I started writing this blog on “robo-advisors” in late 2015; I then got sidetracked. Because of the time-length involved, the subject matter also got sidetracked toward “robots taking jobs” midway through the blog. Anyway, here goes the verbal roller coaster…
DEFINITIONS & CONCEPTS:
Sturgeon’s Law: 90% of everything is [email protected]
Michael Mauboussin: Challenges and Opportunities in Active Management And Using BAIT #MICUS
Law of Computers: Garbage in = garbage out.
Common-sense: The extremely rare ability to think clearly and to be mentally free of cognitive biases and rigid belief systems.
Investing: Holding an asset for the longer-term and reaping profits from price gains or interest or dividends.
Job-robot: When a computer program or robot can take over a human’s job. Examples include much of the blue-collar factory work and mining and field work as well as typists, telephone operators, proof-readers, telemarketers, travel agents, bookkeepers, office assistants and even increasing numbers of new houses are pre-fabed by robots. Uber is starting to use robot drivers. The U.S. Air-force is now using robotic drones, the U.S. Navy has just released a drone warship on the open seas and NASA is currently producing a new human-like “Mars robot.” Japan is starting work on a new amusement park that will have no human employees, only robots. There is a good chance that the computer or hand held device that you are currently concentrating on was assembled by a robot; one robot making another. And now robots are coming after the professional jobs, even doctor’s jobs. If the job entails a process where “A + B = C” then this can work; think of a health problem where abdominal pain (A) plus black blood in the stool (B) equals a gastric ulcer (C). But is a computer really better than a living person? When was the last time that you got trapped in an endless and stupid telephone answering machine loop? And we recently learned that the Google driver-less car crashed into a public-transportation bus.
On February 17, 2017 Bill Gates pointed out a future potential problem that I had not thought of: “Robots do work, but they do not pay taxes.”
CHART: Robot jobs up; human jobs down (chart courtesy of Bank of America). There will be no stopping this.
The rise of robots… via a mid-December 2016 article from Bernstein Analysis. Going forward, more and more manufacturing jobs will be done by robots:
From THE WEEK, December 16, 2016: “U.S. manufacturers make more products than ever at cheaper cost, even though they shed 7-million jobs over the past 35 years. That’s because most of the lost workers have been replaced by robotic automation, not by offshoring.”
The following 2013 study indicates that robots will take about 47% of all U.S. jobs within the next 16 years.
I took this next snippet off of the Internet on June 1, 2016 (the same day that Nike announced that it is starting to use robots to make its shoes). It is from a press release and is supposed to be a good thing. It is a bit long but worth reading in order to get an idea of what is happening:
And this next snippet was taken off of CNBC on June 22, 2016. In 2017, the European Commonwealth will be voting to put “kill switches” into robots so that they don’t eventually turn on their humans, which by the way, is physicist Stephen Hawking’s greatest fear for our future.
Headline from Business Insider on December 24, 2016 discussing comments from Dr. Angus Deaton to the Financial Times. He expects millions of jobs to disappear.
CNBC showing a Tweet from Mark Cuban on February 20, 2017:
Also from Business Insider on January 2, 2017:
CNBC on January 9, 2017:
Snippet from Yahoo on December 22, 2016:
From CNBC on August 23, 2016:
It isn’t just robotic driver-less cars running into things. This is a July 13, 2016 news story:
Okay, now back to the topic…
Robo-advisor: A computer program and website, created by a fallible and biased human programmer, that makes automated long-term investing decisions for investors. Robo-advisors currently “manage” around $60-billion as compared to the $20-TRILLION held at brokerage firms. Trust me on this: they are universally built on well known but faulty information, concepts and beliefs. As stated earlier in the blog, in most situations “A + B = C” but in investing it holds true that “A + B = ?” (as investors temporarily learned during the financial crash in 2008). Because people are in love with their computers and little mobile devices, these robo-advisor programs will continue to propagate as people rotate into them when conditions are good and easy for stocks and they will rotate out of them after they lose most of their hard earned money. Some will not like the prior sentence, but it is true. If you ask the wrong questions, you get the wrong answers; robo-advisors are built from the ground up by asking the wrong questions.
Investing: A process that is impossibly difficult for most investors (and therefore also difficult for computer investing programmers) to understand and implement.
Investing education: A self-taught process which takes countless hours over a period of decades and at an incredible cost (in losses) ending with a 90% chance of still not knowing anything because, as we saw above, “90% of everything is [email protected]” One must be tenacious in order to uncover the 10% that can actually make one wealthy.
Buy & Hold: What investors do when they cannot obtain an edge over investment markets, also known as “Buy & Hope.” Buy & Hold does not work because investor’s volatile emotions ultimately take over their investment accounts and because long-term diversification just for the sake of diversification does not work. (One must ONLY diversify into assets that are trending up in present time and for legitimate reasons!)
Based on Sturgeon’s Law, the likelihood of a human programmer being able to create a robust, hardy, viable and beneficial robo-advisor computer program where the investor does not lose their hard earned money? Again, according to Sturgeon’s Law, the answer is 10%.
Person most likely to succumb to a robo-advisor? Anyone that has fallen in love with, and refuses to look up from, his/her computer and selfie-generating phone-device. Last Fall I was reading an article about how there are many Investment Advisors that now use robo-advisors for their own client investment advice, clearly showing that many professionals also do not know what they are doing.
I’m not going to explain WHY the vast majority of popular and universally believed investing ideas are incorrect, but my constant, non-stop testing has proven to me that they are incorrect. If I am right, then these same investing ideas, when programmed into a robo-advisor, will also be incorrect. These incorrect but popularly believed investing ideas are the very same ones that any investor could obtain simply by reading a book: “Buy and hold, no matter what happens and even if you are down 85%, hold onto a portfolio of 60% stocks and 40% bonds and blah, blah, blah.”
Importantly, the next recession or financial crisis will severely damage those investors that have put their trust in these computerized robo-advisors because market conditions change and the computer programs won’t; robots aren’t intelligent and even when artificial intelligence is created it won’t help with investing because so much of investing is irrational. Star Trek’s Mr. Spock would have lost his shirt in the markets. Computer savvy (and often young) investors seek out intuitive tools and this includes robo-advisors, but markets are actually counter-intuitive by nature, so good luck with that. And these robot advisors will never understand the art of investing.
On April 1, 2016 the Massachusetts Securities Division (which usually leads the rulings in the other states) declared that robo-advisors, unlike living investment advisors, are incapable of acting as a fiduciary; this means that they have been officially ruled incapable of looking out for the client’s best interests.
Snippet from CNBC:
This snippet was taken from a recent November posting of a popular blog that is written by Cullen Roche where he says that investors get no benefit from robo-advisors and should just buy a “target-date ETF” instead if all they actually want to do is “buy & hold.”
- 90% of everything is [email protected]
- Garbage in ? garbage out.
- When you ask the wrong questions, you get the wrong answers.
- Robo-advisors will put people into the same “Buy & Hold” positions that killed investors during the last two big bear markets with their 55-85% portfolio losses. (Anyone that simply switched to safe extended-duration U.S. Treasuries at the top of the past two bull markets would have rapidly made a 50% profit during each of these big market drops rather than the gigantic losses that most investors suffered!)
- Computer programs cannot deal with the market’s irrationality and counter-intuitiveness.
- You get what you pay for.
- To quote Benjamin Franklin: “We grow too soon old and too late smart.”
Thank you for reading! Remember to buy things made in your home country by humans.
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Article by Stephen Aust, MarketCycle Wealth Management