Machines threatening human beings is not a new thing. It’s been a theme of countless science fiction movies, and folk stories like John Henry vs. the Machine. It is being talked a lot today in the “modern economy” and not just as it relates to coal miners.

Tech has become a hot topic in the finance industry too. Folks are wondering what the advancement of tech and artificial intelligence means for the future of financial services and how investors manage their money.

My general opinion is that tech is and will continue to give investors better and more options at a lower cost than ever before. I think that is most evident in the shift towards independent RIA firms. Many of these firms would not have been able to exist 15 years ago, but today technology allows sole proprietor RIAs to compete with the biggest wire houses for clients. For this piece, I want to address a specific element of tech and investing. I want to look specifically at tech and portfolio management.

“Won’t portfolio managers be replaced by algorithms?” That is the question that was recently asked me, and my answer is very simple “no.”

Technology, and algorithms will enhance and make portfolio managers more efficient than ever before, but they will not replace the human element. There are two extremely important concepts that explain why.

1. The markets are a function of supply and demand.

2. The markets are discounters of widely known information.

Supply & Demand

Algorithms can be used to evaluate supply. Computers can look at all the data in the world on publicly traded companies, and all the economic data, etc., etc., but ultimately a human will need to make an interpretation of that data as it relates to demand. Demand is emotional, demand it is sentiment driven, and that makes it uniquely human. My dad once told me “that something is only worth what someone else is willing to pay for it.” His statement is 100% spot on when it comes to capital markets.

Discounter of Information

All known information is factored into the market. That means that once information is known it becomes obsolete, unless it is interpreted in a unique manner. Therefore, I could create an algorithmic formula for managing 100 client’s portfolios that works great. However, once I start using it to work with a really large pool client portfolios or I do not constantly change the formula my algorithm will become obsolete, because it is based on assumptions and interpretations that will be discounted into the market. Think about a fish that can only swim in a straight line or turn left, how long will it take the shark to figure out that the fish always turns left?

Geeks have been trying to be smarter than the markets for years, always convinced that they have what it takes and that “this time it’s different.” Success investing in capital markets will always be more dependent on the stomach than the brain, and that means humans will always have a place in portfolio management.

– Wyatt Swartz

6/21/2017