But let’s monitor development and see how AI progresses. We’ll introduce AI techniques on the website chapters when they are relevant to the material there.  If you see other applications to fundamental analysis, please pass them along. As you read, think of two things. First, there is the all important question of the performance of AI: How well does it work? What is the best model for a specific task, if any? Second, how do you efficiently integrate AI into your analysis workflow?

“This thing is not intelligence. It has no understanding of what it is saying.”

Usama Fayyad, Institute for Experimental AI at Northeastern University, as told to WSJ. WSJ, January 24, 2024, p. R4.

AI and Accounting

Accountants were the first to use spreadsheets, invented in 1979 and marketed as VisiCalc. That was not just efficiency for a hum-drum task; there is something about rows and columns that imbeds accounting thinking. A spreadsheet by itself is no good unless you get the numbers in the right cells and accounting is a discipline that dictates the cells (called accounts) in an organized way such that the accounts as a whole convey a message. Value investing by the book does the same accounting, and spreadsheets lend themselves to developing an investing tool as many students have found. Is AI up to the task? AI will be more intelligent if it is governed by an accounting discipline that organizes the inputs. Good thinking for AI?

AI and Finance

The following paper shows how AI (as of 2024) can be helpful in finance with innovations in research methods linked to AI tools.

Eisfeldt, A. and G. Schubert. 2024. AI and Finance. At https://ssrn.com/abstract=4988553.

AI and Investing

A paper concludes that predicting the stock market with Machine Learning is difficult, as with most other quantitative techniques. The conclusions reflect the remarks of panelists on a March 28, 2023, panel titled “Advances of ML Approaches for Financial Decision Making & Time Series Analysis” at the 2022 Applied Machine Learning Days (AMLD) organized by the Swiss Federal Institute of Technology, now published in The Journal of Financial Data Science, Spring 2023 issue.

That is of 2023. Watch for any further reports.

Here is a paper that compares AI to analysts and how they complement each other:

Cao, S., W. Jiang, J. Wang, and B. Wang. 2024. From Man vs. Machine to Man + Machine: The Art and AI of Stock Analyses. Journal of Financial Economics 160, article 103910.

AI and Economic Indicators

The following paper reports that managerial expectations cleaned by generative AI from conference call transcripts predict GDP, production, and employment, and better than survey forecasts.

Jha, M., J. Qian, M. Weber, and B. Yang. 2024. Harnessing Generative AI for Economic Insights. At https://www.ssrn.com/abstract=4976759.

AI Performance Evaluation

FinanceBench is a suite for evaluating LLMs on answering financial questions. See https://arxiv.org/abs/2311.11944. A paper at that site tested 16 state of the art AI models in answering questions on financial topics as of 2023. The performance has improved as of 2025 with DeepSeek and ChatGPT-03 (we are told).

The answer is not clear except to say value investing is gaining traction in China. Two value investors that we know of have been very successful, Yongping Duan and Hong Liang. There is a value investing website called Xueqiu where Yongping Duan and Hong Liang write blogs and testimonials. You can go there and, if you cannot handle the Mandarin, use Google Chrome’s translate function to translate to English. Yongping Duan’s home page is https://xueqiu.com/u/1247347556 and that for Hong Liang is https://xueqiu.com/u/9887656769. More on their investing style on the web page for chapter 2.

There are Exchange Traded Funds (ETFs) now being offered that take away some of the downside but cap the upside. These funds are called buffer funds or defined-outcome, defined-protection, target-outcome, or structured-protection funds. They typically employ options to limit the downside. The funds can be helpful to an investor seeking downside protection while sharing in some of the upside in holding stocks.

But, beware: Reducing the downside is good, but by capping the upside, the investor is forfeiting upside compounding, much of which comes from stock market rallies.

A 2019 paper reviews a wide set of papers that reinforce the view that active management with (active share) allocations that differ from the index enhanced returns and details the various strategies that enable this.

