AI and the Promise of Superior Stock Picking
As artificial intelligence (AI) continues to revolutionize various industries, its potential in the financial sector—particularly in stock picking—has become a hot topic. While AI holds promise, the question remains: can it truly outperform human investors and traditional index strategies?
Historically, humans have struggled with stock selection. The 2025 Dalbar Quantitative Analysis of Investor Behavior (QAIB) underscores this, revealing that the average equity investor underperformed the S&P 500 by 8.5 percent in 2024. Emotional decision-making, including fear, greed, and herd mentality, frequently undermines investor returns.
In contrast, AI is often seen as a solution that can eliminate emotional bias and process vast data sets to make informed decisions. But does this technological edge translate into consistent market outperformance?
AI’s Early Attempts at Stock Picking
Several experiments suggest AI could be effective at selecting stocks—at least in the short term. For instance, a project conducted by Finder.com tested ChatGPT’s investment potential. Remarkably, the AI-led portfolio outperformed traditional human-managed funds, returning 4.9 percent compared to a 0.8 percent loss during the same period.
Another noteworthy case involved a high school student who used ChatGPT to build a portfolio of small-cap stocks. The result? A 23 percent return, far exceeding the Russell 2000’s 3.9 percent gain. These examples highlight AI’s potential, but they also raise questions about sustainability and replicability.
The Allure and Pitfalls of Stock Picking
Stock picking has long fascinated investors. It’s exciting and appeals to our innate belief that we can beat the odds. However, research consistently shows this confidence is often misplaced. Hendrik Bessembinder of Arizona State University analyzed nearly a century of U.S. stock data and found that more than half of all stocks had negative cumulative returns.
Even more telling, a mere 2.4 percent of stocks accounted for 100 percent of global market value creation from 1991 to 2020. This means that unless investors pick those few outperforming stocks, they’re likely to underperform the market. The median return for thousands of other stocks was a staggering negative 7.41 percent.
AI: Just Following Market Trends?
Many AI-driven models, including the recent “Comet Portfolio,” often select high-profile tech stocks like Amazon, Nvidia, and Microsoft. While these choices may seem intelligent, they largely reflect established market consensus. In essence, AI may not be uncovering hidden gems but rather reiterating already favored investments.
This approach is akin to momentum investing, which can be effective, particularly if it removes emotional elements like panic selling or irrational exuberance. However, it also raises concerns about AI’s ability to generate truly original or contrarian strategies that can outperform the market over the long term.
Psychology: The Human Weak Link
According to Dalbar’s latest QAIB report, behavioral biases are the biggest enemy of investors. The report cites examples such as raising cash during downturns and chasing trends after rallies. Common pitfalls include:
- Loss aversion
- Anchoring
- Regret
- Herd behavior
- Overconfidence
These human tendencies consistently erode returns, making AI’s unemotional decision-making process appear advantageous. But is it enough?
Limitations of AI in Investing
Despite its advantages, AI isn’t infallible. A recent academic study found that AI-based timing strategies often underperform passive benchmarks. These models tended to be too conservative during bull markets and overly aggressive during downturns, leading to significant portfolio losses.
AI’s effectiveness is also contingent on the quality of its programming. If it reflects human biases—intentionally or not—it may simply replicate the same decision-making flaws. Moreover, humans remain in control of the AI and may still override it during turbulent times, effectively reintroducing the emotional element AI seeks to eliminate.
Index Funds: Still the Gold Standard?
Given the inconsistent performance of both humans and AI in stock selection, low-cost index funds remain a compelling option. These funds offer broad market exposure, reduced volatility, and eliminate the need for constant decision-making.
Even the best AI strategies have yet to demonstrate long-term consistency in beating the market. Until they do, investors might be better off embracing the “buy the haystack” approach rather than searching for elusive needles.
Reality Check for Investors
Investment advisors who promise market-beating returns through stock picking—human or AI-assisted—should be scrutinized. Are they offering genuine insight or selling hope and hype?
As AI evolves, it may eventually deliver more reliable results. But for now, the prudent path for most investors is to remain skeptical and grounded in data-backed strategies.
This article is inspired by content from Original Source. It has been rephrased for originality. Images are credited to the original source.