Artificial intelligence is increasingly used by asset managers to help assess risk and make portfolio choices. And theres at least one institutional investor who believes hes hit on a model that can routinely beat benchmark indices.
Doug Clinton, managing partner at Deepwater Asset Management, is embracing what the late Charlie Munger called sit on your ass investing.
Minneapolis-based Deepwater launched Intelligent Alpha in 2022 using generative AI (GenAI) models to seek long-term investments fueled only by fundamental business performance.
Clinton says this new approach uses a committee of generative AI systems. They include ChatGPT, Bard and Claude. Each system avoids emotional mania buying and panic selling.
Essentially, the model cuts out all the noise that might drive short-term equity performance, Clinton explains. And, just like Warren Buffett and Munger, it selects good companies and sits on them.
Instead of trying to harness AI's superpower to process massive amounts of data,Intelligent Alpha uses a different AI superpower: the lack of human emotion and bias that corrupts mere mortals from exercising the discipline of Buffett and Munger, Clinton wrote on his Substack page, The Deload.
Clintons results appear to be impressive over all the core strategies. Clintons portfolios compete with exchange-traded fund benchmarks such as the SPDR S&P 500 SPY , which itself is benchmarked against the S&P 500 index, and the NASDAQ-based Invesco QQQ Trust QQQ .
His results, which were posted on X this week, are below:
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It remains to be seen how Clintons portfolios perform under more stressful circumstances. Markets moved broadly higher during 2023. Although his Intelligent Large Cap Conviction portfolio outperformed its benchmark during the downturn in the third quarter, a longer period of deeper losses could test it.
Clinton hasnt divulged the contents of all the portfolios for the above strategies. The Intelligent Large Cap Conviction includes just 30 stocks compared with SPYs 504. This makes the S&P 500 easier to beat, as it has a higher ratio of underperforming stocks to drag it down.
Clintons portfolio also includes all the Magnificent 7 tech mega caps. Those stocks comprise about one-third of the S&P 500s market weighting. Buffetts approach was to choose the best companies and hang on to them; Clinton insists his way works, too.
Clinton sums it up as the contrarian approach of avoiding the temptation to pump AI with excess data combined with the beautiful simplicity of looking for great companies yields a novel approach to AI-powered investing.
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