bending behavioral financial solutions.

Yep, we will need humans in the mix, AI or no.

Why Isn’t AI an Investment Winner?