Learning Generative AI #5: An Invaluable Investing Tool

This is the seventh in my newsletter's, Advances in Technology, series on Generative AI and the fifth on Learning Generative AI. If you are interested in the others, here are the links to the original articles archived on Substack.

Learning Generative AI #4: Planning Your Travel

Learning Generative AI: #3 Getting Useful Medical Information

Learning Generative AI: #2 Satisfying Your Curiosity

Learning to Use Generative AI: #1 Writing and Editing

Explanation and Access to Leading Generative AI Systems

A Primer on Generative AI

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Generative AI revolutionizes how investors approach financial markets, providing unparalleled insights, personalized strategies, and enhanced efficiency. This transformative technology, capable of analyzing vast datasets and generating actionable recommendations, is becoming a powerful ally for novice and seasoned investors.

In this article, we explore how generative AI shapes the future of investment advice. From crafting personalized financial strategies to predicting market trends with precision, generative AI empowers investors to make data-driven decisions in an increasingly complex economic landscape. We’ll examine practical applications like portfolio optimization, risk assessment, and stock recommendations.

Whether navigating volatile markets or looking to diversify your portfolio, understanding how to harness generative AI can provide a competitive edge. Read on to discover how this cutting-edge technology democratizes access to high-quality investment advice and reshapes the financial industry.

Example #1: What will the stock market do next year?

Let’s start with a fundamental question: Is the stock market expected to be a good investment next year? Professional investors pay a lot for this advice from research firms, but you can get it easily and for free from ChatGPT.

ChatGPT Prompt:?

What are the projections for the stock market in 2025?

ChatGPT Response:

As of November 26, 2024, financial analysts and institutions have provided various projections for the U.S. stock market in 2025, particularly focusing on the S&P 500 index.

S&P 500 Projections:

• Goldman Sachs and Morgan Stanley:?Both firms have set a base case target of 6,500 for the S&P 500 by the end of 2025, indicating a potential return of approximately 9.75% from its recent close of 5,969.34.?
• Wells Fargo:?The bank anticipates the S&P 500 to reach between 6,500 and 6,700 by the end of 2025, attributing this growth to a robust U.S. economy and earnings enhancements driven by policies expected under President-elect Donald Trump's second term, such as reduced regulatory costs and potential corporate tax cuts.?
• Barclays:?The firm has increased its year-end target for the S&P 500 for 2025 from 6,500 to 6,600, aligning closely with other Wall Street predictions.?

Factors Influencing Projections:

• Economic Policies:?Anticipated policy changes, including corporate tax cuts and deregulation under the incoming administration, are expected to stimulate economic growth and corporate earnings.
• Interest Rates:?The Federal Reserve's recent interest rate cuts are projected to boost stock valuations if economic activity remains strong.?
• Market Valuations:?While current valuations are higher than historical averages, strategists justify their optimism with expected earnings growth and economic boosts from policy changes.?

Cautions and Considerations:

• Market Volatility:?Despite the optimistic outlook, advisors warn of potential volatility. A survey of 650 advisors by InspereX revealed that over two-thirds expect the S&P 500 to increase by more than 10% in 2025; however, about 80% forecast at least one market correction during the year.?
• Historical Patterns:?Analysts note that while the S&P 500 has experienced substantial gains, the likelihood of consecutive years of double-digit gains is lower, with projected returns slowing significantly.?

In summary, while projections for the S&P 500 in 2025 are generally optimistic, with targets ranging from 6,500 to 6,700, investors should remain cautious of potential volatility and market corrections. It's advisable to stay informed about economic policies and market conditions as the year progresses.

Example #2: Getting specific stock recommendations

Let’s look at some specific stock recommendations. I used the Perplexity AI generative aI app for this. It searches the current internet sites, so it is current, and it also uses citations to form the response.?

Perplexity Prompt:?

Which are the five best technology stock investments today?

Perplexity Response:

Based on the latest market data and analyst recommendations, here are five of the best technology stock investments to consider today:

1. NVIDIA Corporation (NVDA)

NVIDIA has been a standout performer in the tech sector, with its stock price surging over 200% in the past year[1][2]. As the world's largest manufacturer of graphical processing units, NVIDIA is at the forefront of the AI revolution[2]. Despite its meteoric rise, more than half of the analysts following the stock still rate it a "buy" or "strong buy"[2].

