Larry Berman

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Ray Dalio, the founder of Bridgewater Associates, the largest hedge fund in the world, hired IBM’s Watson programming team to incorporate artificial intelligence into the investment process. Later this year, I will be doing something similar so stay tuned to learn more about this exciting endeavor.

Today, we have Jamie Wise from BUZZ Indexes, based in Toronto, who recently launched an Artificial Intelligence driven ETF based index fund BUZ (US).

The investment process uses natural language processing software and artificial intelligence to scour the Internet for tweets, blogs, and searches for company names. One of the most interesting things is that the software is able distinguish between someone typing amazon when talking about a bad product they bought on line and AMZN and a bad outlook for the stock.    

The Buzz process scans over 50 million data points monthly and selects the top 100 most talked about securities. It then culls the selection to 25 of the most bullish scores as measured by their proprietary insights scoring. Here’s where the artificial intelligence (AI) shines. Back in early 2007, I went back historically and evaluated all the calls that I made in written research reports from 1995 to 2006; as it turns out I was right about 62 per cent of the time.

The AI increases the weighting to the analysts and bloggers (influencers) that have a better call record. The formula for determining this is part of the intellectual property of BUZZ Indexes and they will not give you the formula. The index rebalances monthly so the IP is more in line with a shorter-term horizon. Col. Sanders won’t give you formula for KFC’s yummy crust and coke won’t give you their formula either. It’s kind of like if Berman made the call on VRX and my last few calls were correct, than the software would possibly weight my call higher than some others. It’s more complex than that, but that’s the general idea. In the past few weeks, there has been more positive chatter on the net about VRX and it was added to the index in the recent index rebalancing.

Try doing the following Google search every day and keep track of it like I do: This is a very good sentiment indicator. I thank my friend Bob Prechter for his presentation on this a few years ago at the annual MTA symposium.

This morning, I did a Google search for VRX Bearish and got 52,600 results while searching for VRX Bullish at 127,000 results.

This means that these are not new investment ideas because they are well talked (written) about on the Internet, so it means it’s more of a momentum type index creation. So possibly the index returns should be compared to a benchmark of momentum stocks. There’s an ETF for that too – MTUM would possibly be a good comparable. On a risk adjusted return basis (how investors should evaluate all potential purchases), the BUZZ Index has returned about 17.89 per cent since inception with a standard deviation of 16.02 per cent for a Sharpe ratio of 1.12 compared to the S&P 500 Total Return Index which had a 12.75 per cent return with a standard deviation of 13.25 per cent for a Sharpe ratio of 0.96. So about 4.5 per cent extra return per year and less volatility, which so far makes is a superior risk adjusted return for investors.

The ETF has an MER of 75 bps versus about 10 bps for the S&P 500 ETFs. The iShares US Momentum ETF (MTUM) has been out for several years and has a 15.88 per cent return with a 14.46 per cent standard deviation for a Sharpe ratio of 1.1 and an MER of 15 bps and selects about 100 stocks, so it’s a bit more diversified.

I love the technology around artificial intelligence and we are only in the early innings of this new entry into the investment world. I think the biggest potential in artificial intelligence will be around reducing emotion and volatility in portfolios, which tends to be the biggest cost for investors.

As I have said for years, the biggest cost for investors is staying with the market through the bad volatility periods in order to get the expected return. In the case of BUZ, their goal is to deliver higher returns than the market, which they have so far done a very good job of and time will tell if this remains a superior performer. But because it has 25 stocks in it versus the S&P 500 in the index or the MSCI 100 in the momentum index, it will likely have more volatility to it so when the markets go down it probably falls a bit more than the more diversified comparables. But if you can handle the extra volatility, this technology probably delivers a higher longer-term performance. 

Thanks to all those who came out to the recent roadshow. With help from partners and sponsors, our fundraising for Alzheimer’s research this year will exceed $60,000. Over the past three years, Berman’s Call viewers have helped me raise over $160,000 for Alzheimer’s research in Canada. What we are learning from this important research is expected to defer the onset of dementias for a decade or more with some healthy lifestyle choices basically minimizing the impact to society. Join Larry and help keep your mind sharp so that you can make more thoughtful investment decisions. 

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