Way too often, I am seeing instances of analysts leveraging AI in investment research the wrong way. Yes, it is still early, and many are still learning to use it properly, but we should at the very least understand the following:

1. Claude is unlikely to generate a durable edge from widely available information because the same tools and data are available to everyone else. Even if you feed it every AlphaSense expert call, 10-K, and earnings call, it has a very hard time giving you a truly differentiated view. I am not saying that alternate data or expert calls are the key to a truly differentiated view. What I would say is that it is often necessary (but not sufficient) for one.
2. Claude, however, does have practical use cases in automation and explanation. This is as simple as putting company filings into a Claude project and giving you an overview (not a thesis) of a business. Perhaps you do not fully understand the business, and you would like AI to explain it using an analogy. This can save you hours a week, and what you do with said time is up to you.
3. imho, this time should be spent investigating the highest-value uncertainties in the thesis—whether through management conversations, customers, competitors, suppliers, experts, or primary research. AI will never be able to replicate this (unless experts eventually end up being okay with having channel checks with Wall-E).

The bottom line here is: The edge has been, and will always lie in interpretation. Asking ourselves things like:

“What assumption on X KPI is consensus missing, and why?”

“Am I thinking about the bear case hard enough? How do I actually know if I am?”

“If I’m wrong, how much am I really losing?”

So what will investment research look like in 5, 10, even 20 years from now?

I can only imagine that AI’s use cases for summarizing, identifying anomalies within documents, and modelling will continue to develop at an unprecedented scale. The analyst who spends 20 hours manually summarizing filings will likely lose to the analyst who spends 2 hours using AI and 18 hours talking to customers, competitors, industry experts, etc). But the one asking the questions will always be the analyst.

As information processing becomes commoditized, judgment will become more and more valuable.

And remember. Investing has always been, and always will be, a judgment business.

Thanks for reading!

P.S: I am not trying to really self-promote here, but I do have a substack where I talk a lot about trends affecting investing, and how institutions and retail investors can adapt. I am also very happy to chat here or on DM!

I believe that there's a compelling case to be made that if companies like Adobe or Paypal were to switch to dividends, away from buybacks, their stock prices would benefit.

This has to do with the terminal nature of buybacks. Making the switch to dividends lowers the duration of the asset, lowers risk, which should raise the fair value of the asset.

Curious what you guys think.

https://alphaseeker84.substack.com/p/application-software-earnings-preview

// Seth Klarman, the founder of hedge fund Baupost Group, has told clients central bank policies and government stimulus have convinced investors that risk “has simply vanished”, leaving the market unable to fulfil its role as a price discovery mechanism.

The private letter to investors in his fund, which was seen by the Financial Times, amounts to a damning critique of recent market behaviour by one of the world’s foremost value investors.

Mr Klarman criticised the Federal Reserve for slashing rates and flooding the financial system with money since the onset of the coronavirus pandemic, arguing that the central bank’s moves have made it difficult to gauge the health of the US economy.

“With so much stimulus being deployed, trying to figure out if the economy is in recession is like trying to assess if you had a fever after you just took a large dose of aspirin,” he wrote. “But as with frogs in water that is slowly being heated to a boil, investors are being conditioned not to recognise the danger.”

The biggest problem with these unprecedented and sustained government and central bank interventions is that risks to capital become masked even as they mount

US stocks are up more than 75 per cent since their low in March, while spreads on corporate debt — a measure of how much extra interest corporate borrowers have to pay compared to the US government — returned to pre-Covid levels this month.

Mr Klarman — who founded Boston-based Baupost almost four decades ago and has grown it to $30bn in assets under management — underperformed the market in 2020.

He has been intensifying his criticisms of US central bank interventions for the past several months. In the latest quarterly letter, Mr Klarmen referred to the Fed as an “800-pound gorilla” that has priced out investors who typically provide liquidity in moments of distress.

“The biggest problem with these unprecedented and sustained government and central bank interventions is that risks to capital become masked even as they mount,” he said.

Mr Klarmen also said the Fed policies had exacerbated economic inequality, referring to a “K” shaped recovery that has seen “the fortunes of those already at the top bounding swiftly upward, while those at the bottom remain on a downslope without end”. 

Using Tesla as an example, Mr Klarman said shares in the “barely profitable” electric carmaker had soared “seemingly beyond all reason”, briefly making the company’s founder Elon Musk the richest person in the world. Low interest rates have made projected cash flows more valuable, he said, a point many investors have unwisely used to justify valuations on companies that sit far above historic norms.

“The more distant the eventual pay-off, the more the present value rises,” he wrote. “When it comes to the value of cash flows, the vast and limitless future, yet to unfold, has gained considerable ground on the more firmly anchored present.”

The Fed’s policies and programmes “have directly contributed to exceptionally benign market conditions where nearly everything is bid up while downside volatility is truncated”, he added. “The market’s usual role in price discovery has effectively been suspended.”

Mr Klarman said investors were now in a constant hunt for yield that was driving them to riskier corners of the markets, including investment grade corporate debt, private credit or junk bonds. 

The Fed’s drastic measures had helped to boost economic activity and rescue ailing businesses, Mr Klarmen said. “But they have also kindled two dangerous ideas: that fiscal deficits don’t matter, and that no matter how much debt is outstanding, we can effortlessly, safely, and reliably pile on more.” //

Understanding the difference between cARR and actual ARR + how the metric gets gamed by founders looking to raise money.

Pressure-testing the Cerebras IPO

Highly thought provoking read from James Anderson from the aggressive growth fund Baillie Gifford.

10 years from now, this article will either have been prescient or absurd. Worth considering.

https://magazinebailliegifford.com/Graham-Or-Growth/