2. Meta Platforms (META)

Formerly known as Facebook, Meta has seen a significant resurgence, partly due to its AI ambitions[2]. The stock has risen over 80% in the past year, and 60 out of 68 analysts have "buy" or "strong buy" ratings on it[2].

3. Apple Inc. (AAPL)

Apple continues to be a tech leader in terms of innovation and market cap[2]. With its strong consumer product lineup and potential in the AI space, 32 out of 38 analysts have a "buy" or "strong buy" rating on the company[2].

4. Microsoft Corporation (MSFT)

Microsoft remains one of the world's largest corporations by market cap and has shown steady growth[1]. Its diverse product portfolio and strong position in cloud computing make it a solid long-term investment choice.

5. Taiwan Semiconductor Manufacturing Company (TSM)

As the world's largest chip manufacturer, TSM is crucial to the global tech ecosystem[2]. The stock has shown impressive growth, rising over 114% in the past year[2]. Its dominant position in chip production makes it a key player in the ongoing AI and technology boom.

These recommendations are based on recent performance, analyst ratings, and market positioning. However, it's important to conduct your own research and consider your personal financial goals before making any investment decisions.

Citations:

[[1] https://www.bankrate.com/investing/best-performing-tech-stocks/

[2] https://www.gobankingrates.com/investing/stocks/best-tech-stocks/

[3] https://www.morningstar.com/stocks/best-technology-stocks-buy-now

[4] https://www.nerdwallet.com/article/investing/best-performing-technology-stocks

[5] https://www.tastylive.com/news-insights/are-these-the-best-stocks-to-buy-in-november-2024

[6] https://www.investopedia.com/dow-jones-today-11052024-8739730

[7] https://finance.yahoo.com/news/exploring-high-growth-tech-stocks-050623103.html

[8] https://money.usnews.com/investing/articles/best-tech-stocks-to-buy-this-year

Example #3: Getting analyst estimates on a stock

You usually need an investment account to get analyst stock recommendations of buy/hold/sell and price targets on specific stocks. But with generative AI, you can get them all instantly for free. You don’t need to look them up individually and then summarize them. In this example, I’m using Microsoft CoPilot.

Microsoft CoPilot Prompt:

List recent analyst ratings for Apple (AAPL) along with their price targets. Put the information in a table and calculate the overall averages.

Microsoft CoPilot Response:

Here are some recent financial analyst ratings and price targets for Apple Inc. (AAPL):

• Monness Crespi & Hardt: Buy $245 (11/13/2024)
• Robert W. Baird: Outperform $240 (11/13/2024)
• Morgan Stanley: Overweight $273 (11/13/2024)
• Loop Capital: Buy $275 (11/04/2024)
• Maxim Group: Hold $215 (11/01/2024)
• KeyBanc Capital Markets: Underweight $200 (10/25/2024)
• Jefferies: Hold $212.92 (10/07/2024)
• Tigress Financial: Strong Buy $295 (08/28/2024)
• Piper Sandler: Neutral $225 (10/10/2024)
• Barclays: Underweight - (11/01/2024)
• Rosenblatt Securities: Buy $262 (11/01/2024)
• Needham: Buy $260 (11/02/2024)
• Canaccord Genuity: Buy $215 (05/04/2024)
• UBS: Neutral $236 (09/04/2024)
• Raymond James: Outperform $250 (07/26/2024)
• DA Davidson: Buy $230 (06/11/2024)

The average rating for Apple Inc. (AAPL) is?Outperform, and the average price target is approximately?$262.26.

Example #4: Requesting a list of stock choices

You are interested in investing in dividend-paying stock. Still, you want to know the P/E ratio because you are cautious of high P/E companies and are interested in analyst ratings. So, you ask ChatGPT.

ChatGPT Prompt:

List the ten highest dividend stocks on the Fortune 500, with their P/E ratio and analyst ratings.

Chat GPT Response:

ChatGPT provided the following table of ten stock, although I couldn’t copy and paste it easily.

Here are the top 10 dividend-paying stocks.

