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Deep Learning Goes to Wall Street

  • (0:30) - Automated Financial Management: Betterment & Wealthfront
  • (5:30) - Burton Malkiel: Are Markets Too Random?
  • (9:00) - Resources for the Deep Learning / AI Future We Face
  • (16:40) - qplum: Automated Investing Using AI and Data Science
  • (25:45) - Concerns with qplum: Will the Same Science Work for All?
  • (31:00) - Takeaways from qplum
  • (35:45) - Episode Roundup: Podcast@Zacks.com

Welcome back to Mind Over Money. I’m Kevin Cook, your field guide and story teller for the fascinating arena of behavioral economics.

Remember when you tried to pick mutual funds from a list in your employer’s retirement savings program? If you were like me, you always felt limited by the available choices, questioned the fund’s top holdings, and wondered about the manager’s skill, commitment and incentives.

Even with innovations like “target date” funds, you probably felt locked-in to somebody else’s ideas about what blend of investments and risk vs return matrix would achieve the goal.

Thankfully, innovation is accelerating in “fintech,” the moniker for the fast-changing field of financial technology.

Among new investing platform models, we have Betterment, which, according to the company website, uses “diversification, automated rebalancing, better behavioral guardrails, and low fees” in an approach to long-term investing that can help generate 2.66% higher returns than the typical DIY investor.

I like their nod to “enabling better investor behavior” and want to learn more about it. I imagine that “behavioral guardrails” might be things like preventing or warning people from taking too much risk over too short a time horizon, placing too much concentration in one sector, panicking and selling after extreme moves lower when one should be buying, or even taking cash out of retirement funds too early and incurring extremely negative penalties and tax consequences.

Wealthfront is a similar new enterprise that says “Our investment strategies may be sophisticated, but our philosophy is simple. Technology can do some things better than people.”

They claim using software, they can better execute time-tested investment strategies that ultimately reduce risk, reduce taxes and reduce fees. I am also keen to share this self-description on the Wealthfront website:

“Fortune favors the smart, not the bold. Picking stocks and chasing market fluctuations may be exciting. But when it comes to long-term investing, you can't expect to outperform the market.”

So what’s their solution? Indexing, which simply means parking your money in a diversified portfolio of low-cost index funds and having the patience to stay the course.

Wealthfront says “It was a radical idea when economist Burton Malkiel first introduced it. He’s a smart guy, Burt. So smart we made him Wealthfront’s Chief Investment Officer.”

Now here’s where it gets interesting for me. While I like the idea of people having more choices to grow their retirement savings, I am also an active investor, stock-picker and trader at heart, as are most of the followers of my newsletters at Zacks.

And Burton Malkiel is the progenitor of a philosophy that runs counter to my beliefs: that the markets are too random to succeed as a stock-picker and that you should invest in index mutual funds.

The author of the classic finance book A Random Walk Down Wall Street is the leading proponent of the efficient-market hypothesis, which contends that prices of publicly traded assets reflect all publicly available information.

I respect Wealthfront’s approach and believe that it will be a good solution for millions who don't care, or can’t make the time, to research stocks and mutual funds.

But I’ll also stick with my belief for myself and my followers that I can indeed beat the market over many time frames, from one year to twenty. More on that coming up in a 1-minute video investing lesson I made last month.

Introducing the AI-Powered Platform Called qplum

In this episode of Mind Over Money, we’re going to focus on a new platform called qplum (yes, all lower-case). I learned more about it through the NVIDIA NVDA AI Podcast, episode #26 from last June, to be precise, where host Michael Copeland interviewed qplum co-founder Guarav Chakravorty.

The AI Podcast seems to be where I learn a lot of new things these days. And that’s not just because I am an enthusiastic NVDA investor but also that I find the future of machine learning and deep learning technologies so exciting.

In Copeland’s 40 episodes since he started last November, he has created a library of fascinating interviews on exciting topics involving the bleeding edge of technology. I consider it a must-listen podcast!

Back to qplum who claims “Investing can now be a science and not a game.”

And to achieve this goal, they are using “dynamic AI strategies and protecting against downturns.”

In describing their core investment beliefs on the company website, the qplum team says “We believe in the mathematics of data-driven decision-making, the science of behavioral economics, and the art of effective communication.”

qplum emphasizes that they are offering investing strategies, not products. And those products are coming from a data scientist and engineer, Chakravorty, who spent the start of his career building machine learning models before he took finance classes at Wharton that inspired him to bring the two worlds together.

Contrary to Wall Street hedge funds that hire quantitative PhDs to build complex investing and trading algorithms, qplum “taught” their AI to learn on market data what works best in the long-term if given the chance to re-balance a portfolio every day. From the qplum website...

“We utilize the best practices and processes of institutional investors to manage your wealth. Rather than making one or two great predictions, we expose the portfolio to many growth opportunities.”

Avoiding the Downturns, Systematically

In addition to low fees and costs, they also have a unique risk management model to prevent compounding of losses during market slides, which could potentially turn into bigger and longer downturns. Plus, the firm offers four different strategies based on risk tolerance and time horizon.

One thing I don't make perfectly clear in my podcast is how qplum only uses ETFs in their investment strategies. And with a selection of nearly two-dozen ETFs in their pool, they can employ tax efficient strategies of loss capture and still be in the market when the model says it should be.

Be sure to listen to my Mind Over Money podcast attached to this article to learn more about the exciting AI-powered investing approach of qplum, where I also challenge the company’s “scientific” approach to markets in the vein of “if everybody does this, will it still work?”

This is an important question to ask when dealing with the infinite complexity and “wild randomness” of social beasts like markets. As I like to say since reading The Black Swan by Nassim Nicholas Taleb, who taught us about the severe limits of standard deviation in measuring market risk, “When anything can happen, there is no standard for deviation.”

I’m looking forward to learning more about qplum and hope to have Mr. Chakravorty or another company representative on the Mind Over Money podcast.

Three Great Resources From Last Week’s Episode

Now I want to make sure you have some resources that I only briefly mentioned in last week’s episode about deep learning.

First up is the Time.com article How College Students Should Prepare for Our Automated Future by Joseph Aoun.

Aoun is president of Northeastern University and the author of Robot-Proof: Higher Education in the Age of Artificial Intelligence, copyright 2017 by MIT Press.

Next is my recent report on Tesla TSLA. I was a Tesla bear a year ago when he “bailed-in” his company SolarCity.

But I didn’t understand his company’s commitment to developing the next iteration of their electric consumer vehicle, the Model 3.

The revenue ramp that is coming in the next year could send Tesla stock to new highs over $400. Here’s my article...

Bear of the Day: Tesla (TSLA)

Finally, I offer my 1-minute video on successful growth investing in this bull market and how to win while others wring their hands about interest rates, corrections, and valuations.

It's how I explain that winning equals following other smart and well-heeled investors who really do their homework. This approach has helped me stay in winning stocks like Facebook FBAlibaba BABA, and Align Technology ALGN.

Here's the best investing advice I could give in just one minute...

Disclosure: I own shares of NVDA, BABA, FB, and ALGN for the Zacks TAZR Trader portfolio.

Kevin Cook is a Senior Stock Strategist for Zacks Investme


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