[DDIntel] AI-Driven Investing

DataDrivenInvestor

May 7, 2023

In these unpredictable times, many people say that we are heading toward an economic crisis, due to the macroeconomic events happening right now.

Well, since everyone is panicking and starting to pull their funds out of the stock market and banks, we can say with confidence that this craze will most likely cause at least a short-lived crash. We all know that many investors are relying on their guts and feelings, and will panic at the first sight of trouble. But as data-driven investors, we do our due diligence, take the pulse of the market sentiment around us, and adapt to the times.

Right now some advisors suggest leaving the stock market while others advise you to invest in things that will grow during a crisis, such as Silver and Gold, to beat the market. Whichever path we choose going forward, we need to create our own strategy or follow the market trends we like the most.

One person you can learn from, about following trends, is Larry Hite. He is a successful trend follower, and he shares four essential ideas in his book "The Rule: How I Beat the Odds in the Markets and in Life." If you want to excel in trading, Hite advises sticking to the basics and executing simple rules effectively over time. This means taking action, managing risks intelligently, consistently making good bets using a reliable strategy, and being flexible enough to adapt to the market's signals.

With patience, consistency, and the ability to learn from failures, anyone can become a successful trader. Trading requires hard work, discipline, and a willingness to take risks, but it can also be a lucrative and fulfilling endeavor if done right.

Beating the Odds in the Markets

Speaking about market trends and hypes, investing in an index fund, such as the S&P 500, has become a popular choice for many risk-averse investors especially during uncertain times. However, recent data suggests that traditional market-capitalization weighted indexes may not offer the diversification and broad market exposure investors seek. This is due to a few large companies dominating such indexes, leading to significant concentration risk.

If you're seeking better diversification and are worried about concentration risk, consider an equal-weight index fund. In an equal-weight ETF, every stock has the same weight, regardless of its market capitalization, leading to better exposure to small and mid-cap stocks and greater diversification.

It's important to note that there are pros and cons to each ETF type. Equal-weight ETFs typically have higher portfolio turnover and expense ratios due to increased trading costs, while market-cap weighted ETFs may offer less diversification and be overly concentrated in large-cap stocks.

Over the last three years, the equal-weight index has outperformed the market-cap weighted version, but the latter is ahead over a five-year period. However, on a long-term basis, the two are nearly equal, with the equal-weight version slightly ahead on a risk-adjusted basis. Whichever option you want to choose, be aware and research more in-depth about both of them. Doing the best due diligence you can is your responsibility.

Is the S&P 500 Index Fund safe?

While taking the pulse of the current market and world economic situation, we also need to remember that people who do not know history, are doomed to repeat it. And while each event, past and future, is unique, there are similarities, patterns and lessons to learn from each of them.

Toward the goal of learning from the past, let's go back in time to the 1920s, around a year after the end of World War I. At this time, people were optimistic that good times were ahead.

Companies were making profits like never before, and unemployment was very low. As a result, the US became richer each year from 1920. However, with economic prosperity came consumer culture and new, often expensive, "hobbies," like speculating in stocks with margin or leverage. Unfortunately, the economy gradually changed and hit a snag by 1929.

Looking back at the infamous 1929 stock market crash, rising stock prices led to oversupply, businesses started selling at a loss, and share prices declined. Contributing factors included international tariffs, buying on margin, and banks liquidating trading portfolios, leading to widespread panic, similarly to what is happening right now (maybe we need a new type of banking?).

On Black Thursday, October 24th, 1929, stocks started falling, followed by panic sell-offs on Black Monday and Black Tuesday. The Great Depression followed, worsening the situation.

Fortunately, we have learned from our mistakes, and measures are now in place to prevent another catastrophic event like 1929. Long-term investing is now widely recognized, and exchanges have better systems to handle panic volume. Banks are more responsible in lending money for margin trading.

While we may never see another crash like 1929, we must remain vigilant and learn from the past to ensure our investments are safe and secure, so we can weather any future storm that may come our way. Especially now, since a storm is brewing.

Reliving The 1929 Wall Street Crash

Let’s also remember that, compared to the era of 1929, we now have awesome novel technologies at our disposal. The emerging AI technologies are changing the game in investing and many other domains, providing speedy data gathering and analysis; this gave birth to the latest trend in stock investing, called the AI-driven investor! Tools like the revolutionary ChatGPT, Bard, and Alpaca use generative text to optimize your portfolio, improve decision-making, and maximize returns.

These tools process vast amounts of text data, including financial reports, news articles, and market trends, providing valuable insights that enable informed decisions. AI-generated summaries of lengthy financial reports can help you avoid information overload and make quicker decisions, while AI can explain complex financial products in plain language, through web-scrapping and analysis, making evaluation easier.

AI-powered algorithms can help to identify potential investment opportunities, assess risks, and forecast future market trends, leading to improved investment strategies and higher returns. However, it's important to be aware of limitations and privacy concerns. AI models may have errors and biases, and sharing sensitive financial data with cloud-based AI services may pose privacy risks.

AI-driven wealth is an exciting trend in stock investing that can improve your portfolio performance. Remember to be vigilant of limitations, privacy concerns, and biases when using AI-generated insights, and always do your own due diligence.

AI-Driven Investing

ChatGPT for Traders

Those were some of the most notable pieces for last week’s postings.

You can also check out our main site or our popular DDI Medium publication for more interesting work.

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