?This is an excellent list to start looking at dividend-paying investments.

Example #5: Evaluating alternative investments

You are considering four new high-technology investments and would like advice on each to select one.?

ChatGPT Prompt:?

Compare current investment opportunities in AAPL, NVDA, AMD, and AVGO/ Include potential appreciation, downside risk, and overall recommendation.

ChatGPT Response:

As of November 22, 2024, here's an analysis of the investment opportunities in Apple Inc. (AAPL), NVIDIA Corporation (NVDA), Advanced Micro Devices, Inc. (AMD), and Broadcom Inc. (AVGO), focusing on potential appreciation, downside risk, and overall recommendations.

Apple Inc. (AAPL):

Potential Appreciation: Analysts have an average price target of $235.51, suggesting a potential 5.03% increase from the current price of $224.23.

Downside Risk: Apple's mature market position and diversified product line offer stability, but potential risks include market saturation and supply chain challenges.

Recommendation: With a consensus rating of "Moderate Buy," Apple is considered a stable investment with modest growth potential.

NVIDIA Corporation (NVDA):

Potential Appreciation: NVIDIA has experienced significant growth, driven by its leadership in AI and data center markets. Analysts have set price targets up to $190, indicating substantial upside potential.

Downside Risk: High valuation metrics and potential supply constraints pose risks. Additionally, geopolitical factors could impact operations.

Recommendation: NVIDIA is viewed as a strong investment in the AI sector, but investors should be mindful of valuation and market volatility.

Advanced Micro Devices, Inc. (AMD):

Potential Appreciation: AMD has shown positive revenue growth and is expanding its presence in AI and data center markets.

Downside Risk: Negative free cash flow and high valuation metrics may raise concerns about financial health and overvaluation.

Recommendation: AMD presents growth opportunities but carries higher risk due to financial metrics. Investors should approach with caution.

Broadcom Inc. (AVGO):

Potential Appreciation: Broadcom is capitalizing on AI demand, with significant revenue growth and strong free cash flow. Analysts have set price targets up to $190, reflecting optimism.

Downside Risk: Negative EPS and high valuation metrics suggest potential overvaluation concerns.

Recommendation: Broadcom is a compelling investment in AI infrastructure, but investors should be cautious of valuation and profitability metrics.

Overall Recommendation:

• Apple (AAPL): Suitable for investors seeking stability and modest growth.
• NVIDIA (NVDA): Attractive for those looking to invest in AI leadership, with consideration of valuation risks.
• AMD (AMD): Potential for growth exists, but higher risk due to financial metrics.
• Broadcom (AVGO): Offers exposure to AI infrastructure growth, with caution advised regarding valuation.

Investors should assess their risk tolerance and investment goals when considering these opportunities.

Example #6: Improve understanding of stock trading

You are still learning about trading stocks and are interested in “short selling” stocks you think will drop in price.?

Char GPT Prompt:?

How do you short-sell stock?

ChatGPT Response:

Short selling is a trading strategy where you profit from a stock's price declining. It involves borrowing shares, selling them at the current price, and later buying them back at a lower price to return to the lender. Here's how it works:

Step-by-Step Guide to Short Selling Stocks

1. Open a Margin Account:You need a margin account with a brokerage, as short selling involves borrowing shares. The broker may require a minimum balance and charge interest on the borrowed shares.
2. Choose the Stock to Short:Identify a stock you believe will decrease in value. Research the stock thoroughly, considering its fundamentals, technical indicators, and market conditions.
3. Borrow Shares:Your broker lends you shares of the stock. These shares are typically borrowed from another investor's account.
4. Sell the Shares:The borrowed shares are sold on the market at the current price. For example, if the stock is trading at $100 per share, you sell 100 shares for $10,000.
5. Monitor the Stock:Track the stock's price movement. The goal is for the price to drop so you can repurchase the shares at a lower price.
6. Buy Back the Shares (Covering):When the stock price drops to your target, buy back the same number of shares at the lower price. For instance, if the price falls to $80, you buy back 100 shares for $8,000.
7. Return the Shares:Return the borrowed shares to the lender (broker). The difference between the selling price and the repurchase price (minus fees and interest) is your profit.

