Friday, July 17, 2015


Last week the Wall Street Journal ran an article entitled “Can You Tell the Difference Between a Robot and a Stock Analyst?”  No doubt the question was rhetorical, but at the risk of seeming literal-minded, I would say that, much of the time, the answer is “No.”  Too much alleged “research” is so devoid of analytical value-added that, if it is not written by machines, it might as well be.  Although I suspect robots have a stronger grasp of grammar and less of a predilection for TV taglines than many human analysts, performing a Turing Test on Wall Street research is becoming increasingly difficult: shaky grammar and an unhealthy obsession with TV may soon be the only sure indicators of flesh-and-blood authorship.

Having been a sell-side analyst in the early 1980s, I can vouch for the fact that, in those days, analysts were human.  There were several respects in which we were not only noticeably different from, but unquestionably superior to robots: 
·         Analysts aspired to style.  Few of us could write as gracefully as Barton Biggs or some of the other research luminaries of the day, but I think all of us wished to.  We did not revel in solecisms such as ‘going forward’ or ‘proactive’ and did not try desperately to sound like sportscasters.  Granted, concern for style was not an unmitigated good: I often suspected that my English colleagues devoted more care to how than to what they wrote.  But, as I discovered when I moved to the buy-side and my days were filled with reading research, an effort at style is a kindness to the reader.  Robots are sadly neglectful of this act of charity. 
·         Analysts made satisfactory scapegoats.  Every portfolio manager knows that if something goes wrong with a position, it is the analyst’s fault.  Bullying human analysts is enjoyably therapeutic for a disappointed fund manager: they flinch when shouted at, offer ludicrous excuses and sometimes (though rarely) can be brow-beaten into an apology.  Robots are useless as scapegoats: it is impossible to reduce them to tears and if you kick them you merely put your toes at risk. 
·         Analysts collected anecdotes.  I recall a Chairman advising a CEO to tell the newspapers to stop worrying about their company’s cash mountain, because he had misplaced it.  I recall a Yorkshireman talking about competing with the Genovese family.  Visiting companies and spending time with their managers is an endless source of amusing stories, allowing analysts to appear more interesting than they really are.  Robots are hopeless raconteurs ─ they rarely capture the telling detail and they have a habit of telegraphing punchlines. 
·         Analysts lunched.  The decline of this talent may well deserve most of the blame for the increasingly robotic character of sell-side research.  In the quest for Institutional Investor votes, analysts were expected to entertain: we contributed strongly to, and perhaps underwrote Zagat’s success.  Most analysts were dab hands with a martini and some knew their way around a wine list.  In my experience, robots insist on ordering moscato, for which a suitable food pairing is unlikely ever to be discovered. 
Obviously, Wall Street, the City of London and a few other previously favored locations will be a lot duller for the rise of the Grahamatrons and Doddodynes.

Automated research is probably an inevitable development, in keeping with the Street’s pursuit of ever more tawdry cheapness.  Those jolly specialists and market makers who used to mishandle your orders for you have largely been replaced by machines that do it faster and more cost-effectively, but with a sad lack of humor.  Much upstairs trading and portfolio management is now computerized.  The humans who remain in those functions are becoming increasingly cybernetic ─ with software to make good their deficits of life experience, common sense and market history.  I am unaware of any efforts to automate investment banking, although I have long suspected that some calling officers I have known were wind-up toys.  But at least they still know how to make use of an expense account.  Even retail investors, whose function is to pay for brokers’ yachts, are increasingly relegated to obtaining financial market access through machines.  Robo-advisors presumably suggest that they place their orders electronically, keeping humans as much as possible out of the relationship.  What the robots do with their yachts is a good question, and to my knowledge their designers have yet to find ways to build in hand-holding or golfing functionality, let alone the ability to explain that even bonds can lose money.  No doubt they are working on it.  All that remains is to replace the final customers.

Although I do not think that paleontologists any longer believe it, they once theorized that mammals evolved as scavengers and egg-stealers in the age of the dinosaurs.  Something similar may be the role that is left to humans in a thoroughly automated system of transactional finance.  Things were probably headed in that direction even before the machines intruded themselves so pervasively: it surely is no coincidence that the widespread adoption of passive investment techniques was accompanied by the growth of hedge funds and similarly “undisciplined,” opportunistic forms of investment.  We humans can get our own back on the machines by thriving in the environment they create.

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