“…as soon as it works, no one calls it AI anymore.”
John McCarthy, the father of artificial intelligence, who coined the term in 1955.
On a recent golfing trip to Ireland, leaving home in the middle of the night and not wishing to eat or drink much EasyJet were offering inflight, the group voted for a McDonald’s breakfast soon after I drove our minibus out of Belfast airport.
Not a McDonald’s regular customer, it was intriguing that my cup of tea and breakfast arrived without me interacting with a single person.
Orders are placed by tapping your choices on a giant screen (and declining the nudges to scale up portion sizes), you tap a card to pay, an order number is shown and a short time later your order is there to be collected.
Where a downtown Belfast McDonald’s used to employ, say 20 people per shift, it might now only employ 12. These jobs are not being exported to China or taken by low paid migrants. The jobs have been lost to technology. You can see the same happening at the cinema.
As it is with fast food, it is increasingly so with investments too.
Investment and pension funds were run by large teams of people. Such active management, where the focus is on trying to beat the market, is still dominant today, albeit to a much lesser extent that it once was. Employees here have degrees from prestigious universities, high salaries, Christmas bonuses and expensive London office space. These costs add up and they are only paid by the end users, investors.
In the 1970s Vanguard launched the first index tracking fund. They are backed by decades of academic research, which is why we prefer the term ‘evidence based’ investing. Such funds don’t need armies of expensive staff as their trading runs largely on computer programs (or do I mean artificial intelligence?). Their costs are therefore low, which is a large part of why they outperform their actively managed siblings, and this outperformance is why around 20% of the global stock market is now held in evidence-based funds.
A recent AJ Bell report stated that in the 10 years to 30 June 2022, only 28% of active global equity funds outperformed their passive alternative. Investors are quite rightly voting with their feet. You have a less than 3 in 10 chance of beating the market. Those odds might be okay for the occasional punt on the horses but not for my financial future.
Just like McDonald’s performs more efficiently (and profitably?) with good use of technology, so does the investment world.
One place where the two worlds of applying technology and human input diverge is storytelling.
The active management world tells a good story that investors and the media are continual suckers for; you only buy the best companies, avoid the worst because X, Y and Z is happening is never ending and can fill column inches and dominate conversations day in, day out, open ended.
The evidence-based investing story of keeping costs as low as possible and buying everything proportionately because you simply can’t predict what will happen tomorrow, by the way look at the evidence to support this, and look at our impressive track record, gets a bit repetitive.
However, all you need to do is use some more AI – Google search (you see, AI is more common than you thought!) for some peer reviewed articles on the evidence behind evidence-based investing.