Can AI Ever Replace Experienced Investors?

During their latest episode of the VALUE: After Hours Podcast, Carlisle, Taylor, and Eric Cinnamond discussed Can AI Ever Replace Experienced Investors?. Here’s an excerpt from the episode:

Jake: [laughs] Ah, ooh, boy. Eric, how well do you think a model could do if you gave it all of the data that you collect on a bottom-up basis from these individual companies? Do you think that there’s more insights to be gleaned from there, or would it start tipping into absurdities?

Eric: I have trouble thinking a computer can accurately predict the cyclicality of these businesses. There’s so many variables that can affect margins, and they all move different ways at different times. A lot of it’s based on human behavior. So, I’m too reluctant to feel confident of evaluation spit out by an AI model. In the data going in, is that accurate? Is it smooth? We talked about the multiples being not really accurate in some cases. So, when you look at an operating margin of a business every quarter, there’s just so many things that can make it go one way or the other that are– I don’t know, maybe we do need AI, because my mind is having a hard time comprehending this.

[laughter]

Tobias: Do you find it helpful for hunting for ideas to look through–? Is that why you do it to look through industries and look through them at that level–? You’re looking for something that might be depressed but showing signs of life?

Jake: Or, is it to help normalize for the companies that you’re modeling?

Eric: Yeah, it’s more for normalized. But we follow a lot of the same companies that we followed 20 years ago. So, there’s only so many mature market leaders in small caps, and that hasn’t changed over many years. I hate using it. I always use this, but I’m using it anyways. Oil drives the market leader in Cat Litter, one of the market leaders, and it was founded in the 1960s. I’m very confident it will be one of the market leaders in 10 years from now. I’m very confident many of the variables that drive the earnings will be similar.

So, for us, a lot of it too is familiarity. We have 300 names. We know them well. So, we follow the same ones. And some get bought out, and a name will come on the list and they will come off. But over time, just following the same things, knowing something really well, I think provides a really good advantage. Because when COVID hit and small caps fell 40%, we didn’t have to do screens. It was immediate. We had ideas, we were buying immediately. And because we had familiarity with the names, we knew it was affecting margins and we had a good idea what normalized were. So, yeah, I don’t know if AI could recreate that. If it could, I guess we’re done. [laughs]

Jake: Well, or maybe AI would allow you to keep a larger inventory of ideas on the shelf then.

Eric: Yeah. Or, it could alert you to, “Hey, this is trading below normalized. The profits are above normalized, profits are below.” And it could maybe help you with your screening, where should I look? I think it might be more useful that way for us over time. But that’s going to be tough for us to transit, or at least for me, because how I’ve done things for 30 years, I admit that would be hard.

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