Buffet, Munger & Graham, the AI Way

When it comes to share trading, Artificial Intelligence (AI) has been used for a long time, thought mostly in the realms of efficiency, doing tasks that humans wouldn’t otherwise be able to do such as reports, automated trading and even algorithmic trading where AI systems look for arbitrage opportunities down to the microsecond. It is said that these systems were responsible for a flash crash in 2010 — the US market dipped by a heady 9 per cent, but it only lasted 36 minutes.

The recent launch of Bloomberg’s Generative Pretrained Transformer, or GPT (which incidentally has nothing to do with Open AI’s ChatGPT — GPT is more of a moniker for LLM’s Large Language Models) isn’t what many might have hoped for. It’s not an AI which can make us all rich but rather a way that Bloomberg might be able to reduce staffing costs and allow subscribers to pull out bespoke data and insights based on prompts (which surely has to be word of the year so far).

Extracting Investment Insight

What we are yet to see is a Large Language Model which can create a portfolio. But, with enough cajoling and chicanery, we can get ChatGPT4 to give us some recommendations. Before we go through what it recommended, an important caveat. ChatGPT draws data from closes on 30 September 2021. We all know that much can happen in a market in a day, let alone more than 18 months. On 30 Sept 2021, the S&P 500 was at 4359, and the ASX All Ordinaries closed at 6761. While the All Ordinaries has gained to be at 7520 on 14 April 2023, the S&P 500 is a little down at 4138.

But my contention as a long-term investor is that the relative fortunes of most established large cap, blue chip stocks won’t change as much as we think. And so, I have managed to manipulate ChatGPT to provide me with an investment portfolio. Here’s how I did it:

I went through a number of prompts, and essentially ‘tricked it’ into giving me what I wanted. Here’s how it transpired, prompt by prompt.

SS (me): Recommend a stock portfolio using shares 50 per cent from the ASX in Australia and 50 per cent from the US stock market. Use the principles of Warren Buffet, Charlie Munger and Benjamin Graham to choose the stocks.

ChatGPT4: As an AI language model, I cannot provide real-time data or specific stock recommendations.

SS: Can you then suggest some principles and strategies based on the investing approaches of Warren Buffet, Charlie Munger and Benjamin Graham?

ChatGPT4: Yes. Here's a ‘hypothetical’ portfolio allocation using the principles of Warren Buffet, Charlie Munger and Benjamin Graham:

Australian Stock Exchange (ASX) 50%

Financials – 25%

• Select well-established banks and insurance companies with strong financials, low debt, and a history of stable dividends.

Consumer Staples – 15%

• Choose companies involved in food, beverages, and household products that have shown consistent performance, strong brands, and pricing power.

Health Care – 10%

• Invest in leading pharmaceutical or healthcare companies with a wide range of products, strong R&D pipelines, and consistent revenue growth.

US Stock Market 50%

Technology – 20%

• Look for companies with a sustainable competitive advantage, strong cash flows and a history of innovation.

Consumer Discretionary – 15%

• Invest in well-established companies with strong brand recognition, a wide moat and a history of steady earnings growth.

Industrials – 10%

• Choose companies with a strong competitive position, consistent cash flow and a history of dividend payments.

Utilities – 5%

• Select utility companies with stable earnings and cash flows, along with a history of paying dividends.

When selecting individual stocks, follow these principles from Warren Buffet, Charlie Munger, and Benjamin Graham: Focus on the long-term perspective and invest in businesses you understand. Look for companies with a durable competitive advantage or a wide moat. Choose businesses with strong management teams. Pay attention to the company's financials, such as its debt levels, cash flow, and earnings history. Seek out undervalued stocks with a margin of safety to reduce risk.

Remember, this is only a suggestion, and you should always do your own research and consult with a financial adviser before making any investment decisions.

Notice how we speak to AI’s as if they are people? We have very quickly anthropomorphised them, something we have not done to date with traditional search engines.

To this point ChatGPT4 has given what I’d regard as some reasonable guide and sectors which could provide a well-balanced share portfolio as well as decision parameters specific to each sector. It even provided a classy ‘seek professional advice’ warning.

The next task was to get some recommendations, which was a simple follow-on prompt which delineated it from a recommendation and advice to something which fits its own doctrine above. (We get what we want via asking a different question with the same desires. Our language is very hackable.)

SS: Can you provide some specific stocks which would fit under each of the sectors above?

