AI tools now help investors pick funds by analyzing thousands of options instantly. While software can easily spot good portfolios, it cannot manage the human emotions of long-term investing. One expert said, "The human aspect of sustaining a business over a period of time is something the machine won’t do."
Synopsis
The software can analyse thousands of funds and figure out that the three or four you are researching have almost identical portfolios. However, the investor’s real challenge lies in the middle stage. Choosing a good fund is the easy part because there are actually a lot of good funds and distinguishing the good from the bad is not black magic, nor is it guesswork.
There has been a spate of articles and social media posts in recent months about what is called the ‘AI rollup’ business strategy. This is the thesis: buy an ordinary, stable but unglamorous business; put a layer of artificial intelligence (AI) on its operations, thereby reducing costs and increasing the margins; and then, as profits rise, sell it off. Better still, acquire several similar businesses and roll them up into one with a single AI layer on top. ‘Acquire and implement AI’ has apparently become the plan for private equity and other usual suspects.
Some of the flaws in this concept are obvious. However, someone who has been in this kind of an activity had an excellent analysis. This person said that the opportunities for AI improving business operations is real because it can indeed, if implemented well, cut administrative effort and thereby increase margins.
However, these improvements occur only when you just get into a business. The human aspect of sustaining a business over a period of time, the daily firefighting that every entrepreneur does, is something the machine won’t do.
This applies quite well to retail investors’ personal investments, too. There is now a slew of (supposedly) AI tools that are being thrown at investors which all promise to help them make better investments. To understand what these AI tools can or cannot do for you, let’s see the lifecycle of an investment. There is the acquisition, when you choose your funds and invest in them. There is a long holding period, which is, hopefully, the growth phase, where returns grow and compound. And at some point, you sell off the fund either because you need the money or the fund has declined. The thing to note is that the tools now being sold to investors are aimed almost entirely at the first and third of these stages.
Sticking to your plan
For example, the software can analyse thousands of funds instantly and figure out that the three or four you are researching have almost identical portfolios. Or, it could go through the mass of marketing jargon from a fund company and rewrite it in human-understandable terms in whatever language you want. There are many such examples and they are genuinely useful.
However, the investor’s real challenge, like the business acquirer’s, lies in the middle stage. Choosing a good fund is the easy part because there are actually a lot of good funds and distinguishing the good from the bad is not black magic, nor is it guesswork. The difficult part comes when the markets fall sharply and you have to keep your systematic investment plans (SIPs) running. It also comes when someone tells you to buy a fund that did slightly better than the one you are holding. Or, when there are wars and instability around the world, and you start panicking about what will happen to your investments.
Discipline & patience real tools
This is when the ‘AI tools will make you a great investor’ theory starts failing. When your finger hovers above the sell button in the app, there will not be an AI hand that will reach out and stop you from doing so.
The real challenge of investing is in the human factor, your own emotions and attitude. And this is not just an opinion: study after study, including a recent one by my team at Value Research, shows that investors’ actual returns always lag behind those of the funds they invest in. Investors arrive after the good times and leave during the bad ones. This is the hole in the AI investor hype—the robots help you choose but that is not where the challenge is.
So do go ahead and use the tools, but remember that discipline and patience are the real tools, and only you can supply them.