Who is better at picking stocks: AI or my 5-year-old?

I consider myself a disciplined investor. I stick with dollar-cost averaging and dividend reinvestment plans. I check quarterly earnings reports; I usually refrain meme stock And IPOs no matter how much hype they get. And I pride myself on having a well-diversified portfolio.

Is it boring? for sure but Is it effective?? absolutely

It was also because of my grandfather, who taught me the fundamentals of investing, including how important patience is to long-term success than which companies I choose to buy shares of. She passed away in 2006, and 18 years later, my grandmother—who recently turned 92—is still living comfortably off the seeds she planted decades ago.

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But when a bunch of self-proclaimed monkeys start targeting short sellers, or when a new technology claims it can produce market-beating returns — a feat most investment professionals are unable to achieve. are – it always catches my interest. A similar case came to light earlier this year when a company had Danulfin It began claiming that its AI-powered stock-picking tool was capable of outperforming benchmarks. S&P 500 Index More than 90 consecutive trading days (ie, excluding stock market holidays and weekends).

It was a bold claim by a little-known startup, and as Money’s investment editor, I wouldn’t have shied away from trying it out for myself. So in the nick of time, I signed up for Danolphin’s free model and decided to give it a shot against the S&P 500. And while I was at it, I asked my son – whose interests currently revolve around Roblox and ice cream – to push the big blue button on a digital stock randomizer until he got bored.

The stage was set: S&P 500 vs. AI vs. my 5-year.

How Danulfin’s AI Works

Before diving into the stocks I picked, it’s useful to understand how some companies are leveraging AI to help investors improve their chances of success.

The ability to beat the market is not taken lightly in investment circles. BNP Paribas found that in 2023, hedge funds returned an average of 6.67% while the S&P 500 returned 24%. Additionally, a 2020 study by S&P Dow Jones Indices compared actively managed funds to the performance of the S&P 500, finding that 89% of fund managers failed to beat the benchmark index.

Danulfin’s stock analytics platform aims to secure big returns by leveraging AI’s ability to sift through massive amounts of data to provide retail investors with a technological edge previously reserved for professionally managed funds. To improve the prospects of the investors of Founded in 2016, the company aims to “democratize the use of artificial intelligence to help everyone make better investment decisions,” according to its website.

Danulfin It intends to do so by using its interpretable artificial intelligence, an analytics platform, to provide users with stock and ETF ratings, as well as an easy-to-understand AI-generated score between 1 and 10. The platform uses 600 technical indicators, 150 Fundamental indicators and 150 sentiment indicators for every stock and ETF. According to the company, the higher the score determined by its AI, the more likely an equity will outperform the market over the next 90 trading days.

Stock AI (and my son) chose for me

Since I’m a disciplined investor, I wasn’t about to break the bank on an AI stock-picking experiment just because it would make for a fun story. Fortunately, most major brokerages now offer Partial share.

So before the market opened on July 8, I picked two stocks that Danolphin’s free AI model recommended — big-box retailer Costco Wholesale Corp. (COST) and legacy carrier United Airlines Holding Inc. (UAL) — both of which received AI scores of 10. At that time. Then, after about 30 seconds of my son not being interested in the stock randomizer, I picked him: car parts retailer Autozone Inc. (AZO).

That Monday, before the opening bell, I bought $1 worth of each. COST was trading for $885.67 per share, UAL was trading for $47 per share, and my 5-year pick, AZO, was trading for $2,815 per share. Meanwhile, the S&P 500 started the day at a then-record high earlier at $5,567.19.

After 30 business days

Things got off to a rousing start. In the lead-up to this analysis, the S&P 500 posted a year-to-date return of 17.38%. But summertime volatility suddenly engulfed the market, reaching its highest levels at the tail end of the last bear market since October 2023.

After the first 30 trading days, on August 16, here were things as they stood:

S&P 500: $5,554.25, down 0.23%
Cost: $870.59, down 1.70%
UAL: $42.07, down 10.48%
AZO: $3,212.87, up 14.13%

The S&P 500 was outperforming two AI picks despite both elevated volatility and significant Tech-fuel sales off which saw it decline by 8.49% between July 16 and August 5. But the index was able to recover almost all losses by August 16, the 30-day mark of the experiment. At this juncture, the S&P 500 and both AI stock picks were in the red, and it looked like my son — who believes Santa is real and broccoli is evil — was a stock-picking savant.

After 60 business days

September is the worst month of the year for stock performance. According to S&P 500 data, since 1950, the average return for the index in September is about -0.5%, making it the only month that has posted a consistent loss over that period.

When the month started, it looked like this. From the last trading day of August to September 6, the S&P 500 experienced another selloff that sent the index down 4.25%. But things changed quickly as visionary investors scooped up shares that experienced and nervous sellers had offloaded. As of September 19, the S&P 500 was trading higher than it had been before the selloff began.

After 60 trading days, on September 30, here’s where things stand:

S&P 500: $5,762.48, up 3.50%
Cost: $886.52, up 0.09%
UAL: $57.06, up 21.40%
AZO: $3,150.04, up 11.90%

At this point, the average return of the two AI picks was 10.74%, with one stock outperforming the S&P 500 by nearly five times and the other lagging the market by more than three percentage points. Meanwhile, my 5-year-old found himself in second place, beating the market with a return of 11.90% through 60 trading days and a stock picked by AI.

After 90 business days

The third and final phase of this experiment began with a strong October for the broader market and ended with a boost from the 2024 presidential election. In October, the S&P 500 set several more all-time highs, and after a brief pullback at the end of the month, stocks rallied on the final day of Danulfin’s AI-determined 90-trading day window.

At the end of those 90 trading days, on November 11, here was where everything stood:

S&P 500: $6,001.35, up 7.79%
Cost: $932.88, up 5.33%
UAL: $89.43, up 90.27%
AZO: $3,173.40, up 12.73%

While the market rally allowed the S&P 500 to outperform one of AI’s stock picks — Costco — it was no match for United Airline’s more than 90% gain. Danellifin’s proprietary model was able to identify a buy-short opportunity in the troubled airline before the stock hit its year-to-date low of $37.88 on Aug. 5. As of November 11, UAL shares had reached their highest value since January 2020. .

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The takeaway

At the time of writing, United Airlines shares have just hit their all-time high, suggesting that AI agrees with my grandfather’s investing mantra of patience and discipline. While Danulfin’s second pick failed to beat the market, the average return of both stocks over the 90-trading day window was 47.8%, or more than five times the return of the S&P 500 over the same period.

So: it worked.

But I just decided to choose one Of Danulfin’s recommendations, I could either outperform or underperform the market, which leads me to believe that — for now — AI’s claims are probably no more valid than those made by the average Wall Street suit. are

No one has a crystal ball. The same goes for emerging technologies like stock-picking AI platforms. And for new or passive investors, the best approach remains investing Low risk index funds which historically provide reliable returns.

My son has since gone back to focusing on computer games and manipulating me into buying him cups of Cookie Monster ice cream (which includes enough blue food coloring to make him look like the flavor’s namesake). Sesame Street character on a regular basis). That said, I will never forget that during the long run of 2024, my 5-year-old randomly picked a stock that not only outperformed the market but performed against the AI.