Transforming time of investing and trading from human to machine

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              Transforming time of investing and trading from human to machine

The Industrial Revolution transformed economies based on agriculture and handicrafts into economies based on large-scale industry, mechanized manufacturing, and the factory system long back some time during 18th century. Thereafter, the world never looked back and kept on developing and inventing newer and newer techniques and tools for achieving never ending heights in manufacturing. The ongoing industrial evolution has been helping mankind enormously to produce anything from a small all pin to a huge spacecraft. Then, came the computers, internet, mobile and other technology-driven tools like AI, machine learning, cloud computing, data science which again have taken the automization to a new level which we never had imagined till eighties. Technology has now reached everywhere in all the aspects of human activities whether it is healthcare, manufacturing, education, banking, business development or marketing.

Today even technology has now penetrated deeply into investing and trading in financial products like stocks, bonds and securities.  This is why the financial markets globally have been one of the earliest adopters of AI and machine learning.  In 2001, IBM built a team of “robots” that beat humans at trading.  Sixty percent of all trading activity today is run on technology. In fact, the top five hedge funds in the world are all tech driven funds, using some form of technology to develop their trading strategies.

The world is so increasingly complex and interconnected today that predicting future trend has become a challenging job.  Even fundamental analysis has become harder in the present complexity.  Blue-chip companies today are both stronger and weaker today. Stronger because of their competitive edge and weaker because of ease of disruption today. The amount of news flow – political, economic, social that impacts markets daily is near impossible for humans to keep up with. In a single eight-hour trading day, there are 480 one-minute data sets.  

If we want an edge to this complexity, trading based on AI, machine learning and algorithm is the answer. High-frequency trading is fully ceded to machines and thousands of trades a second has no place for human involvement.  As far as trading is concerned, we have been shifting to machines using AI and algorithm and will witness that trading activities in financial market will going to be executed majorly through machine only in future. Machine performs with support of data and their is no human psychology involved.

Although investing, at least in India, much of our equity investments (mostly through mutual funds, PMS, etc.) rely on actual investing performed by human experts.  However, the number of factors that impact a company has grown manifold now and humans are struggling to beat their benchmarks. Eighty percent of large-cap mutual fund managers in India have been unable to beat their index over the last five years. This is because humans are emotional and suffer from biases, panic, and euphoria. That is why in the US; more money is now managed by indexed funds and ETFs than active mutual funds.

Therefore, the question is, how can AI help in investing? Can machine learning truly teach itself fundamental analysis? Many experts believe the answer is yes. They believe that the next step in the evolution of AI in the markets is building algorithms that can learn and understand financial statements, industry movement, and global macros.

Therefore, time has come to diversify your approaches and, of course, diversify away from humans by allocating to tech products. Do you think 10 years from now; there will be more technology in investing ? If your answer is yes, you need to start thinking right now as to how to get it to work for you.

-Rajendra Jhanwar

 












 

 

  

Comments

  1. Lalit SinghviMay 28, 2021 at 8:44 PM

    Highly thought provoking stuff. It can again be disruptive. May make jobs of financial advisors who sell MFs/PMS and like wise capital market consultants redundant. Will however be boon for investing community. Rightly mentioned that one need to plan for all these possibilities which will shape our future not very distant.

    ReplyDelete
  2. DR AQNovember 25, 2021 at 1:25 AM

    Therefore, time has come to diversify your approaches and, of course, diversify away from humans by allocating to tech products. Singapore Citizenship Application

    ReplyDelete

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