Two brothers charged for peddling bogus software, but even the honest stuff is unlikely to bring you riches.
Artificial intelligence so good it can analyse share trends far better and quicker than humans can, and will tip you off to potential multi-baggers before the market catches on to them?
That's what Alexander and Thomas Hunter, from the unlikely sounding financial nerve centre of Whitley Bay, claimed they had to offer back in 2007 in the form of a smart computer software package known as Marl.
Marl, they claimed, was based in a trading algorithm developed for Goldman Sachs. And, for a modest sum, you could subscribe to a newsletter revealing Marl's share picks, or for a little more you could buy a home version of the software.
Who'd say no to that?
Well, you should have done, because it has now been revealed that the software actually attempted no such thing. Instead, it just downloaded share tips that the 16-year-old brothers were feeding in manually.
And they got those tips from companies that paid the Hunters for placements. The brothers are currently facing stock fraud charges from US authorities.
What about the real stuff?
But how about those real software packages you can get, which genuinely do filter market data and try to come up with winners for you?
Even if an honestly developed investing algorithm could actually pick enough winners to make it worthwhile, its very success would almost certainly be its own downfall. The thing is, the "spotting the signs before the market" approach to investment can only work, if it works at all, if the market itself isn't doing the same. And as soon as you release your secret methods out into the world, you can no longer get in ahead of the crowd.
That's assuming such algorithms actually can work at all, and there's doubt about that -- at least when it comes to the longer term.
Hedge funds
Fancy computer-based trading is how a number of investment firms, notably hedge funds, work. But they do it by jealously guarding their secrets and not letting anyone else in on the details of how they make their selections. They know that as soon as the rest of the market can reproduce their strategy, it's finished.
In fact, something like that helped kill the Long-Term Capital Management hedge fund in the late nineties. It had developed a computer-based strategy based on taking large leveraged positions with low margins, which partly relied on few or no other traders following suit. But other investors copying LTCM's moves helped push that leveraged strategy that bit too far, and it's all history now.
And even today, we're seeing doubts creeping in about algorithm-based investing at Man Group (LSE: EMG), with its flagship AHL Diversified fund not making the profits it needs to impose the premium charges necessary to maintain its high dividend payout.
Still thinking about investing in share-picking software? Do tell us, below.
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