Value Investing Algorithm : Applying Ai & ML to Value Investing
Value investing Algorithm : Value Investing may be the most popular style of investing today.
Discovered by the famed investor Benjamin Graham and now followed most notably by billionaire Warren Buffett, the strategy dictates that an investor should purchase stocks considerably below their intrinsic value. So as to enable the investor to achieve outsized gains from the security and reduce the chance of permanent capital loss due to adverse, unexpected developments at the business whose security was purchased.
Value investing has been greatly popularized by Warren Buffett and his partner Charlie Munger, who closely adhere to it to run their conglomerate holding company, Berkshire Hathaway.
Throughout their history together, Buffett and Munger have grown Berkshire into one of the most valuable corporations in the world by consistently buying stocks, and more recently, entire businesses, for far less than they are worth and subsequently holding those investments for long periods of time — often decades — to reap the rewards.
In order for an investor to purchase a security for substantially less than it is worth, they must first accurately determine its worth. Without estimating the value of the business, the price an investor pays for a given stock has little meaning, and the intellectual process underlying the investment vanishes.
Additionally, one might discern that in order to estimate the true value of a stock, an investor must analyze an unwieldy amount of data pertaining to the business whose stock is under consideration for purchase, the industry in which this business operates, perhaps the prevailing macroeconomic environment, and much more.
With the advent and subsequent proliferation of artificial intelligence, one might ask how AI can play a part in this process given that computers trounce humans in efficient analysis and categorization of large amounts of data. So, can AI be functionally applied to value investing? While the answer is yes, there appears to be one clear weakness in the technology.
The greatest shortcoming of applying AI to value investing is that successful value investing often requires the analysis of qualitative rather than quantitative data, such as the strength of a particular brand or the honesty and forthcomingness of a management team.
While AI certainly has a natural aptitude for processing numbers, it is not nearly as adept at interpreting qualitative data that cannot be precisely expressed as a number or as a part in a system of numbers.
Because value investing depends substantially on that data, it is not unreasonable to question the applicability of AI to the modern value investor. Warren Buffett certainly does not use it.
Value Investing Algorithm : Can Machine Learning & Artificial Intelligence Apply to Value Investing?