Who Is Higher at Picking Stocks: AI or My 5-12 months-Old?

I consider myself a disciplined investor. I keep on with dollar-cost averaging and dividend reinvestment plans. I sift through quarterly earnings reports; I generally avoid meme stocks and IPOs regardless of how much hype they receive. And I pride myself on having a well-diversified portfolio.

Is it boring? Sure. But is it effective? Absolutely.

It was for my grandfather, too, who taught me the fundamentals of investing, including how patience is as critical to long-term success as which firms I decide to purchase shares of. He passed away in 2006, and 18 years later, my grandmother — who turned 92 recently — continues to be living comfortably from the seeds he sowed many years ago.

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But when a bunch of self-proclaimed apes begin to focus on short sellers, or when a latest technology claims it could possibly produce returns that beat the market — a feat that the vast majority of investment professionals are incapable of achieving — it all the time piques my interest. Such was the case earlier this 12 months when an organization named Danelfin began claiming that its AI-powered stock-picking tool was able to outperforming the benchmark S&P 500 index over 90 consecutive trading days (i.e., excluding stock market holidays and weekends).

It was a daring assertion made by the little-known startup, and as Money’s investing editor, I’d’ve been remiss to not have tried it out for myself. So briefly order, I signed up for Danelfin’s free model and decided to pit it against the S&P 500. And while I used to be at it, I asked my son — whose interests currently revolve around Roblox and ice cream — to hit the large blue button on a digital stock randomizer until he got bored.

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

How Danelfin’s AI works

Before diving into the stocks chosen for me, it’s useful to know how some firms are leveraging AI to assist improve investors’ odds of success.

The flexibility to beat the market is not taken flippantly in investing circles. BNP Paribas found that in 2023, hedge funds returned a median of 6.67% while the S&P 500 returned 24%. Furthermore, a 2020 study conducted by S&P Dow Jones Indices compared actively managed funds to the performance of the S&P 500, finding that 89% of fund managers did not beat the benchmark index.

Danelfin’s stock analytics platform goals to enhance investors’ possibilities of securing large returns by leveraging AI’s ability to sort through massive amounts of knowledge to be able to provide retail investors with a technological edge formerly reserved for professionally managed funds. Founded in 2016, the corporate’s mission is to “democratize the usage of artificial intelligence to assist everyone make higher investment decisions,” based on its website.

Danelfin intends to achieve this by utilizing its Explainable Artificial Intelligence, an analytics platform, to offer users with stock and ETF rankings, plus an easy-to-understand AI-generated rating that ranges from 1 to 10. The platform uses 600 technical indicators, 150 fundamental indicators and 150 sentiment indicators for each stock and ETF it rates. Based on the corporate, the upper the rating assigned by its AI, the upper the probability that an equity will outperform the market over the subsequent 90 trading days.

The stocks AI (and my son) picked for me

Because I’m a disciplined investor, I wasn’t about to interrupt the bank on an AI stock-picking experiment solely because it will make for a fun story. Fortunately, most major brokerages now offer fractional shares.

So before the market opened on July 8, I selected two stocks that Danelfin’s free AI model really useful — big-box retailer Costco Wholesale Corporation (COST) and legacy carrier United Airlines Holding Inc. (UAL) — each of which received AI scores of 10 on the time. Then, after my son became disinterested within the stock randomizer after roughly 30 seconds, I had his pick: automotive parts retailer AutoZone Inc. (AZO).

That Monday, before the opening bell, I purchased $1 value of every. COST was trading for $885.67 per share, UAL was trading for $47 per share, and my 5-year-old’s pick, AZO, was trading for $2,815 per share. Meanwhile, the S&P 500 began the day at $5,567.19 before hitting a then-record high.

After 30 trading days

Things got off to a rocky start. Within the lead-up to this evaluation, the S&P 500 had posted a year-to-date return of 17.38%. But summertime volatility suddenly gripped the market, spiking to its highest levels since October 2023 on the tail end of the last bear market.

After the primary 30 trading days, on Aug. 16, here’s where things 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 the 2 AI picks despite each elevated volatility and a big tech-fueled sell-off that saw it fall by 8.49% between July 16 and Aug. 5. However the index was in a position to get well nearly all of those losses by Aug. 16, the 30-day mark of the experiment. At this juncture, the S&P 500 and each AI stock picks were within the red, and it was starting to appear like my son — who thinks Santa is real and broccoli is evil — was a stock-picking savant.

After 60 trading days

September is notoriously the worst month of the 12 months for stock performance. Based on data from the S&P 500, since 1950, the common return for the S&P 500 for September is roughly -0.5%, which makes it the one month that has consistently posted a loss over that period.

When the month began, it looked like more of the identical. From the last trading day of August through Sept. 6, the S&P 500 experienced one other sell-off that drove the index down by 4.25%. But things turned around quickly as foresighted investors scooped up the shares that inexperienced and panicked sellers offloaded. By Sept. 19, the S&P 500 was trading higher than it was before the sell-off began.

After 60 trading days, on Sept. 30, here’s where things stood:

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 2 AI picks had a median return of 10.74%, with one stock outperforming the S&P 500 by nearly fivefold and the opposite trailing the market by greater than three percentage points. Meanwhile, my 5-year-old found himself in second place, with a return of 11.90% through 60 trading days, beating the market and one among the stocks AI picked.

After 90 trading days

The third and final phase of this experiment began with a robust October for the broad market and ended with a lift from the 2024 presidential election. In October, the S&P 500 set several more of all-time highs, and following a temporary pullback at the tip of the month, stocks rallied through the ultimate day of the 90-trading day window prescribed by Danelfin’s AI.

On the conclusion of those 90 trading days, on Nov. 11, here’s where every part 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 among AI’s stock picks — Costco — it was no match for United Airline’s gain of greater than 90%. Danelifin’s proprietary model was in a position to discover the buy-low opportunity within the beleaguered airline before the stock hit its year-to-date low of $37.88 on Aug. 5. By Nov. 11, shares of UAL had reached their highest price since January 2020.

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The takeaway

On the time of writing, shares of United Airlines just hit their all-time high, suggesting that AI is in agreement with my grandfather’s investment mantra of patience and discipline. While Danelfin’s other pick did not beat the market, the common return for each stocks over the 90-trading day window was 47.8%, or greater than five times the return of the S&P 500 in the course of the same period.

So: It worked.

But had I made a decision to selected just one of Danelfin’s recommendations, I could have either outperformed or underperformed the market, which leads me to imagine that — for now — AI’s claims are perhaps no more authentic than those made by the common Wall Street suit.

No one has a crystal ball. The identical goes for emerging technology like stock-picking AI platforms. And for novice or passive investors, the most effective approach stays investing in lower-risk index funds that historically provide reliable returns.

My son has since returned to specializing in computer games and manipulating me into buying him cups of Cookie Monster ice cream (which comprises enough blue food coloring to go away him looking like the flavour’s namesake Sesame Street character regularly). That said, I’ll always remember that in a stretch of 2024, my 5-year-old randomly picked a stock that not only outperformed the market but held its own against AI.