Artificial intelligence (AI) has become a hot topic in stock investing, with many touting its ability to determine fair prices and predict market outcomes. However, we want to share the perspective of our principal fund managers at Dimensional Fund Advisors (DFA), one that places trust in the ultimate AI: Aggregated Intelligence – the market itself…
The market is an unparalleled information processing machine, fuelled by the judgements of countless buyers and sellers. When you check the price of a stock, it’s a reflection of buyers and sellers agreeing that it represents a fair deal based on all available information. In this sense, the market is a massive model, continuously evolving to assess the performance of each company’s stocks and bonds.
While AI holds promise, we advocate for accepting market prices over algorithmic predictions. Large language models like ChatGPT can mimic human-like text generation, but they struggle to predict future outcomes accurately. Markets, on the other hand, embody real human intelligence, integrating millions of judgments from market participants.
AI can undoubtedly enhance trade execution through algorithmic trading, but it’s unlikely to revolutionize how we perceive stock prices in the near future. The market is extraordinarily complex, with multiple simultaneous inputs that make it impossible to determine the precise impact of any particular information. Nevertheless, the market ensures that prices represent the most accurate current value of stocks and bonds. Moreover, it’s freely accessible to all investors.
This viewpoint isn’t just an opinion; it’s backed by evidence. The Efficient Market Hypothesis, a theory over 50 years old, gains more validation with each passing year. Google it (or ask ChatGPT for an explanation)!
Still sceptical? Consider Chairman and Founder of DFA David Booth’s comments:
“Do you think you can hire a manager to implement the strategy of using AI to pick stocks that consistently beat the market? After fees, probably not. If they had some cool AI that actually did predict stock prices better than the market, why would they share the information with you?”
The takeaway is simple: you can have a good experience over the long-term by trusting the market. Over nearly a century, the stock market has consistently provided an average annual return of about 10%, surpassing inflation by 7%. This has remained true through major technological advancements and global events; why would the expansion of AI be any different?
Disclaimer: The information provided in this blog is for general informational purposes only and should not be construed as financial advice. While we strive to present accurate and up-to-date information, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information contained herein. Any reliance you place on such information is strictly at your own risk. The content of this blog is not intended to be a substitute for professional financial advice.