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Can ChatGPT Help Investors? Yes, But It’s Not A Silver Bullet

Last Updated January 10, 2024 10:23 AM
Giuseppe Ciccomascolo
Last Updated January 10, 2024 10:23 AM

Key Takeaways

  • ChatGPT can be a valuable tool for investors who are new to the market or who do not have a lot of experience with research and analysis.
  • Investors can use it to supplement traditional research methods, but it is important to avoid relying on ChatGPT exclusively.
  • Here’s how language models, such as OpenAI’s main product, can assist investors in making wiser decisions.

In the world of investing, there is a constant quest for tools and strategies that can help investors make better decisions. ChatGPT, a large language model chatbot developed by OpenAI, has emerged as one such tool, with proponents touting its ability to provide investors with personalized investment advice and market insights.

While ChatGPT can offer valuable assistance to investors, it is important to recognize that it is not a silver bullet. Investors should still conduct their own research and make informed decisions based on their own risk tolerance and financial goals. But it can still help, here’s how.

Get Info On The Company

Start with something that must be clear: ChatGPT is not a financial advisor. You can ask it to analyze a company, its balance sheet, and stock movements. But the OpenAI’s main product cannot provide precise expectations for the future.

So, what’s the point? Investors should use language models such as ChatGPT to better understand an asset they want to invest in. And it’s also relevant to the way a user asks a question to ChatGPT. Let’s make a practical example with Nvidia stock.

Before diving into a company’s stock, which essentially means investing in the core of the firm, it’s imperative to gain a profound understanding of the business. While traditional methods involve poring over annual reports and investor presentations, ChatGPT offers a unique avenue for obtaining an initial, high-level comprehension.

For instance, when inquired about Nvidia’s exact business model, ChatGPT provided a concise summary, elucidating what Nvidia sells and how it operates – a valuable starting point.

Explain Nvidia’s business model

Taking the analysis a step further, ChatGPT can be leveraged to unveil a company’s economic moat. This refers to the firm’s ability to sustain a competitive advantage, safeguarding its market share and long-term profitability. Even investment guru Warren Buffett prioritizes assessing a company’s moat before making decisions. In our conversation with ChatGPT about Nvidia‘s economic moats, it furnished me with another insightful summary.

Economic moats

But it doesn’t stop there; you can infuse creativity into your queries to extract more nuanced insights. For instance, if you ask “How easy is it for Nvidia to scale,” ChatGPT may deliver a thoughtful response, adding another layer to your understanding of the company’s dynamics.

Make a SWOT And Earnings Analysis

Unlocking a company’s strategic insights is a breeze with ChatGPT, making complex tasks like a SWOT analysis – a comprehensive evaluation of strengths, weaknesses, opportunities, and threats – accessible and efficient. Traditionally a time-consuming endeavor, I put ChatGPT to the test by asking it to craft a SWOT analysis on Nvidia. While the response was simplistically articulated, it served as an excellent starting point.

SWOT analysis

Delving deeper into the investor’s toolkit, ChatGPT proved its mettle in summarizing lengthy earnings calls, an invaluable source of information. With quarterly updates, company leaders dissect recent performance, delve into the business and industry outlook, field questions from analysts, and more. However, sifting through these hour-long calls for every stock can be daunting.

In this case, you can use Google to locate the transcript of the specific earnings call you wanted, paste the link into ChatGPT, and ask for the 15 most critical points. The result will be a concise summary, showcasing ChatGPT’s efficiency in distilling key information.

While this approach is undoubtedly valuable, it’s essential to acknowledge potential drawbacks. Not all earnings call transcripts may be readily available online, listening to calls provides nuanced insights into management’s tone, and there’s always a risk of missing crucial details in the summarization process. Despite these considerations, leveraging ChatGPT for such tasks has proven to be one of my preferred methods.

