The focus of power in the investing world resides in the hands of institutional investors, which have crucial resources such as enormous capital reserves, skilled labor, powerful machines and expensive terminals to make the best data-driven decisions.
With all these technological advancements and access to sophisticated data analysis, institutional investors have gained even more advantage over self-directed investors with the help of algorithms. Everything from high frequency trading to artificial intelligence has been used by institutional investors for years, which is why we often see that retail investors are late to the party.
When institutional investors put all their power to work, the probability of retail investors’ success falls dramatically. That’s why many prefer using the asset management services offered by these funds, or invest with the help of advisors. However, according to a survey by Accern, those who pursued the path of self-directed investing also do pretty well.
On average, self-directed investors make portfolio returns of 17%, while for investors who use the services of advisors that figure is 14%. This is probably why self-directed investors hold a considerable portion of U.S. equities.
Meanwhile, fundamental changes are afoot. The entire investment industry is moving away from managed and advised services because services aimed at self-directed investors such as Robinhood are pushing down brokerage commissions. Thus, it’s now easier for investors, especially beginners, to access the stock market. This democratizes the execution side of investing in stocks, but not so much on the decision making part, where people pick and analyze stocks even though it’s the main part of the investing experience.
The major challenges that retail investor face is the enormous amount of data that must be analyzed in order to make an informed decision. But the truth is that very often the more information an investor has, the more difficult it is to make an investment decision, and the longer it takes to go through all the information.
There are many factors affecting the stock price that must be analyzed, such as the macro economy, financials, the industry and competitors. Once a company is chosen it’s crucial to seize the right timing. This takes hours or even days to do. The average retail investor, however, does not have so much time and energy to invest in data analysis and data collection.
People rarely do due diligence, and instead make decisions based on high level overview of stocks or even personal recommendations. This tends to lead to portfolio losses that discourage many from investing in stocks.
Services such as StockMetrix and Simply Wall Street are changing the investment eco-system, and are leveling the playing field between retail investors and institutional investors. Aiming to save the time of retail investors on analyzing stocks, these robo-analysts gather terabytes of data and process it in order to give investors ready conclusions on thousands of stocks.
The analysis covers a wide range of factors that affect the stock price, from macroeconomics to financials, from social media to insiders’ sentiment. Ready-to-use analysis, however, is not the only advantage offered by robo-analysts. One of the major benefits is the presentation. As is well-known, about 90% of all information processed by the brain is visual, and people process images 60,000 times faster than text. Nevertheless, the old data providers, including the ones used by institutions, give raw data, numbers, charts, and texts.
Robo-analysts, however, make sure that their interface is intuitive and can be understood even by beginner investors. They also provide the ability to backtest investing ideas on stocks. This is a simulation of stock trading using historical share price data, something that institutions always did prior to actually investing in stocks. Previously, this was very time consuming and complex for individual investors.
Similar software has always been available to major financial institutions, but only recently has it been released for wider public use. Having received the benefits of commission free stock trading, the next step is naturally getting access to powerful analytical tools that will even the odds with institutions. To stay competitive in the quickly evolving world of investing, self-directed investors have no choice but to embrace the advances provided by machines.
Doszhan Zhussupov, co-founder of StockMetrix app