ChatGPT, the generative artificial intelligence (AI) chatbot from OpenAI, dazzled the world with its introduction and set off the next race in technology as enterprises big and small figure out how to take advantage of the new AI tech and develop their own generative AI applications. Investors are also exploring the possibilities with ChatGPT, which can answer questions directly and pull up difficult-to-find information in just a few seconds.
But how useful is ChatGPT for investing?
Well, if you're looking for general investment information, the chatbot can steer you in the right direction. But if you want to know something about today's market, like if we're in a bear market right now, you're out of luck. Asking ChatGPT if we're in a bear market gets you a disappointing response. That's because the chatbot says that its training data only goes up to September 2021, so it's unable to provide information regarding anything past that date.
This limitation could potentially be remedied once Microsoft's (MSFT +1.47%) Bing search engine is integrated into ChatGPT. But for now, investors are unable to get recent market information from the AI chatbot, a frustration to any investor hoping to get some guidance on the current stock market.
Even if ChatGPT can't tell you what happened in the market today, it can give you some useful information as an investor.
Image source: Getty Images.
How ChatGPT can make you a better investor
Most of ChatGPT's financial advice may come off as standardized or generic, but that is partly by design. ChatGPT won't give you specific investing advice, but it can guide you in the right direction, and answer more general questions. For instance, in response to a question about becoming a better investor, ChatGPT encourages you to diversify your portfolio, manage risk, create a long-term plan, and embrace a disciplined approach.
ChatGPT can also clearly explain complicated investing topics. For instance, it gave a step-by-step explanation of how to make a discounted cash flow model, starting with the cash flow projection, determining the discount rate, and discounting future cash flow. It can also explain investing concepts like the weighted average cost of capital (WACC), the capital asset pricing model (CAPM), and return on invested capital (ROIC).
In other words, the best way for investors to use ChatGPT is as a teaching tool. Though the OpenAI chatbot can't analyze the latest earnings reports from the stocks you own, it can help break down concepts and vocabulary that might be unfamiliar, which is especially helpful if you're new to investing or trying to learn about a new industry or stock market sector.
Will AI chatbots beat the market?
It will be difficult (if not impossible) to design an AI chatbot that can consistently beat the market in making stock picks. That's not because the chatbots aren't smart enough. After all, they can process more data than any human can.
It's because the stock market is an infinite feedback loop that is constantly adjusting to investors' decisions. For example, if there were a chatbot that consistently picked winning stocks, investors would likely pile into those stocks, raising the price to the point where they would be overvalued, making them losers rather than winners.
The market is subject to herd behavior, and investors tend to respond to the same signals. For example, investors tend to bid a stock higher after finding that Warren Buffett has bought it due to the Berkshire Hathaway CEO's historical track record of beating the market.
A chatbot like ChatGPT could certainly outperform the market, especially over the long term, but it won't be a shortcut to crushing market returns the way some investors might dream of.
Unlike, say, a game of chess, the stock market is constantly changing, and even a perfect computer can't predict the outcomes in the market since they are subject to real-world events that haven't happened yet. Those include both black-swan events like the COVID-19 pandemic and more mundane activities like economic data, earnings reports, and monetary policy decisions.
If you're looking to use ChatGPT to be a better investor, the best way to do is for educational purposes. Hoping that AI will be your personal stock picker is likely a fantasy.
