Over the weekend, I heard a scary story involving artificial intelligence and an investment portfolio gone wrong.

Over the weekend, I heard a scary story involving artificial intelligence and an investment portfolio gone wrong.

Hong-Kong based investor Samathur Li Kin-kan made a sizeable fortune in real estate. He entrusted a good portion of those profits with a hedge fund manager called Tyndaris Investments.

Now, Tyndaris does something that’s fairly unique.

They don’t do any trading themselves. Instead, they put their faith in an AI-powered supercomputing platform called K1. The Times of India explains how it works:

‘Developed by Austria-based company 42.x, the supercomputer named K1 would comb through real-times news and social media to gauge investor sentiment and make predictions on US stock futures. It would then send instructions to a broker to execute trades, adjusting its strategy as it learned more.’

It’s scary enough that this sort of technology exists.

It’s even scarier that Li let K1 manage US$2.5 billion for him ($250 million of his own money and the rest leveraged through Citigroup).

Unfortunately for Li, K1 wasn’t too good at its job. It started losing money almost right away…including one day where it lost over $20 million.

An expensive misfire.

So Li has turned around and sued Tyndaris Investments…claiming that they oversold K1’s capabilities when they marketed the platform to him.

They, of course, counter by saying that they never guaranteed profits.

My guess is that both parties will have a long and expensive litigation route ahead of them…

Robots in the office

If you work in the financial sector, you’ll know that robots and computer programs run a whole lot more than most people realise. Lots of funds and wealth managers rely on proprietary code to dictate what money goes where.

It’s scary.

Last October, I drew your attention to this fact when I explained why we experienced a sudden sell-off, then an almost immediate rebound…

Robo-traders.

In the industry, we call these HFTs or High-Frequency Trading systems. They’re complex programs designed to buy and sell stocks when prices move certain ways. They sit on a hair trigger…waiting for the perfect time…then CLICK.

They come to life within milliseconds and move fortunes faster than you can blink.

Then other robo-traders — designed to counteract these micro-movements — take advantage of the blip-sized opportunity by buying or selling.

The whole battle happens faster than we can keep up…all thanks to superfast supercomputers like K1. [openx slug=inpost]

It feels a whole lot like when I spend time with my wife and her family. They’re a big card-game family…and love getting competitive around the table. One of their favourite games is a game called Nertz.

If you’re not familiar, it’s a frenzied game that mixes Solitaire with speed. Four players, stacking cards in order, playing off one another’s’ piles. Frankly, I still don’t really get it…

Anyways, during the game, my in-laws are placing and grabbing cards faster than I can figure out if it’s a Jack or a Queen. It’s hectic. There’s normally blood, sweat, and tears (mostly mine) by the time the lightning-quick game is done…

I imagine that’s a whole lot like what these HFT systems are like…buying and selling stocks between one another faster than a human trader can read what the stock’s current price is.

You shouldn’t be able to beat it.

Unless you’re playing against K1, apparently…

For some reason, K1’s strategy, which involves social media, doesn’t work quite as well. Perhaps it’s too slow. Maybe it takes too many risks. Maybe the code still needs some debugging.

It lost money while human traders profited.

That should give you hope (if you’re a trader like me). We still have a chance in this new AI-powered world.

Why humans are still relevant…

Because there are layers to investing that computers will always struggle to fully comprehend.

Things like gauging company management…or valuing new developments…or identifying emerging mega-trends.

All of these things require a well-seasoned gut.

Experienced intuition.

The ability to read between the lines and through the numbers…to get a clearer picture of what’s happening at a particular company and where it might go in the future.

A lot of the top investors in my network go to great lengths to apply that extra human ‘oomph’ to their stock picks. They’ll go meet with the management team. They’ll talk with competitors. They’ll look at and hold the company’s products. They’ll sit down with the folks in the R&D department…and chat about what their guts are telling them about the next few years.

That’s the kind of elbow grease that no robot can put in…

…yet.

I reckon these robots will only get smarter.


They’ll figure out how they can do what we traders do.

They’ll tap into the wealth of data pouring through the interwebs and capture the last insights we humans can offer.

But that day’s not quite here.

K1 is ‘living’ proof.

These robots still have a ways to go before they’ve got it sorted.

Until then, happy investing and don’t go handing any computers your money!

Best,

Taylor Kee
Editor, Money Morning New Zealand