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Artificial Insight

June 2023 Insight

Artificial Intelligence (AI) is all the rage in the news. From Nvidia (NVDA) having massive stock price appreciation as the supplier of the high-power chips needed for processing, to students using ChatGPT, Bard, and other AI chatbots to write essays for them, the world is rapidly changing, with some even now referring to what we are experiencing as the fourth industrial revolution.

From the dawn of the Information Age to the current proliferation of cutting-edge technology, the world of investing has undergone radical transformations. Foremost among these transformative forces stands Artificial Intelligence (AI). A once nascent technology, AI has now permeated virtually all sectors of our economy, demonstrating its immense potential to revolutionize everything we do, including the way we approach investing.

While not quite in the same vein as of previous discussions on the influx of real estate investment opportunities and banking industry disruptions, let’s delve into the groundbreaking impact of AI on the investment landscape.

AI has been the driving force behind a host of sophisticated investing strategies and tools. By automating data analysis, AI can sift through vast amounts of information at unprecedented speeds, extracting valuable insights that would be nearly impossible for humans to discern manually.

In environments where every second counts, such as in high-frequency trading, AI’s ability to rapidly identify patterns and predict market trends is a game-changer. By leveraging these data-driven insights, traders can make more informed decisions, enhancing their risk-adjusted returns.

Just as we’ve witnessed the changing dynamics of risk assessment in real estate investing, AI has the potential to redefine how we approach risk management in the investment world at large. With its predictive analytics capabilities, AI may be able to foresee potential market downturns, enabling investors to adjust their portfolios in advance and protect their assets against severe losses.

Moreover, AI’s role in stress testing—an essential exercise that evaluates an investment’s potential resilience in adverse scenarios—is more crucial than ever. By running hundreds of different stress test scenarios in a fraction of the time, AI helps investors to better understand their exposure and mitigate risks more effectively.

AI has also brought us the advent of robo-advisors—automated digital platforms that provide algorithm-driven financial planning services with little to no human intervention. Robo-advisors democratize investing, making it accessible and affordable for a wider audience.

Like their human counterparts, robo-advisors analyze an investor’s financial situation, risk tolerance, and investment goals. However, they do it faster, cheaper, and potentially with greater accuracy. By automatically rebalancing portfolios and tax-loss harvesting, robo-advisors can improve overall returns, mirroring a trend we’ve observed in the increasingly complex world of real estate investing.

In light of recent market disruptions, and the sometimes puzzling decisions of regulatory bodies, the transparency and accountability AI can offer are particularly welcome. AI algorithms can track and monitor transactions, ensuring they comply with regulatory standards while minimizing the likelihood of fraudulent activities.

While AI brings significant advantages, it also presents new challenges. With the automation of investing, we face a conundrum: How much trust can we place in machines to make critical financial decisions on our behalf?

Moreover, the “black box” nature of some AI systems, where inputs and outputs are visible, but the decision-making process is not, raises concerns about transparency. The opacity of these systems could lead to unintended consequences, echoing the risks associated with the murky depths of debt markets and complex investment vehicles.

Navigating the AI-driven investing landscape requires a robust understanding of both its immense potential and inherent limitations. Like any tool, AI is only as effective as the hands that wield it. Thus, investors and financial professionals must educate themselves about AI, integrating it thoughtfully into their strategies.

As AI continues to evolve and become even more sophisticated, the future of investing will undoubtedly be one where humans and machines collaborate. Together, they will redefine the boundaries of what is possible in the world of investing, guiding us through a future rife with both uncertainty and possibility.

If you have made it this far in your reading, you have read the first Altus Insight written by AI (ChatGPT). I provided the text of three previous Insights and gave directions to write an Insight on AI in investing, but didn’t provide much direction beyond that. You may have noticed that certain parts of the text are a slightly larger font. That is text that I wrote or edited from the original document provided by Chat GPT. Frankly, I think the quality of the information provided, and even more so the conclusions reached by the chatbot are pretty poor, but much of that is in the details. For instance, does better information really help traders make better risk adjusted returns (note that the word “trader” was “investor” in the original text – I changed it because high-frequency trading is by definition NOT investing)? Maybe, but if everyone is doing it, then the advantage of that extra information, or that extra speed, is lost.

Will AI really improve investment returns? I am frankly doubtful. Improved returns come only from two things: higher prices or higher cash flow (relative to the baseline). Prices may increase some due to the increased efficiency offered by AI, but once that efficiency is built into the system the tail wind is gone. I think there is a better argument that AI can lead to increased cash flow through higher productivity. Productivity has been stagnant for the past couple years. Previous economic booms were mostly due to increased productivity. AI could be that stimulant.

I don’t know where this all goes yet, no one does. But I do know it is real, and it is here, and it is here now. Altus is actively exploring ways to incorporate the use of AI into our business. In a business such as ours there is always more work that can be done. The more efficient we can be through the use of AI, the more time and attention we can spend on the things that can’t (yet) be sourced to a computer. I am sure we aren’t the only investment company trying to figure this out, and we surely don’t want to be left behind. One thing I do know- AI, and however we end up using it, doesn’t change our commitment to our core values or the commitment we have made to our investors, team members, and communities. AI does not change Altus Being Invested. It is just a tool that we hope will allow us to be even better at chasing our Why.

Happy Investing.

About the Author: Forrest Jinks is CEO of Altus Equity Group Inc and a licensed real estate broker. Forrest has decades of experience as principal in a variety of alternative investment segments including real estate (residential rehab, in-fill development, multi-family, office and retail), debt, and small business start-up (online marketing and site retail). He can be reached at fjinks@altusequity.com.