Example of Short Selling:

• Initial Trade:?Borrow and sell 100 shares of Stock XYZ at $50 each. You receive $5,000.
• Price Drops:?The stock price falls to $30.
• Repurchase Shares:?Buy back 100 shares for $3,000.
• Profit:?$5,000 (selling price) - $3,000 (buyback price) = $2,000 (excluding fees/interest).

Risks of Short Selling:

1. Unlimited Loss Potential:Stock prices can rise indefinitely, so potential losses are unlimited.
2. Margin Requirements:Brokers may require you to maintain a certain level of equity in your account. If the stock price rises, you might face a margin call, requiring you to deposit more funds.
3. Short Squeeze:If many traders are shorting the stock and its price rises sharply, short sellers may rush to cover, driving the price even higher.
4. Borrowing Costs:Fees for borrowing shares can be high, especially for stocks with high short interest.
5. Dividend Payments:If the company pays a dividend during your short position, you must pay it to the lender.

Alternatives to Short Selling:

• Put Options:?Buying put options gives you the right to sell a stock at a set price, allowing you to profit from a price decline with limited risk.
• Inverse ETFs:?These are funds designed to move inversely to an index or sector, providing a way to profit from declines without borrowing shares.

Tips for Short Selling:

1. Use stop-loss orders to manage risk.
2. Avoid shorting in volatile or trending bull markets.
3. Understand the stock's fundamentals and technical indicators.
4. Consider the costs of borrowing and potential dividends.

Short selling is a sophisticated strategy best suited for experienced traders who understand its risks and mechanics. Always use caution and consider consulting a financial advisor.

After this advice, you decide that short-selling is not for you, but you are considering put options.?

Example #7: Understanding how the stock market will react to interest rate changes

You hear that the stock market reacts to interest rate changes. Since this is expected over the next few years, you want to understand it better.?

ChatGPT Prompt:??

What stocks will benefit from lower interest rates?

ChatGPT Response:

Lower interest rates can significantly influence various sectors of the stock market. When the Federal Reserve reduces its benchmark rate, borrowing becomes more affordable, potentially boosting economic activity. Certain industries are particularly poised to benefit from such an environment:

1. Real Estate and Homebuilders:

• Impact:?Reduced interest rates often lead to lower mortgage rates, stimulating demand for housing. This benefits real estate companies and homebuilders.
• Examples:?Companies like D.R. Horton and Lennar may see increased activity due to more affordable financing options for homebuyers.?

2. Utilities:

• Impact:?Utilities are capital-intensive and often carry significant debt. Lower interest rates reduce borrowing costs, improving profitability.
• Examples:?Firms such as Duke Energy and NextEra Energy could experience financial benefits from decreased interest expenses.?

3. Technology:

• Impact:?Tech companies, especially those in growth phases, rely on financing for expansion. Lower rates make capital more accessible, supporting innovation and development.
• Examples:?Companies like Apple and Microsoft might find it more cost-effective to invest in new projects and technologies.?

4. Financials:

• Impact:?While banks may face pressure on net interest margins, other financial entities like asset managers and insurance companies can benefit from increased economic activity and investment.
• Examples:?Firms such as BlackRock and Prudential Financial could see positive effects from a more active investment environment.?

5. Consumer Discretionary:

• Impact:?Lower interest rates can boost consumer spending on non-essential goods and services, benefiting companies in this sector.
• Examples:?Retailers like Amazon and automakers such as Ford may experience increased sales due to higher consumer confidence and spending power.?

It's important to note that while these sectors may benefit from lower interest rates, individual company performance can vary based on specific circumstances. Investors should conduct thorough research or consult financial advisors to make informed decisions.

Example #8: Getting portfolio advice

Generative AI can provide sound advice on building your portfolio. Here is one example.?

CharGPTPrompt:?

What is the best portfolio mix for someone just retiring?

ChatGPT Response:

Recommended portfolio mix for a retiree with asset class allocation and purpose:

• Stocks (Equities):?40-60% — Growth to outpace inflation.
• Bonds (Fixed Income):?30-50% — Income and stability.
• Cash (Short-Term):?5-10% — Emergency and liquidity needs.
• Alternative Investments:?5-10% — Diversification (real estate, REITs, etc.).

