Maybe the more appropriate question is: are computers better stock pickers?
It is no surprise that many mutual funds, institutional investors, and hedge funds use sophisticated computer models to help them make investment decisions.
While the systems perform a variety of sophisticated functions, in the end the programs come up with buy and sell recommendations.
Stock Answers
Those recommendations may be simple buy or sell answers or complicated trading patterns involving a combination of options, stock futures, and so on.One of the hot products in mutual funds is “quant funds” or quantitative funds.
These funds are built on sophisticated trading models that take human emotion out of the buying and selling decision.
The computer program scours company data looking for stocks that meet the model’s requirements and either buys the stock or sells companies that fall below the requirements.
Emotions out of Stocks
The quant models are supposed to avoid those pesky human emotions like ego and greed that often cause investment strategies to run off course.Do these computer models work?
The answer is yes and no.
Yes, they are good at finding stocks that meet investment requirements and they do take emotion out of trading.
However, even sophisticated computer models can’t account for all the variances of the market – at least, not yet. Of course, humans build the models, which may include a bias that will produce inferior results in certain market conditions.
Another potential problem is that many of the programs could end up with the same or many of the same stocks on their buy lists.
Stock Orders
If there were hundreds of these programs constantly analyzing companies, they could all reach many of the same conclusions at the same time.Can you see a problem if 100 plus big investors issued buy orders for a stock at the same time?
Mutual funds, institutional investors, and hedge funds typically don’t buy just a few hundred shares.
Large orders for the same stock would obviously drive the price up, which would probably push the stock out of the computer’s range for a buy recommendation.
This example may be a bit of a stretch, but it points out that no system is perfect.
While these programs may take human emotion out of investing, they can’t take it out of other investors.
When the broad market is reacting sharply to news that may affect only a small portion of stocks, computer-driven portfolios may not perform well.
It can be hard to quantify irrational behavior.
