“No human is better than a machine, but no machine is better than a human with a machine.” says Paul Tudor Jones, the legendary American hedge fund manager.

Artificial Intelligence machines have already all but won the short-term trading game, but when it comes to long-term investing, a human with an Augmented Intelligence machine should remain the more potent combination for some time.

Augmented Intelligence investing has the edge over ‘traditional’ robo-advisors in a number of ways, including;

• Re-asserting the values of “truly active” investing, rather than relegating active funds to closet-indexing
• Empowering non-professionals to competently build and oversee their own portfolios of individual stocks, rather than leaving it all to the “robos”

So, how can Augmented Intelligence tip the scales, and why now?

A Changing Investment Landscape

Passive investors have been attracted by the low-fee no-hassle nature of index- funds as well as the guarantee of returns that closely track their market. But the exceptionally favourable market conditions of the past five years reduce the odds of a repeat over the next five years.

Since 2013, the MSCI ACWI index (All Countries World Index) delivered 10% annualised return over the cash deposit rate (in $US), with only 12% of volatility.

This is an unheard-of return/risk ratio over such a long period. With the norm of the previous 50 years being more like 4% return and over 18% volatility, the prospect for five years of less than 0% return with 20% volatility looms large enough to take notice.

What will happen to the passive herd when it realises that, as has always been the case, about half of all publicly-listed equities keep returning 10% a year more than the index?

Many should find the prospects of active returns too enticing to resist, and in the process be reminded that active investing is first about preserving long-term purchasing power, something that cannot be achieved by trying to beat an index every quarter or changing fund manager every year.

Investors who then return to actively managed funds, hoping to see that competition from passive strategies forced the industry to adapt its fee structure and assert its difference (i.e. edge) are however likely to be unimpressed and in turn more discerning than before.

Front or back-end loads still exist (so you may still need to give away 5% of your assets to pay the middle man’s commission), and you still pay each year 10x the fee of an index tracker.

With revenues entirely driven by a declining pool of assets under management, a fund’s incentive has been to consolidate assets and stem redemptions, both of which detracted performance, be it for operational (placing very large trades come at a price) or psychological (can’t afford a poor quarter) reasons. It is not fees that active funds have been slashing so much as risk (and research) budgets.

More than half of the 7,345 European and North American equity funds we analysed look more like expensive index-trackers than the real deal, running portfolios with too many holdings that are not controversial enough to make a difference. Closet-indexing has become rampant and until now remained largely unnoticed thanks to the shadow cast by index-funds over the entire industry (-10% relative over five years, source: SPIVA-Scorecards 2017).

The indiscriminate trading of index-trackers on the one hand and the conviction- less trading of closet indexers on the other hand merely amplify the prize that awaits truly active stock-pickers – not only that, thanks to the digital revolution, it is something that any financially-literate individual can now aspire to take on for the mere cost of passive strategies.

While low-cost global trading platforms abound, taking the risky matter of individual stock-picking into one’s hands only makes sense if it is done with an edge.

Randomness has a way to work against the ill-informed: play at a final table of a poker tournament as an amateur and your odds of cashing in will be significantly lower than what statistics would suggest (33% chance of finishing in the Top three at a table of nine becomes 28% if you’re an amateur vs. 44% if you’re a full-time professional).

Why Move From Robo Advisors to Augmented Intelligence?

In horse-race handicapping, William Benter became a legend thanks to painstakingly designed models that helped him play the odds cleverly, not by luck, insider tips, denial or hubris.

Augmented Intelligence is the key to meet the rise of the gentle(wo)man stock-picker as inexorable as the need for advisors and managers to regain the trust and loyalty of investors.

Rather than taking the mainstream AI path (“a machine knows better, and it costs less than a human”), Augmented Intelligence means to empower investors, whether professionals (advisors, analysts, managers) or sophisticated amateurs, in generating higher returns by/for themselves, with sharper stock selection, better risk control, a long-term horizon, and little trading activity.

It does so by using an innovative engine and intuitive interface that nudge, safeguard, alert, educate, and distil actionable investment insights while at the same time refraining from being prescriptive, dogmatic or indeed having to pretend to know better than everyone.

It is basically a research and portfolio management assistant that makes the non-specialists savvier, the specialists more productive, and ultimately markets more liquid.

By combining and intuitively distilling insights from normally unconnected investment styles (fundamental, quant, macro and technical), augmented intelligence systems such as Butterwire aim to make users know faster/better, to give them that little extra edge that will compound into big gains over the long-run.

Last year, consistent with the previous five years, using Augmented Intelligence systems nudged users toward stocks whose median returns were 11% over the global index Butterwire found. The company estimates that at least 10% of the 100 million individuals worldwide with £250k to £2.5m of investible assets could rapidly develop into competent, AI-assisted, stock-pickers.

And demographics is taking care of fast growing this population of financial and tech-savvy individuals, and with it the demand for better investment intelligence.