I have a few conflicting thoughts on this. I absolutely believe that a lot of people will outsource their critical thinking to AI and, consequently, the markets will demonstrate more herding behaviour. This opens the door for the contrarian.
However, how does that contrarian stock pick then recover? To maintain or improve its price multiple, people will have to converge on that stock in the future. It can carry on being excellent and generating great earnings and free cash flow, pulling down its price multiple, but until it attracts attention, the price isn't going to move. There needs to be a catalyst.
To be a successful contrarian in a world of AI and momentum trades, you are hoping that the ubiquitous AI models will identify your chosen stock as a great opportunity (some time after you do) when the multiple gets low enough, drawing in investment.
Otherwise herding continues to pull investment towards the biggest, hottest stocks, irrespective of valuation. And if critical thinking is outsourced and the art of valuation is lost, who will be looking for the unloved gems? Will the AI recognise value when all learned behaviour is that bigger and louder is better?
I'm sure there will also be a few plucky souls who are willing to short the crowded trades, but I'm not one of them 😂
Yeah, very good point. Hard to deny that these unloved or misunderstood stocks can remain so for a long period of time. Placing emphasis on high-quality managers who can identify when their stock is undervalued and exploit that will be even more critical than before.
Hi Rene. I agree, although like you not with high conviction. Cliff Asness from AQR years ago argued that markets have actually become less efficient over the last few decades despite the easier accessibility of information. He blames social media and the democratization of easy online trading for exacerbating herding behavior. His conclusion was this creates opportunities but requires greater patience than in the past (markets can stray further from fundamental value anchors - and for longer). I suspect AI is just part of this evolution.
Artificial intelligence is making intelligence cheaper. As answers become abundant, the ability to ask the right questions becomes increasingly valuable. Judgement is everything. There is no artificial judgement available. That is the sole preserve of humans.
AI gives everyone access to vast amounts of data and analysis, reducing the advantage of simply knowing more than everyone else. The real edge shifts to interpretation. Understanding what information means, what matters, and what can safely be ignored becomes more valuable than the information itself.
AI encourages everyone to think in similar ways. Shared models, similar prompts, and common datasets increase the likelihood of consensus. That creates crowded trades and more fragile markets. Ironically, the widespread adoption of AI may increase the rewards available to investors capable of genuinely independent thinking.
Temperament also becomes a scarcer asset. As AI enables faster analysis and encourages more reactive decision making, patience becomes increasingly valuable. Investors willing to think over longer time horizons may find that time arbitrage becomes an even greater source of competitive advantage.
Finally, AI excels at analysing the obvious but remains less effective in situations that are messy, ambiguous, underfollowed, or shaped by local knowledge and human nuance. Those are often the areas where mispricing persists. Rather than eliminating hidden investment treasures, abundant intelligence may simply make them harder to find, and ultimately more valuable for those willing to do the work.
I have a few conflicting thoughts on this. I absolutely believe that a lot of people will outsource their critical thinking to AI and, consequently, the markets will demonstrate more herding behaviour. This opens the door for the contrarian.
However, how does that contrarian stock pick then recover? To maintain or improve its price multiple, people will have to converge on that stock in the future. It can carry on being excellent and generating great earnings and free cash flow, pulling down its price multiple, but until it attracts attention, the price isn't going to move. There needs to be a catalyst.
To be a successful contrarian in a world of AI and momentum trades, you are hoping that the ubiquitous AI models will identify your chosen stock as a great opportunity (some time after you do) when the multiple gets low enough, drawing in investment.
Otherwise herding continues to pull investment towards the biggest, hottest stocks, irrespective of valuation. And if critical thinking is outsourced and the art of valuation is lost, who will be looking for the unloved gems? Will the AI recognise value when all learned behaviour is that bigger and louder is better?
I'm sure there will also be a few plucky souls who are willing to short the crowded trades, but I'm not one of them 😂
Yeah, very good point. Hard to deny that these unloved or misunderstood stocks can remain so for a long period of time. Placing emphasis on high-quality managers who can identify when their stock is undervalued and exploit that will be even more critical than before.
Hi Rene. I agree, although like you not with high conviction. Cliff Asness from AQR years ago argued that markets have actually become less efficient over the last few decades despite the easier accessibility of information. He blames social media and the democratization of easy online trading for exacerbating herding behavior. His conclusion was this creates opportunities but requires greater patience than in the past (markets can stray further from fundamental value anchors - and for longer). I suspect AI is just part of this evolution.
That’s great additional input, thanks!🙏🏻
Artificial intelligence is making intelligence cheaper. As answers become abundant, the ability to ask the right questions becomes increasingly valuable. Judgement is everything. There is no artificial judgement available. That is the sole preserve of humans.
AI gives everyone access to vast amounts of data and analysis, reducing the advantage of simply knowing more than everyone else. The real edge shifts to interpretation. Understanding what information means, what matters, and what can safely be ignored becomes more valuable than the information itself.
AI encourages everyone to think in similar ways. Shared models, similar prompts, and common datasets increase the likelihood of consensus. That creates crowded trades and more fragile markets. Ironically, the widespread adoption of AI may increase the rewards available to investors capable of genuinely independent thinking.
Temperament also becomes a scarcer asset. As AI enables faster analysis and encourages more reactive decision making, patience becomes increasingly valuable. Investors willing to think over longer time horizons may find that time arbitrage becomes an even greater source of competitive advantage.
Finally, AI excels at analysing the obvious but remains less effective in situations that are messy, ambiguous, underfollowed, or shaped by local knowledge and human nuance. Those are often the areas where mispricing persists. Rather than eliminating hidden investment treasures, abundant intelligence may simply make them harder to find, and ultimately more valuable for those willing to do the work.