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In today's episode, I want to discuss a topic that's trending a lot. I get some questions on this myself, and I've thought about it myself. And the question really is can artificial intelligence, can AI be a better investor than humans? Can AI beat the market? Um, it can do a lot of stuff, and we're early, right? So, I mean, there's there's so much coming down the road in artificial intelligence or maybe artificial general intelligence. I mean, there's a lot that's out there. Some of it can be quite scary if you listen to the Doomers. But when we think about investing, um, the two questions I have that I started with was well, can AI beat the market? Uh and the second question, really more to the point, is can AI invest better than a human being? So let's not bury the lead. I'm gonna start with the second one first. Can AI, can artificial intelligence do a better job investing than a human? Absolutely yes. That's a that's an easy one for me to answer. I don't need any data to suggest that it can. And the reason I'm gonna tell you that it absolutely can is because it's artificial. It's not human intelligence, meaning it has no emotion. And one thing we know about investors and in returns and net returns is that the market's going to give you the return. The problem is the human. The problem that's that's where the weak link is. And the human behavior and the fear and the greed and the moving money around and trying to beat your neighbor or trying to beat some index or something like that. That's what gets in the way of actually getting the returns that the market will give you. And AI doesn't have that problem. Here's the issue: if you as a human want AI to do that for you, you have to give it this artificial intelligence, or at some point, artificial general intelligence, maybe, you have to give it full authority over all of your finances, not just your market-based instruments, but everything. And not just for a period of time, but forever. Now, that should scare the heck out of you. I mean, if you think about it, you'd have to open up all of your bank accounts to it. You have to open up all of your investment statements to it, you have to literally give it trading authority and cash flow authority and tax making authority, tax decisions over all of your stuff forever. Arguably, you'd have to do it not just for yourself, but your spouse and maybe even your kids as you move forward. So is that practical? No, it's not. Uh, is it anything that I think anybody I know would actually want to have happen? And the answer to that is no, because if you give full authority to anybody else, forget even AI, just anybody else, then that other entity is now going to tell you not just when you can buy and sell positions, but when you can actually take the money and use it. Imagine a situation where you're letting AI run your entire balance sheet and you decide you want to pull it, put a pool in the backyard. Uh, ask me why I'm thinking about that right now, because we're thinking about a pool. And we say to the AI, hey, we want to put a pool in the backyard. And the AI says, no, you can't do it. It's just not a good time to sell your equities. It's not a good time to take a uh a loan against the equities. It's not a good time to generate that tax. Or we, you know, that's insane. So can AI do a better job of investing than humans? Yes, it absolutely can because it has no emotion. It's not human. And that's the problem. You'd have to give everything over to the AI. Now, the second question, which is a little more nuanced and a little bit more data-driven, is well, can AI beat the market? And let's not bury the lead on that one. The answer to that question is absolutely not. So, can it be do a better job than you? Sure. Can it do a better job at beating the market than just letting the market run itself? Absolutely not. Why? The fundamental issue here is that the only way to beat the market long term is to be able to predict the future. And AI cannot predict the future. So let me take a step back here. And we've covered this before. Uh, by the way, I think this would be a really good episode to share with maybe friends or family and and and even your adult children, um, because this is becoming more of a thing. Um there's more of a gamification of investing, a gambling kind of a methodology to it. We're seeing a lot of investment funds being kind of commingled with uh sports betting and uh and prediction markets. And those are just two totally separate things. But if you think about it, um if you want to be the best sports gambler ever and beat everybody, then you just simply have to predict the future. If you want to be able to predict, uh, you know, be in the prediction markets and know exactly who's gonna win the Democratic nomination for president or, you know, during the Super Bowl, which color Gatorade are they gonna use? Like, okay, great, you either have to have inside knowledge or you have to be able to predict the future. And that's the same situation. That's the only correlation I'd say with the stock market in that if you want to beat the market, you have to be able to predict the future. So, what is the market really? And that's really the crux of the of the whole question here. The market is efficient. Okay. We invest your money on the whole premise that markets are efficient, okay, generally speaking. Do they become inefficient in short periods of time? Sure, that happens. But over the long period of time, markets are efficient. And that just simply means that everything that we know, all known information about a company, company XYZ, all known information is already priced instantaneously into that stock price, into the cost or the price tag of that share. So, okay, let's back up at another step. What moves markets then? Um, and what I'd say is generally speaking, and really at its most fundamental, is just supply and demand. If there's no demand for a stock, uh shares of stock, the price is going to go down. So, what would then generate demand for a stock? Well, things like profitability and cash flow. So, really, when you look at a price of a stock, you're looking at, all right, if we think that the based on all known information of that company, we think that the future cash flows of that stock is X, then it's a math formula. We just have to take the discounted value or the net present value of X, all those future cash flows, and that's the price of the stock. Okay, that seems simple, but then what would change that? Because markets go up and down, up and down, up and down. I mean, every second they're changing. What changes that is new information and it's unknowable information. This is why insider trading is illegal. Um, I mean, Congress likes to do it, but aside from Congress, we can't insider trade. Why? Because that would break the markets, it would no longer be efficient. You would have one group of people knowing things that nobody else would, and they would trade on that and and obviously make insane profits because that's not efficient markets. Okay, well, then how would AI be able to know what the future is? And the answer is it can't. The only thing that AI could do is to go in and get that insider knowledge and trade illegally, right? So that again, that's illegal, that's insider trading. It wouldn't work for an AI just like it wouldn't work for me or for you. So then AI is left with all of the known information that that you and I have. That's what it's left with. It can't know the future. And even that statement, I think