Trade like a bot

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Katie Martin (0:36)

Pushkin.

Everyone knows the robots are coming, right? Artificial intelligence has the potential to reshape everything, all the kind of professional services, law, accountancy, all those kinds of things. Is journalism safe? I guess we'll find out. But a new study suggests that AI is better at picking stocks than you. So today on the show, we're asking, is nothing sacred? Should fund managers welcome their new robot overlords?

This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am not a robot, honest. I'm Katie Martin, a markets columnist here at the FT in London, and I'm joined by fellow non-robot human, Robert Armstrong, who writes the Unhedged newsletter in New York. Hello, fellow human.

Robert Armstrong (1:23)

It's a great day not to be a robot.

Katie Martin (1:25)

Every day is a good day not to be a robot. But how do you know you're not a robot? Is it because you tick those boxes on the internet that say, select the squares with cars?

That's the way we know we are human.

Robert Armstrong (1:37)

When you start failing those tests, you have to wonder if you're just a simulation.

Katie Martin (1:41)

Yeah. So look, we're going to talk about AI, but I want to throw you a curveball first and say, you are on record as saying that politics do not matter for markets, to which I say, vive la France.

I mean, what the heck is going on over there? I mean, this is really a fairly sizeable move in French stocks, French bonds. They do not like this snap election that's been called by President Macron.

Robert Armstrong (2:05)

I don't know, fairly sizeable. What do you mean by that?

Katie Martin (2:10)

Well, look, it's only a few short weeks.

Robert Armstrong (2:13)

What is that sound that French people make when they're not impressed?

Katie Martin (2:17)

I mean, there's a lot of them.

Robert Armstrong (2:19)

I can't mean not impressed by the move in this French stock market.

Katie Martin (2:24)

So you're giving a gallic shrug, but I guess we'll have to see the results, I think, early July. So we're going to see whether your insouciance is warranted.

But so, OK, AI., you've been writing about this today. It has human-like capabilities at picking stocks. So do they suck as badly as humans, or do they do something actually good?

Robert Armstrong (2:49)

So a couple of business school professors at the University of Chicago have taken a bog standard large language model and fed it a bunch of balance sheet and income statements, asked it a bunch of questions about the... and I should say that they were anonymized. So the machine didn't know what year it was or what company it was looking at and so forth. And then they said, what's going on with this balance sheet? What are the big changes? They sort of prompted it into thinking about these financial statements in a kind of financial analyst-y way.

You know, calculate the margins. What is the liquidity ratio? What is net cash or whatever?

And then they would ask a very simple question of ChatGPT. They would say, are earnings going to go up or down next year, whatever the next year is after the balance sheet they're looking at, by a lot or a little, and how sure are you?

And the machine hummed and clicked and made whatever noises computers make and came back with a set of predictions that turned out to be not hugely better, but clearly better than the predictions analysts had made about those same companies in the years of all those balance sheets and income statements.

Katie Martin (4:11)

So did it spit out something that said buy, sell or hold?

Robert Armstrong (4:16)

No, it just said up a lot, up by a little, down a lot, down by a little. Those were the answers it could give.

And it would say, and I'm very sure. Or it would say this one I'm not so sure on. And then these business professors did something clever, which is they took the earnings expectations that the ChatGPT was most certain about and built long short portfolios.

Katie Martin (4:44)

So it did better than just the index, right?

Robert Armstrong (4:46)

They did pretty well. They generated alpha versus the broad stock market. I talked to one of the authors, a guy called Alex Kim, and he said, look, we're not claiming to have solved stock picking forever.