Short read: The Golden Age of Value Investing Is Over

The information edge in investing has long been nullified with the emergence of the PCs, Internet and Google. So, it boiled down to the insight an analyst or a fund manager could produce by stitching together information that was now ubiquitously available to all i.e, mosaic theory. This piece argues that even that edge is likely gone. The article is by Guy Spier, a fund manager, author and more importantly an evangelist for value investing through his writing, talks and forums. Guy laments about AI knocking off the edge a value investor enjoyed – scuttlebutt – to do the hard yards of primary research, visiting stores, factories, market places, speaking to customers, suppliers, competitors to get that insight which informs the value of a business.

“…Before ChatGPT, you still had to have the patience to assemble and read through the mosaic of sources. Now you can just ask ChatGPT or Gemini to do all the trawling. An LLM can give an instant summary of all that has been said in the public domain about a company. And it can be instantly analyzed to provide the current state of wisdom on the topic.

Granted, the LLMs cannot, to the best of my knowledge, generate original thinking. But the path to original thoughts is so much shorter — and so much more accessible.

…So many original thoughts or variant opinions are available online and the LLMs can trawl through all of them — adding in and cross-referencing a mosaic of additional sources: social media posts, SEC filings and more. That material is all now public domain.

It’s true that there are still many nonpublic data sources that are not accessible by LLMs. But data tends to leak out via Scribd, Reddit, arXiv or social media. Even if that’s just metadata, it can be assembled effortlessly. Then a human like me can apply intuition and fact-check the sources to make sure the LLM is not hallucinating.

…My conclusion is that the golden age of value investing is well and truly over. Thanks to the LLMs, I have no need for a junior analyst: At a fraction of the cost, an LLM can do a far better job. And the era of the swashbuckling hedge fund manager — Michael Steinhardt, George Soros, Julian Robertson — is also gone.

Asset pricing will become more accurate. Hidden subtleties about a particular business that make it either better or worse than it appears will be more easily revealed. The return on better analysis and better insight will diminish because it will be available to all. The British scientist and writer Matt Ridley would liken this to the Red Queen effect: We can all run faster, but at the end of the day, we will all have access to the same LLMs. The dispersion of returns for active management has to reduce, clustering even closer to the index return, even for investors who don’t closet index.”

But is this all bad? He concludes otherwise:

“If the only thing AI and LLM’s do for finance is to level the playing field — to further marginalize the masters of the universe (and wannabees like me) — would that be such a bad thing? Most likely not.

Thanks to AI, the playing field is more level than it’s ever been. Now more than ever there is no need for the average investor to have to pay outrageous fees. A big benefit of the stock market was democratize finance. Perhaps, now, thanks to AI, that day is finally here.”

Disclaimer: ‘Alphabet (parent company of Google), Microsoft Corp and Meta Platforms Inc. are part of Marcellus’ Global Compounders Portfolio, a strategy offered by the IFSC branch of Marcellus Investment Managers Private Limited and regulated by IFSCA. Accordingly, Marcellus, its employees, immediate relatives, and clients may hold interests or positions in these stocks. Any direct references to these companies or the platform owned by them are made solely for informational and educational purposes, in the context of the article discussed.’

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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.