Are you wondering what AI can do and if it truly has potential for the future? Well, an enlightening research paper has just been published that you should definitely read.
According to a paper by Udit Gupta, AI-powered index investing has generated “double the returns of the S&P500 over a 5-year period.” It’s worth noting that the average return of the S&P500 is said to be around 10%.
When returns reach twice that, at 20%, it becomes equivalent to the lifetime returns of the investment guru Warren Buffett himself.
In this article, we will delve into the details of AI index investing, explaining the mechanics and results based on research. We will provide explanations that anyone, even those without investment knowledge, can understand. We invite you to use this as a reference.
However, it is important to emphasize that the research paper explains simulations of AI investments rather than actual investments. Therefore, whether AI can actually produce results in real-life investments is still unknown.
Q: What is index investing?
A: Index investing refers to a investment strategy that tracks the movements of a market index, which represents market fluctuations.
Q: What is the S&P500?
A: The S&P500 is a stock market index that represents the top 500 companies in the United States. It generally reflects the movement of the US market.
Reference: [Research Paper](https://arxiv.org/pdf/2309.03079.pdf)
AI’s Incredible Potential in Index Investing
In order to be successful in investing, one must thoroughly understand a company’s performance and financial situation. To obtain this information, one would need to read each company’s investor relations (IR) materials. However, these materials can be quite voluminous, even for just one company. If a person were to try and read all of the IR materials for every company, it would take an enormous amount of time.
But what if AI were used instead?
With AI, IR materials can be analyzed quickly and accurately. And with the data from this analysis, if one were to engage in index investing based on AI predictions, could AI potentially forecast market movements better than humans?
Research in the field of AI in investments is currently being conducted with this kind of thinking in mind.
“A foolproof investment strategy that not only avoids losses but also ensures substantial returns.”
Such a dream-like investment strategy could potentially be realized in the future by utilizing AI.
If you’re interested in learning about other applications of AI beyond investments, we recommend referring to the following article: [Recommended AI Tools for the Latest Work Techniques](https://weel.jp/article/)
How Does AI Invest?
The basic process of AI investing, as explained in the research paper, is as follows:
1. Analysis of IR materials
2. Construction of the optimal model
3. Actual operation
Let’s take a look at a specific example from a study conducted by Udit Gupta in 2023.
In Gupta’s study, AI was engaged in index investing following these general steps:
1. Analysis of IR materials from 1,500 companies
– IR materials from the top 1,500 companies by market capitalization in the United States (from 2002 to 2017) were collected and analyzed by AI.
2. Construction of the optimal model
– The data from the analysis was used to construct the best model for AI.
– In this study, the importance of the “number of stocks (k) to be invested” was highlighted, and the result of the verification indicated that the “k=5” yielded the highest returns. (Refer to the graph below.)
3. Simulation of AI index investing over 5 years
– Finally, a simulation was conducted using the constructed model and AI engaged in index investing for 5 years (from 2018 to 2023).
– The selection of stocks to invest in was also automatically done by AI.
– The simulation results were compared with the actual movements of the S&P500 to determine which had higher returns.
[h2>AI Can Generate Double the Returns of the S&P500
The results of Gupta’s study were astounding. The simulation results using AI models showed that AI could generate double the returns of the S&P500.
Instead of quotes, this descriptive sentence demonstrates the incredible potential of AI in generating returns through index investing.
Here’s a graph to illustrate the results:
The graph depicts:
– X-axis: Year (AD)
– Y-axis: Return (cumulative)
– Blue line: S&P500
– Orange line: AI simulation results
As you can see, it is evident that AI outperforms the S&P500. When comparing the returns in 2023, it is clear that AI’s returns are approximately double that of the S&P500.
To put this difference into perspective, let’s assume the average return of the S&P500 is 10%, and the average return of the AI model is 20%. If an initial investment of $1 million is held for 20 years, the final amount could differ by over $30 million. (Refer to the table below*)
Excerpt from the table, calculations based on a hypothetical average return of:
– S&P500 (10%)
– AI model (20%)
Please note that these are simplified calculations, and the actual situation may not be as straightforward. However, if AI investment technology continues to improve, anyone could have the ability to substantially increase their assets.
It is important to note that this research paper presents simulations, and the actual investment returns are not known. Therefore, the results should be taken as an objective fact that there is potential data to suggest such outcomes.
It is speculated that AI may have access to leaked information. In other words, when AI was programmed to begin investments for the 5-year period starting from 2018, it might have been inputted with information up until 2023. This means that AI might already know the performance of each company and could easily determine where to invest.
Individual attention and careful consideration should be given to investment decision-making. (We do not take any responsibility for any damages incurred from the implementation of the contents of this research).
As demonstrated by the research results mentioned earlier, one of the strengths of AI in investments is its ability to instantaneously analyze IR materials. While humans have spent an enormous amount of time on this task, AI can accomplish it in a short period of time and with greater accuracy. As IR information continues to be accumulated by AI, it is not far-fetched to imagine a future where AI surpasses humans as investors.
In such a scenario, what will happen to the world of investing?
Will the barriers to entry in investing decrease, leading to more active economic activity? Or will the emergence of numerous AI investors cause chaos in the economy?
While we cannot determine the outcome, one thing is certain: AI will have a significant impact on the world of investments.
If you want to learn more about AI, we recommend referring to the following article: [What is Generating AI? An Expert Explanation of its Mechanisms and Capabilities](https://weel.jp/article/)
The flow of AI in investments involves analyzing IR materials, constructing the optimal model, and implementing actual operations.
The research study on AI index investing found that AI generated double the returns of the S&P500. Assuming that the average return of the S&P500 is 10%, the average return of the AI model is 20%, which is comparable to the lifetime returns of the investment guru Warren Buffett.
If AI’s investment technology continues to improve, anyone could have the potential to considerably increase their assets.
However, it is essential to acknowledge that this research paper explains simulations, and the actual skills of AI in investing are not definitively proven.
Nevertheless, it is undeniable that AI will have a significant influence on the world of investing in the near future.
To prepare for what lies ahead, we recommend staying up-to-date on the latest AI information.
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