Will machines replace humans in investing?

Feb 21, 2012

In this issue:
» Why Greece default looks more possible
» Is China trying too hard for soft landing?
» India Inc. bullish on Gold ETFs
» Learning from the US on handling corruption
» ...and more!

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Study of human evolution tells us that machines, even the humble bullock cart, has played a pivotal role in our progress. They have increased manifold, the productivity of mankind. This is not just by aiding them but also replacing them in a great number of operations. In fact in modern age, the debate on whether computers can eventually replace the human mind is still valid. Increasingly, the cost and efficiency of using machines has also made manpower dispensable in several industries.

Interestingly, even the area that was believed to be the forte of human mind is being captured by machines. The former was believed to be proficient at 'thinking' rather than the latter's efficiency in 'processing' information. This made the presence of human inevitable in areas like research. However, machines are multiplying the speed of thinking. A report quoted by Business Insider hints at just this. The findings of the report underlie the fact that machines may have been the cause of financial Black Swans. The term used to denote a highly improbable event seems to have been the result of ultra quick algorithms run by machines. Further these machines are expected to soon replace humans for ensuring profitable trades in complex environment.

We are not sure if nano-second thinking by machines can ensure profitable trades. But if that were true in all situations, every entity investing in high tech machines would have been a profitable one. The likes of Lehman Brothers and Goldman Sachs would have topped the list. And the investors who have spent years trying to refine the techniques of investing would have left the job to their machines. Hence, we certainly appreciate the importance of machines and quick thinking. They may be instrumental for success in complex investing. But unfortunately machines have never and will never decipher human behavior. And that we believe is a necessary cue that no smart investor would want to miss out on.

Do you think machines can replace humans when it comes to investing decisions over time? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
Economic slowdown and the US Fed's faulty monetary policies may be widely touted as the causes for high unemployment in the country. But it seems that there is more to the US' unemployment problem than the sagging economy and the Fed's policies. Cost of labour that has been the issue of constant deliberation amongst US companies is an important cause. As today's chart shows the cost of unskilled labour crossed the historical average of US$ 7 per hour in 2011. That makes it all the more worthwhile for US companies to scout for outsourcing opportunities to keep themselves profitable. Hence the problem of US unemployment is far from being solved with easy liquidity.

Data source: Economist

20th March 2012. This date could well pass off like any other date in India. But for a certain Greece, it could really prove to be a game changer. It should be noted that 20th March is the day when this tiny nation will have to repay loans worth around Euro 14.4 bn. But as is well known, Greece does not really have this kind of money to see off its creditors. And hence, it has been forced to approach the European Central Bank for help with the same. However, no help has been forthcoming so far and the time is fast running out. Thus, one is left wondering whether Greece will indeed be bailed out this time around. If a note by Credit Suisse is to be believed, a disorderly Greek default looks more a possibility than a bailout right now. The reason? Purely economical in our view. The cost of letting Greece default is likely to come out a lot cheaper for the European Central Bank than the other option of keep on pumping money into Greece with hardly any improvement in sight. Thus, it remains to be seen which way the ECB goes. They better hurry as 20th March is fast approaching.

Gold has not just shone in the portfolios of the retail investors, but the yellow metal has provided sheen to the coporates as well. The purchase of paper gold in India has doubled last year. The reason has been the buying interest from the corporate as well as the SMEs (Small to medium enterprises). This segment has been increasingly parking its surplus funds in the yellow metal which has been termed as a safe haven by investors. But rather than buying physical gold, this segment has been investing through the exchange traded funds of ETFs. As per a leading daily, corporate and SME segment now accounts for nearly 50% of all ETF purchases in India. Interestingly it is only in India that large investors are flocking towards gold. As per the World Gold Council, the interest in gold ETFs globally has been waning. Gold has already delivered high returns and has seen its prices cooling off in recent times. But till such time as the global markets continue to remain gripped by the financial crisis; there is very little chance that gold would lose its safe haven status. However, considering the high base effect, the returns may not be as stellar as what they were till last year.

Earlier this year, the Reserve Bank of India (RBI) signaled monetary easing with its cut in the Cash Reserve Ratio (CRR). This was a welcome relief after 13 aggressive rate hikes over the past two years. Borrowers can now finally breathe easy. Intense competition for advances has forced banks to decide to cut their lending rates. This is without the RBI making any move to reduce its key policy rates. Some banks have decided to reduce rates in certain buckets such as home, auto, and educational loans while leaving their base rates unchanged. This will help them shore up their advance book in an attempt to meet their loan targets for the year. Central Bank of India has already reduced its home loan rates by 25-50 basis points. Union Bank of India cut its base rate by 0.1% earlier this year. Everyone is now waiting to see what India's largest player in the home loan market State Bank of India has to offer. While these banks seem to be preempting RBI's rate cut, we believe that a policy cut has been due for quite some time now.

