Dan Houghton is our kind of man.
He’s an entrepreneur, a devoted family man… and a do-it-yourself investor.
But what he’s doing (and the money he’s making) would not have been possible just a few years ago.
We’ve all seen the effects of technology on things like taxis, retail stores and even our currency. But what hasn’t been reported all that much is the immense damage it’s done to Wall Street.
It’s all thanks to men like Houghton.
You see, just a decade ago, high-tech, market-beating trading algorithms were the pride of the big trading houses. They could afford the computer power to run the complex math it took to outsmart the market.
These firms did well.
The money managed by so-called quant funds doubled over the last decade… climbing to the trillion-dollar mark this year.
“Over the past decade the results of systematic quantitative investing have been undeniable,” said the boss at one popular hedge fund. “People have gone from being skeptical and uninterested to being artificial intelligence groupies.”
But the tide is no longer rushing into the harbor.
It’s pulling the waves of money back out to sea.
Again, men like Houghton are the reason why.
Sure, after the sale of his tech business he could have opened an account with just about any of the planet’s high-priced quant funds.
But he didn’t.
Instead, he turned to Quantopian… a crowdsourced hedge fund and tool that allows ordinary investors to create and test their own trading algorithms.
There are dozens of sites and tools just like it across the web that allow everyday folks to use the world’s massive collective computer power to eke out oversized returns from the stock market.
It’s doing for investing what bitcoin did for currency… turning the whole damned thing on its head.
Your Own Algorithm?
While we certainly haven’t talked about it often, we’ve been using a tool just like this for several years. In fact, its success is what has made this project possible.
But our goal isn’t to boast… it’s to spread the word.
As small-scale investors, the odds are stacked against us.
These days, 75% of all market volume is automated. Hand-selecting stocks in a world where the majority of trades are preprogrammed to out-time and outsmart us certainly doesn’t put the odds in our favor.
That’s why more everyday investors are turning to automated systems… and are winning.
“Algorithm trading is getting more popular now as you have got better technologies, regulators push towards transparent and electronic trading and it’s increasingly becoming difficult to make money using traditional trading tools,” said the head of quant strategy at Société Générale.
Of course, we suspect few readers are all that excited to dust off their math books and write their own equations. And even fewer are willing to learn the coding skills it takes to implement the math.
The oh-so-eager world of Wall Street has brought algorithmic trading straight to ordinary investors through an exchange-traded fund (ETF).
Since its inception late last year, the tiny AI Powered Equity ETF (AIEQ) has outperformed the stock market.
It’s up about 11% since October while the S&P is up just over 7%.
The ETF works just as we’d expect. It processes more than a million data points each day and uses what it gleans to predict the moves of some 6,000 stocks. It then tosses the best 30 to 70 into its portfolio.
In theory, thanks to machine learning capabilities, the computers behind the fund should get smarter as time goes on.
That said, the ETF remains quite small and illiquid.
It doesn’t get our money yet… not until it shows some steady long-term results.
Playing a New Game
Our point with all of this is that the realm of investing is changing.
When we entered the business so many years ago, computerized trading was just coming online.
Most investing logic was calculated the old-fashioned way… with lots of decipherin’, phone calls and guesses.
These days that’s all changed.
As with most new technology, we don’t have much of a choice in the matter.
We can either follow along or sit on the sidelines as somebody else makes the money.
One of those options, of course, is unacceptable.
Our Triad calls for a man to master three things… his Liberty, his Know-How and his Connections.
It’s that second one – Know-How – that’s tripping up many modern-day investors. The rulebook and therefore the instruction manual have changed.