sometimes investors will will think about that and be like, well, with then enough algorithms, it certainly should be able to in time, you know, as as AI gets further on down the road. And I would say I don't think that's true either, because when we talk about unknowable information, it's not just simply about like, okay, what's the future decisions of the cash flow of the company and you know, what are their quarterlies and that kind of thing. It's it's micro things too that on a grand scale matter. Meaning, if you have an investor who maybe it's an investor or maybe it's a a fund, like a BlackRock or a Vanguard or a Berkshire Hathaway, and they own a very large percentage of a stock and they're deciding to sell that stock, but nobody knows that ahead of time except for the CEO or maybe the individual who owns that stock, well, that's going to change the price of the stock. And the AI can't know that, right? That's like a personal decision or a very closely held corporate uh decision. So, going back to our original question, can AI beat the market? The answer is no because it can't predict the future. It's a very simple answer to a complex question. And the other question was, well, can AI do a better job of investing than you? And the answer to that is absolutely yes. But that's a complex answer to a very simple question, in that the only way that it can do better than you is to completely eradicate all behavior. So I do have a little bit of data on this, and then we'll end after this. Because when I simply say it can't predict the future and it won't beat the markets outside of behavior, I'm just going to look in at other humans, right? So if you think about investors, what they're always looking for or what they're trained to look for in media and in articles they read or people that they talk to is trying to get an edge, you know, trying to beat the next guy. That's not what we do. That's not what we're trying to do. We just want to take what markets give us. And so one of the things I'm usually fighting is well, uh, and I do it even inside of my own organization sometimes. So there's always somebody out there that feels like, well, they can time markets and they can beat markets. And sometimes they actually do it, but it's a very short period of time. And I what I would submit is that of all of the fund managers since 1926, we'll say, and just off the top of my head, going back to data that we have on the SP 500 or large cap stocks at, you know, in general, so that what's a hundred years, and of all those time periods, the odds that your guy or the guy in the cubicle next door, or the guy at that broker dealer or that wirehouse has somehow figured out a way to beat the market is pretty small. The data is compelling. If you look at it, and by the way, I wanted to go look at this not just for large cap, which is usually what's quoted, um, because like the data on this is pretty simple. I'm getting this from the uh SP and Dow Jones indices, something called Spiva, which is the SP indices versus active. And what they'll tell you is over a 20-year time period, large cap uh managers, active managers who are trying, actively trying to beat the market, over 20 over 20 years, 93% of those people fail. 93%. That's a well-known data point, but I wanted to go a little deeper. Well, what about large cap value managers? Not the same as just simply large cap. Um, they didn't do much better. 87% of those people failed. And then, as you may know, if you're my client, we tend to tilt heavier into small cap and small cap value, both internationally and domestic. Small cap managers, active managers, 90% have failed over 20 years, and small cap value managers, 93% have failed over 20 years. So some of you might be hearing that and saying, well, all right, there's nuance there. 93% of small cap value managers fail. It means 7% won. They beat the market. Two things. We don't know how much they beat it by. We also don't know net of fees and taxes did they beat the market. And really the biggest thing is the fact that 7% of active fund managers beat the market over 20 years is not good information. Good information would have been 20 years ago, if you could have told me that guy or that lady is going to be the one that beat it, beat it over the next 20 years. That's good information. And we there's no way to do it. There's no way to know. Furthermore, if you dig a little deeper into this data, we won't go into it today, but just generally speaking, just because somebody has beaten the market over any period of time, whether it be five years, 10 years, 20 years, that there's no correlation to the next time period as to whether they're going to meet beat the market again. Which is why I'm saying telling me who did beat the market tells me nothing about the next time period. So do we even bother? And the answer is there's really no reason to. Equity markets will give you the returns you're looking for. The only thing we really need to do is to make sure beyond just building portfolios statistically sound, we really need to make sure we eliminate poor behavior. That's my job. At its core, that's my job for you. Yes, we build portfolios. Yes, we balance portfolios, yes, we do full planning and we're doing distribution planning and we're looking at taxes and legal documents and insurance and all of that stuff. But as it when it pertains to your investment portfolio, my biggest aha moment for myself was if I can help eliminate poor behavior on the client side, that will generate the returns you're looking for. We don't need AI, we don't need some guy or some lady out there who's gonna try to beat the market. It's really fool's gold.

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Joseph Delisi is a registered representative and financial advisor of Park Avenue Securities, LLC, OSJ 5280 Carroll Canyon Road, 300 San Diego, California, 92121-619-648-6400. Securities products and advisory services offered through PAS, member FENRET SIPC, financial representative of the Guardian Life Insurance Company of America, Guardian, New York, New York. PAS is a wholly owned subsidiary of Guardian. Westpac Wealth Partners LLC is not an affiliate or subsidiary of PAS or Guardian. Insurance products offered through Westpac Wealth Partners and Insurance Services LLC, a DBA of Westpac Wealth Partners LLC. CA Insurance License No. D34103. This podcast is for informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Guardian and its subsidiaries do not issue or advice with regard to mortgages, property and casualty insurance, and/or car insurance. Consult your tax, legal, or accounting professional regarding your individual situation. All investments and investment strategies contain risk and may lose value. Diversification does not guarantee profit or protect against market loss. Equities may decline in value due to both real and perceived general market economic and industry conditions. Investing in securities of smaller companies tends to be more volatile and less liquid than securities of largest companies. Investing in the bond market is subject to certain risks, including market interest rate, issue, or credit, and inflation risk. This material is intended for general use. By providing this content, Park Avenue Securities LLC and your financial representative are not undertaking to provide investment advice or make a recommendation for a specific individual or situation, or to otherwise act in a fiduciary capacity. Past performance is not a guarantee of future results. Indices are unmanaged and one cannot invest directly in an index.