After years of explosive growth, the Chinese economy battling on inflation and growth fronts seems to be losing steam. The concern of growth being less than 9% for the first time in a decade looks very palpable. And the Government is trying its best for a soft landing for the economy. Hence, while interest rate cuts look unlikely on account of fears of price rise, the growth is certainly a priority. This was signaled from the recent 0.5% cut in required reserve ratio. Alarmed by the slow loan growth, falling new orders, imports and demand, the cut in the reserve ratio by China has come slightly before expectation taking markets by surprise.

The move will inject liquidity and do some damage control for the year. However, the trade off may fire back with rising in prices and speculation in real assets. This is something time will tell. What we can surely say now is that being the second largest economy, it's time that China learns to formulate policies so as to guide the markets rather catching them on wrong foot and risking market stability.

Recently, corruption in India has been in the limelight thanks to strings of scams the country witnessed last year. This propelled the anti-corruption movement by Mr Anna Hazare for the enactment of a strong Lokpal Bill. The whole country debated over the provisions of the proposed Bill. No doubt, nitty-gritty of the Lokpal Bill is important. However, what is more important is a strong political will to implement the same. India can take a cue from the enactment of the Foreign Corrupt Practices Act by the US government in 1977. This law did not do much till it was taken seriously by the US government. In the recent times, the US government imposed heavy fines on big companies in bribery cases. It went ahead and did even sting operations on corporate to stop corruptions. All this creates a deterrent in the system against corruptions. India too needs to follow the suit and punish the people involved in high profile corruption cases at the first place. Till then the corruption would only flourish in India even if some form of Lokpal Bill sees the light of the day.

Taking cues from the positive sentiments across Asian markets, the indices in Indian stock markets, took off to a flying start and sustained the momentum for most part of the session. Stocks from the engineering, commodity and energy sectors were the top gainers. At the time of writing, the BSE Sensex was trading 179 points (1%) higher. Indices across other key Asian markets also closed higher. Those in Europe have opened a mixed bag.

 Today's Investing Mantra
"Nearly everyone interested in common stocks wants to be told by someone else what he thinks the market is going to do. The demand being there, it must be supplied." - Benjamin Graham

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8 Responses to "Will machines replace humans in investing?"


Feb 28, 2012

In the present market, which is obviously a 'highly manipulated market' probably machines doing high speed trading are invalidating all the analytical conclusions ( read -the daily backtracking by analysts, constant wondering of wave counters, repeated use of the same props like US , EU situations for explaining what happened in the market ,etc,etc).Can anybody come forward to say that the recent market behaviour is normal by any standard ??!!! I have the feeling that the stock market ( whatever that is left ,compared to the burgeoning gambling market i.e.,the derivatives market)is already a no no place for common man. Enter the machines- exit the man.



Feb 22, 2012

If machines start replacing the humans and every industry will be running with machines only and the entrepreneurs will be happy jingling their pockets with loads of money in the initial years, only to realise that latter they will be converting the jingling money into more products which will only remain in their godown to rot rather than consumed by anybody. Cos who will have money to buy these stuffs, when you don't have job.



Feb 22, 2012




Feb 21, 2012

Hi, presently "machine trading" already exists in the form of Quant trading and Program trading, I think, but these are not entirely machine based. As long as as greed and fear prevail in the market, machine trading will not succeed. regds


Shreeshail C Kamagond

Feb 21, 2012

Market moment is the resultant of minds of investor/trader.It is almost an impossible task for the machine to take an infinite number of inputs(facts) so as to deliver what will exactly happen on the particular day.
Only those whose fifth house(indicates speculative tendency)will strong are the guiding factors for the stock market.!!
Finally, everybody can't be a Warren Buffet/Rakesh Junjunwala



Feb 21, 2012

Machines can compete with humans in only physical work, it can't have intellectual from which the humans made machines. Markets are influenced by the emotions & phycological behaviour of buyers & sellers which the machines don't have. So it is a trait which the humans still haven't mastered then how come it be mastered by things made by them



Feb 21, 2012

Long back in 1930 'TURING'a Russian mathematician, a dirty homosexual said,'Any logical thinking decision can be made by the machine' This is coming true today in present context.But mind you, all decisions are not 'logical'. Therefore, it will always leave room for human brain to make decisions. Especially,stock market is illogical; it never work like this. We are to make logical decisions in illogical market most of the time.


Kranthi Mark

Feb 21, 2012

It will be disastrous completely relying on Machines while investing or taking investment decisions by Machines .... This is high bandwidth & Alogorithimic trading decisions .. go back to May 6th 2010 During the trading Day Dow was down by 1000 points because of this mistereous Algorithimic trading.Ofcouse through machines you can increase the speed and efficacy but giving the steering will be disastrous.
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