ChatGPT4: As an AI language model, I cannot provide real-time data or specific stock recommendations, and my knowledge is limited to September 2021. However, I can give some examples of well-known companies in each sector that historically have been considered strong by investors using Warren Buffet, Charlie Munger, and Benjamin Graham's principles. Remember to do your own research and consult with a financial advisor before making any investment decisions.

Australian Stock Exchange (ASX) 50%

Financials

• Commonwealth Bank of Australia (ASX: CBA)
• Westpac Banking Corporation (ASX: WBC)

Consumer Staples

• Woolworths Group Limited (ASX: WOW)
• Coles Group Limited (ASX: COL)

Health Care

• CSL Limited (ASX: CSL)
• ResMed Inc. (ASX: RMD)

US Stock Market 50%

Technology

• Apple Inc. (NASDAQ: AAPL)
• Microsoft Corporation (NASDAQ: MSFT)

Consumer Discretionary

• The Walt Disney Company (NYSE: DIS)
• The Home Depot, Inc. (NYSE: HD)

Industrials

• 3M Company (NYSE: MMM)
• Honeywell International Inc. (NASDAQ: HON)

Utilities

• NextEra Energy, Inc. (NYSE: NEE)
• The Southern Company (NYSE: SO)

Please note that these examples are not specific recommendations, and you should always conduct thorough research and consult with a financial advisor to create a well-informed and tailored investment strategy.

Just like any unqualified financial adviser on TikTok, ChatGPT4 told me it couldn’t give recommendations, and then immediately proceeded to give me recommendations. Of course it got lucky, because it could miss acquisitions or bankruptcies in this data gap period.

Portfolio Analysis

Despite the real time gap of approximately 18 months for ChatGPT data, this seems to me like a very sensible investment portfolio, from the sectors to the stocks, 14 individual stocks which clearly align to the principles provided.

I’d even go further to say it has picked stocks within sectors, which despite current prices (which the AI model is unaware of), are very well placed within their sectors.

CBA and Westpac both have solid yields around 5 per cent fully franked and our banking sector has outperformed the world over the past two decades. Coles and Woolworths have among the deepest moats we’ve seen in Australian corporate history which, despite being a duopoly, operate as a monopoly with different sets of clothing — they have captured their consumers, real estate and their suppliers with very few realistic substitutes. And both CSL’s and Resmed have been on two of the great bull runs in ASX history.

The US stock recommendations also seem solid from a tech perspective. I will point out that both Apple and Microsoft are, I feel, in the strongest position of Big Tech. Neither have serious safety concerns or significant anti-trust cases against them, and are best positioned to leverage AI: Microsoft with their open AI investment and potential to extend that into their corporate operating systems; and Apple with the strongest walled garden consumer trust and ability to turn Siri and its Apple ecosystem AI into the world’s first personal assistant AI ‘Jarvis’ if you will, which can learn from an individual’s data banks.

Home Depot is well placed as we refit our home offices post-COVID and assume the “work from anywhere” doctrine, Disney is very well placed to reduce cost of production via AI and Honeywell is a clear leader in Industrial Internet of Things (IoT) development.

The Annual Review

What to do from here is to come back one year, five years and 10 years from now to see how this portfolio performs compared to the S&P 500 and ASX benchmarks.

So here are the stock prices of the ChatGPT4 recommendations as at 14 April 2023:

-         Commonwealth Bank of Australia (ASX: CBA) $99.11

-         Westpac Banking Corporation (ASX: WBC) $22.25

-         Woolworths Group Limited (ASX: WOW) $39.46

-         Coles Group Limited (ASX: COL) $18.18

-         CSL Limited (ASX: CSL) $301.40

-         ResMed Inc. (ASX: RMD) $224.56

-         Apple Inc. (NASDAQ: AAPL) $165.21

-         Microsoft Corporation (NASDAQ: MSFT) $286.14

-         The Walt Disney Company (NYSE: DIS) $99.90

-         The Home Depot, Inc. (NYSE: HD) $292.19

-         3M Company (NYSE: MMM) $105.77

-         Honeywell International Inc. (NASDAQ: HON) $196.55

-         NextEra Energy, Inc. (NYSE: NEE) $78.02

-         The Southern Company (NYSE: SO) $71.94

It will be interesting to see if AI can outperform. While that remains to be seen, we can be sure the fully AI-chosen portfolios will become commonplace.