Details on Asset Classes:

1. Stocks (40-60%):Focus on dividend-paying stocks or ETFs.Diversify across U.S. large caps, international equities, and some growth sectors.Consider low-volatility or defensive sectors (e.g., healthcare, utilities).
2. Bonds (30-50%):Emphasize high-quality bonds (Treasuries, municipal bonds, corporate bonds).Use bond funds with short-to-intermediate durations to reduce interest rate risk.Include inflation-protected securities (e.g., TIPS).
3. Cash (5-10%):Keep 1-2 years of living expenses in cash or cash-equivalents (e.g., money market funds, CDs).Use this for emergency funds or income during market downturns.
4. Alternative Investments (5-10%):Real estate investment trusts (REITs) for income and diversification.Commodities or precious metals as an inflation hedge (small allocation).

Additional Strategies:

1. Bucket Approach:Bucket 1:?1-3 years of expenses in cash or near-cash assets.Bucket 2:?4-10 years in bonds or conservative investments.Bucket 3:?Long-term growth in stocks or higher-risk assets.
2. Withdrawal Strategy:Follow the "4% Rule" as a guideline for withdrawals, adjusting for portfolio performance and inflation.Prioritize tax-efficient withdrawals (e.g., withdraw from taxable accounts first, then tax-deferred accounts).
3. Rebalancing:Rebalance the portfolio annually or semi-annually to maintain target allocations.
4. Annuities (Optional):Consider immediate or deferred annuities to secure a portion of income for life.

Sample Portfolio for Moderate Risk Retiree:

• 40% Stocks:25% U.S. equities10% international equities5% REITs
• 50% Bonds:30% Treasuries15% corporate bonds5% TIPS
• 10% Cash:5% money market funds5% high-yield savings

This mix provides growth, income, and liquidity while managing risk. Always consider consulting a financial advisor to customize your portfolio for your unique needs.

Critical Applications of Generative AI in Investing

1. Market Analysis and ProjectionsGenerative AI can forecast market trends, such as S&P 500 growth or interest rate impacts, by analyzing historical and current economic data.Example: AI models predict a range of outcomes for the stock market in 2025, factoring in policies and economic indicators.
2. Stock RecommendationsAI tools like ChatGPT and Perplexity identify top-performing stocks (e.g., NVIDIA, Apple) by aggregating analyst ratings, price targets, and sector trends.Recommendations consider growth potential, dividend yields, and financial stability.
3. Portfolio OptimizationAI suggests tailored portfolio mixes, such as balancing equities, bonds, and cash for retirees, to achieve long-term financial goals while managing risk.It incorporates strategies like the "bucket approach" to ensure liquidity and stability during market volatility.
4. Alternative Investment InsightsAI evaluates non-traditional assets like REITs, commodities, and options for diversification.For instance, guidance on short-selling or put options helps investors understand advanced strategies.
5. Improved AccessibilityAI eliminates barriers to high-quality financial advice by providing instant, data-driven recommendations.Investors gain insights into analyst ratings, P/E ratios, and market reactions to interest rate changes without requiring costly subscriptions.

Conclusion: Advantages of Using Generative AI

Generative AI is revolutionizing the investment landscape, offering tools that enhance decision-making and accessibility for novice and seasoned investors. AI enables more intelligent investment decisions by analyzing vast datasets, generating personalized strategies, and providing real-time market insights. Here’s a summary of how generative AI impacts different facets of investing:

Efficiency:?Instant access to complex financial data and actionable insights.

Personalization:?Tailored strategies based on an individual’s risk tolerance and goals.

Cost-Effective:?Reduces the need for expensive research subscriptions or advisory fees.

Considerations and Risks

Accuracy:?While AI is powerful, it relies on the quality of input data, and projections can vary based on assumptions.

Human Oversight:?Investors should combine AI insights with personal judgment and, when needed, professional financial advice.

Market Volatility:?AI provides trends but cannot eliminate risks tied to unpredictable market behaviors.

Generative AI democratizes investment advice, making it accessible, data-driven, and highly customizable. Whether crafting a portfolio, selecting stocks, or understanding market dynamics, AI offers a competitive edge for investors navigating today’s complex financial world.

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