See Cremers, M., J. Fulkerson, and T. Riley. 2019. Challenging the Conventional Wisdom on Active Management: A Review of the Past 20 Years of Academic Literature on Active Mutual Funds. Financial Analysts Journal 75 (4). Also at https://ssrn.com/abstract=3247356.

Further, active share portfolios that hold stocks for more than two years outperform funds with more frequent turnover. That is adds to the evidence from the Financial Times reported in chapter 1.

See Cremers, M. and A. Pareek. 2016. Patient Outperformance: The Investment Performance of High Active Share Managers Who Trade Infrequently. Journal of Financial Economics 122, 288-306.

See a YouTube video on active share:

Sometimes the long run takes a long time coming. On February 21, 2024, the Nikkei 225 index for the Japanese stock market passed its high in 1969 for the first time, over 34 years later. See other examples in chapter 1.

One has to be careful of the Nikkei index. It’s an average of per-share stock prices, an arbitrary number depending on shares outstanding. Better use the Topix index. That was still 8% below its 1989 high (WSJ Feb 22, 2024). Including dividends, the index reached the 1989 high in March 2021. And don’t forget inflation: The Nikkei was still down in February 2024 adjusted for inflation.

A paper reports that compound return outcomes for the 29,078 U.S. publicly listed common stocks from December 1925 to December 2023. The majority (51.6%) of these stocks had negative cumulative returns. However, the investment performance of some stocks was remarkable. Seventeen stocks delivered cumulative returns greater than five million percent (or $50,000 per dollar initially invested), with the highest cumulative return of 265 million percent (or $2.65 million per dollar initially invested) accruing to long-term investors in Altria Group. Annualized compound returns to these top performers relatively were modest, averaging 13.47% across the top seventeen stocks, thereby affirming the importance of “time in the market.” The highest annualized compound return for any stock with at least 20 years of return data was 33.38%, earned by Nvidia shareholders.

See H. Bessembinder, 2024. Which U.S. Stocks Generated the Highest Long-term Return? At

https://ssrn.com/abstract=48970698.

There are hazards in measuring long-term returns. See

Chambers, D., E. Dimson, A. Ilmamen, and P. Rintamäki. 2024. Long-run Asset Returns. Annual Review of Financial Economics 16 (November). At https://ssrn.com/abstract=5022480.

This paper also reports the annual returns to stocks versus bonds in the U.S. and U.K., going back as far as 1800.

The point: Higher fund performance begets more flows into a fund. But are one period returns a good indicator of future returns?

Source: Zoe, Y. Lost in the Rising Tide: ETF Flows and Valuation. PhD dissertation, Columbia University, 2019.

However, excessive flows into passive funds raises concerns: If the market is dominated by passive investors who do no investment research, how can the market be efficient in its pricing? Prices would really become a “random walk down Wall Street.”

One hopes that there are enough active fundamental investors to bring prices in line with information. While too many passive investors (and too few value investors) are a danger, there is a corrective mechanism: If large flows into passive indexes move prices away from fundamentals, there is an incentive for fundamental investors to trade to bring price back to value. Very glad to be of service!

In 2024, there was a record $450 billion flow out of active funds, up from $413 billion in 2023. (EPFR report as related in Financial Times, Dec 31, 2024.) Globally, $1.5 trillion net flowed into ETFs, up from $1.2 trillion in 2023, of which $377 billion was into non-US funds. Total ETF assets hit $13.8 trillion, up $297 trillion from 2023. $1 trillion was in active ETFs rather than passive funds (Financial Times, January 21, 2025).

Morningstar reported that active funds returned an average 20% for 2024 and 13% annually over the past five years versus 23% and 14% for passive funds.

There is another issue. With so many investors invested in passive index funds, what happens if stock prices decline significantly? Passive investors might draw funds from the passive investments, forcing the funds to sell off the securities they hold to supply the liquidity for redemptions, depressing the prices of the investments they hold, inducing further withdrawals. That could be a nasty cycle. Investors might prefer a passive fund to a bank account but, just as there can be a run on a bank, so there can be a run on a passive fund.