Create Code To Backtest Signals

Unlocking the advanced capabilities of ChatGPT caters specifically to coding enthusiasts. Picture this scenario: you’re assessing the opportune moment to invest in a stock, using a technical analysis indicator such as the Relative Strength Index (RSI). It’s essential to recall that the RSI assigns a value between zero and 100 to an asset, with a reading below 30 indicating it’s ‘oversold’ – a potential attractive entry point.

Now, let’s contemplate the intricacy of determining the historical profitability of buying a specific stock whenever its RSI dips below 30. While seemingly straightforward, answering this question is a challenging task. The most efficient method? Coding – an intricate and time-consuming process requiring technical expertise. Enter ChatGPT, equipped to generate the necessary code effortlessly. Here’s a request: “Write me code to analyze Nvidia’s stock price performance one month after its RSI dips below 30,” and it promptly responded (the code is longer than the following one):

Backtesting code
Backtesting code on Nvidia

To top it off, ChatGPT offered a concise summary: ‘This code downloads Nvidia’s historical stock data, calculates the RSI, identifies instances of RSI below 30, calculates 1-month returns post-buy signal, and plots cumulative returns. Note: for demonstration only, not for actual investment decisions.’ Quite impressive, isn’t it?

This stands as just one among countless examples of technical analysis scenarios you can explore. For instance, you could task ChatGPT with writing code to assess the historical profitability of buying a stock when its 20-day Simple Moving Average (SMA) crosses above its 200-day SMA.

Individuate The Risks

No investment analysis can be deemed comprehensive without a thorough consideration of risk. The most successful investors are not just adept at spotting promising stocks; they also meticulously assess potential pitfalls and strategically exit when necessary.

If you find yourself uncertain about the key risks associated with a particular company, ChatGPT can be a valuable resource to generate initial insights.

As an illustration, if you query ChatGPT about the key risks linked to investing in Nvidia, it may identify ten primary concerns – an excellent starting point for risk assessment.

Investment risks
Risks of investing in Nvidia

Now, suppose you pinpoint the first risk on the list (market competition and innovation) as the potentially most damaging. In this scenario, you would need to delve deeper into this risk. Upon investigation, you may discover that Nvidia, along with several other chipmakers, was recently tempted to reduce the quality of its chips due to heightened competition in the Chinese market, sparking discussions of a “chips quality price war.”

Recognizing this as a significant risk, you may need to scrutinize how these price cuts might impact Nvidia’s above-average profit margins, especially in light of its relatively high valuation.

Bonus Tip: Evaluate ESG Credentials

Investment decisions extend beyond mere financial returns; they encompass the impact on the world around us. One prevalent approach to align investments with broader values is through environmental, social, and governance (ESG) investing.

There’s compelling evidence indicating that companies with strong ESG credentials tend to outperform their counterparts over the long term. With this perspective in mind, leveraging ChatGPT allows you to assess how a firm aligns with ESG principles.

In a practical demonstration, if you task ChatGPT with the inquiry “Evaluate Nvidia’s ESG credentials”, you’ll get an impressively concise summary:

Nvidia ESG profile

ChatGPT Limits

Undoubtedly, ChatGPT, like any current AI technology, has its imperfections. It’s essential to acknowledge some crucial limitations when employing it for stock analysis. Firstly, ChatGPT might encounter challenges with smaller, less prominent companies, as it excels more with well-known entities. Our choice of Nvidia as an example was deliberate due to its widespread recognition.

Secondly, it’s crucial to recognize that ChatGPT’s training data extends only up to 2021. Consequently, its responses lack insights from the most recent year, potentially missing significant developments in a company or industry.

Thirdly, there’s a possibility that the AI may generate responses that are, frankly, incorrect. For instance, suggesting that “Nvidia is expected to benefit from increasing competition in the chips market” contradicts the typical understanding that firms seldom benefit from heightened competition.

Despite these drawbacks, the utility of ChatGPT in streamlining and expediting stock analysis is evident. While it should not be solely relied upon, it serves as a valuable tool to enhance the efficiency of your investing endeavors. In the words of the adage, it encourages working smarter, not harder. And it does this by providing a supplemental resource to aid in the decision-making process.

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