Are there any reliable computer-based ways of automatically selecting winning portfolios? Purveyors of software systems claiming to do just that seem to think so.
Have you ever received any offers for stock-picking computer software packages? Or seen adverts for them? They're often fiendishly expensive, sometimes costing thousands of pounds. You'll see all kinds of promises made for them, and if you believe any of them you'll be expecting to be turned into a stock-picking millionaire overnight.
Typically, you'll see claims of people making thousands of pounds a week from just buying and selling when the software tells them, accompanied by testimonials from happy millionaires with photos of their cheesy grins, flash cars and fabulous homes.
I've seen claims that I should expect to turn £1,000 into £30,000 in a year, and I've had software touted to me with claims that it's responsible for tens of millions of dollars of profits worldwide every year.
But you know what? I don't think I believe them.
Why don't they do it themselves?
The obvious question is, if the software is so good at turning people into millionaire investors, why are they selling it rather than just using it themselves to provide the life of luxury that they so clearly deserve? They have answers to that -- not entirely convincing answers, but answers nonetheless.
One that I've seen quite often is that such software only works for small trades, and if they tried to do it for the larger trades that they'd need in order to make their money directly, they'd skew the market and be unable to make the trades. So they reckon they'll make more money by selling, say, 100 copies, and leaving it to those 100 individuals to make lots of small trades.
But hang on, if the 100 people all get the same stock tips, they'll be buying the same number of shares as one person buying 100 times as many, and that same volume will skew the market in exactly the same way, won't it? If selling it to 100 people to make 100 trades works, they could just run it on 100 computers of their own and make the 100 small trades themselves, couldn't they?
If I'd written software so good and really needed 100 individuals with their own trading accounts, I'm sure I could find 100 people I could just give it to and split the profits.
They're bored?
Some other excuses I've heard are that they authors are already wealthy enough and don't want any more money, and they reckon it's time to give the small guys a chance. Or they just want to give the big-shots on Wall Street their comeuppance. Or they're just bored and want to see what mischief they can cause by helping poor people get rich.
But come on, do any of those sound vaguely plausible coming from people selling software for very high prices?
Why it won't work
There's a fairly simple reason why these get-rich-quick stock-picking systems don't work. They usually try to rely on some sort of combination of recognizable patterns, perhaps combinations of Elliott Waves, cash flow patterns, double-top chart patterns, director buying or selling, recently rising share price, and so on, in order to spot short-term buy and sell signals.
But there are many thousands of people out there watching all of those things, and though a few of them might provide useful filters for a first-pass at selecting companies for further investigation, there is plenty of empirical evidence that many of them tell you nothing hard and fast about where a share price is going. There simply aren't any hard rules about how to interpret the mass of data available and turn it into reliable investment tips.
After all, if such rules were there to be found, the richest person in the world would be a computer nerd. (Oh, wait, yes -- but he didn't make it big through investment software).
The only way
No, successful investing is still one of those things that requires human intelligence, because it a needs proper understanding of the underlying nature of the companies we buy, and that's something no automated computer system yet has.
It's no accident that Warren Buffet, who admits to knowing little about computers but understands business the way few other people can, is currently in second place in the rich list.
We've checked and double-checked and can confirm that Maynard Paton, the lead analyst for our Champion Shares stock-picking service, is definitely not a computer. You can read his latest ideas and tips right now by taking out a free 30-day trial.
