Computers vs. Humans: Who wins the investment game?

computers vs humans: who's the better investor

We’ve entered an era in investing where we read daily about billionaire stock pickers who’ve built large fortunes off their uncanny ability to invest in winners. There’s an entire cottage industry of websites that track all the investment moves of large fund managers in the hope for gleaning the next big homerun investment. Books like John Reese’s Guru Investor have deconstructed the strategies these top investors use so that investors at home can play along.

Here’s Estimize’s founder, Leigh Drogen on the humanness of great investing:

But here’s where it gets interesting. The best humans are still leaps and bounds better at investing than the best computers and the quantitative analysts behind their algorithms. Why? Because we’re just starting to scratch the surface of artificial intelligence in investing, and algorithms are still relatively dumb and inflexible. The best humans are still incredible at pattern matching and adjusting when correlations fall apart. Call it intuition, call it whatever you want, humans still have something extra that computers don’t (for now).

There is still something innately human about being able to identify and manage a great investment. No matter how good computers are at this point, they can’t recreate that special something.

On the other hand, much of today’s investing is happening via algorithms, via machines programmed to do what humans can’t — stick to an investment strategy. Trading volume in certain markets, like government bonds, is estimated to be 90% comprised of algorithms. That means buying and selling is happening machine-to-machine.

Machines can do something that behavioral finance experts know that humans just aren’t built to do: turn off their emotions and stick to a strategy. Algorithmic platforms enable quick filtering of investment candidates against standardized investment criteria and removes extraneous pressures and can make quantitative sense of conflicting signals.

So, which is it? Experts tend to say it’s a little bit of both. It’s the confluence of machines and humans that makes for the best, most successful investing. It’s the computer-enabled research and strategy building that enables a human, in spite of all his or her biases, to pull the trigger, when and where he or she determines is most appropriate.

According to Matthew Klein, the founder and CEO of Collective2, a platform for humans to devise, test, and manage algorithmic trading strategies, new investors should stick to the type of investing that plays to our strengths:

So if I were asked to give advice to some young hot-shot kid MBA at Harvard wondering what kind of investing field to pursue, I would say: Focus on the stuff that requires physical carbon. Do stuff that requires that you stand up at a podium and deliver a speech. Be a short-seller like Andrew Left who can scare the bejeesus out of investors by emailing a really cheesy PDF file to people in your rolodex.

To explore this concept further, Tradestreaming recently invited machine-human investing experts Matthew Klein, CEO of Collective2 and Leigh Drogen, CEO of Estimize to a frank conversation on the relative merits of algorithmic investing and stock picking.

View Can A Computer Do It Better? on Dealbreaker.

Sell your investment strategies (without the cost and burden of creating a fund)

screener

I frequently meet people with really compelling investment strategies and ideas.

Hey, can you help me raise some money?

They’re looking for help putting together a fund to demonstrate exactly how good their strategy or stock picking really is.

Starting a fund is hard…and expensive

It’s not that I can’t really help them — it’s that starting a hedge fund or mutual fund is pretty complicated and expensive. You need to see significant growth in assets to be able to scale these things to profitability (once they achieve that, though, they’re pretty damn profitable).

Like any startup, the chances of these startup funds achieving escape velocity — getting enough traction to turn their good ideas into profitable ones  — is pretty slim.

But, there are other ways of putting your investing talent to work and make money while doing it — all without the headache and onerous infrastructure needed to manage a fund or a regulated investment advisory.

How to make money from your investment ideas (without starting a fund or having $$)

Here are 5 ways to get started selling your portfolio strategies:

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June 2012 Update: Tradestreaming Hedge Fund Guru Portfolio

After a really hard May, which saw the portfolio down 5.1%, my Hedge Fund Guru Portfolio had a strong June, rising 7.7%, beating the S&P which rose about 6.5%.

The portfolio, which is a composite of all-star hedge fund picks from some of the most profitable investors around, rebalances quarterly. This was an off-month, so there were no buys or sells.

Learn more

You can read more about my strategy and sign up to track/autotrade it on Collective2.

I develop my ideas for optimizing hedge fund replication strategies in my book Tradestream and I use AlphaClone technology to run my strategy.

How to create a professionally managed investment portfolio for less than $10 per month

With so much else clamoring for their attention, many investors have a hard time making money in the markets. One way to better your chances (though it certainly doesn’t assure you win) is to lower the fees you pay for advice, trading commissions, management fees, and portfolio management.

Fees down, good for investors

Good news for investors on this front: fees for most types of investment services continue to drop and drop hard.

So, investing is definitely cheaper now for investors. But the next step — what to invest in — still needs to be answered.

Here are 4 ways to have a professionally managed portfolio for less than $10 a month

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May 2012 Update: Tradestreaming Hedge Fund Guru Portfolio

May was brutal. The S&P500 closed down over 6.27% and the Russell 2000 closed down 6.55%.

Tradestreaming Portfolio Performance

The Tradestreaming Hedge Fund Guru Portfolio closed down 5.1%. Beat the indices OK but still down. Not great.hedge fund replication

The portfolio, which is a composite of all-star hedge fund picks from some of the most profitable investors around, rebalances quarterly.

Sales, Buys

We sold News Corp ($NWSA) down 1.4% and CVR Energy (CVI) down 2.5%. The portfolio added one name this quarter as many of the fund managers in the algorithm stuck with their leading ideas.

Real money portfolios are up 35.9% YTD in 2012.

Learn more

You can read more about my strategy and sign up to track/autotrade it on Collective2.

I develop my ideas for optimizing hedge fund replication strategies in my book Tradestream and I use AlphaClone technology to run my strategy.

 

Creating a popular investment strategy marketplace – with Matthew Klein

Today’s Internet means unprecedented accessibility and transparency for investors — a huge opportunity to learn from and invest like some of the smartest and most talented investors.

One place this is clearly manifested is at Collective2.com, a marketplace of trading strategies. Whether you’re a publisher or a consumer, a writer or reader — investors can find thousands of investing systems on the site.

Not only can you follow some of these unknown Buffetts, you can also auto-trade them (program your brokerage account to replicate their every move).

Collective2.com‘s founder, Matthew Klein joins me on this episode of Tradestreaming Radio to discuss the foundation of the site and how some investors are getting rich by following some of the best trading models on the site — while the publishers of those models also make real bank.

Listen to the FULL episode

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