The intelligent way to build wealth  
 

Overview of the AI Advantage


Artificial Intelligence in the financial markets can mean many things. To us at AI investing, it means taking the guesswork out of building wealth. It means adding consistency and focus to your investing instead of playing a random hunch.

AI applications span the entire life-cycle of wealth management:

  • Choosing the right investments
  • Determining the best timing and position size
  • Hedging your investments against risk
  • When to cash in or shift strategies
  • Balancing your overall portfolio to meet your objectives

From simple decision-support tools for the discretionary investor to fully-automated trading solutions, AI is a genre of technologies that are vital in today's markets. Some particularly valuable approaches include:

  • Simple Historical Back testing: Most investors have their theories on how to make money. Buy at certain P/E, at certain times of the year or after a particular technical setup. It is amazing how few of these hunches actually make money in the real-world. Simply back testing a strategy is easy and is the first step to better investment decisions.


  • Neural Nets and Genetic Algorithms: Financial markets are not simple and simple strategies often don't work for long. NN's and GA's learn from the past but adapt themselves as conditions change. NN's will take a good investment strategy and make it much better. The NN will learn where to invest, when and how much. And when conditions start to change, NN's will continue to adapt and learn to make good decisions in any market.


  • Fuzzy Logic: Most humans are not wired for computer speak. "If the StochK of SPY < 30 and the aggregate P/E is < 13 then Buy." This kind of logic is not how we naturally think or how the markets work. That is where fuzzy logic comes in. "If the S&P has pulled back a lot and it is undervalued then buy it". Fuzzy logic makes sense. Let the genetic algorithm figure out what "pulled back a lot" and "undervalued" mean. These are subjective determinations that change over time. Fuzzy logic is a great tool for adapting to changing markets and creating intuitively understandable investing strategies.


  • Data mining: A much maligned yet misunderstood tool in financial decision-making, the field of data mining offers many powerful tools to sift through a vast sea of financial data. Decision Trees, Clustering, Association and many other algorithms help find the hidden relationships in financial data. Are low P/E stocks really better values? In what industries? During what market conditions? Are Small Cap stocks better investments? In what circumstances? These are simple examples but data mining can provide the answers to these and much more complicated questions. Data mining is great for finding associations hidden in millions of records of data. These hidden gems often provide the starting point for a profitable investment strategy.


  • Portfolio Simulation: Financial markets are fraught with uncertainty. Even with a nicely hedged and diversified portfolio there are always unknowns that put your wealth at risk. Every once and awhile the 'perfect storm' wipes out many a 'conservative' investors. There are so many variables at work, portfolio risk management is a daunting prospect. The complexity of the task and prospect of reevaluation after every position change means many investors just 'assume' they have a risk managed portfolio. Monte Carlo simulation, recent improvements to Modern Portfolio Theory and other techniques are valuable for reducing portfolio risk. This is an essential and often overlooked component to the wealth management process.


  • Modeling 'Exotic' Positions: For some reason options have a reputation as an 'exotic' instrument. It must be the fancy greek letters and Nobel Laureates associated with option models. Or perhaps it is the fact that an option's exact value is difficult to pin down. But options make a great addition to portfolios of any size. At AI Investing we are heartily disposed to option selling. Collecting time value and interest income on top of profiting from a directional move is always an enjoyable prospect. As fun as option trading can be, it does take a little savvy (and perhaps some calculus) to properly structure your position and understand your risk. Black-Scholes, Binomial and Monte Carlo are all decent option pricing tools. But pricing is only part of the story, you need to create a well-structured position integrated into the overall portfolio strategy and then options will become a powerful aspect of your investment approach.