When everyone buys the same set of stocks, a very interesting trend is likely. These stocks show superior performance that beats the expectations as well as outperforms the peer set. When a few sectors hog all the limelight, this trend becomes very visible and prominent. Mindshare focuses entirely on these performing sectors and stocks.
We have seen this trend play out in different parts of our markets from time to time. Importantly, the frenzy generated by such intense market interest in a few sectors and select stocks has grown in magnitude, and the capital chasing these trends has increased multifold in the past five years. Investment managers are under intense pressure to spot such trends early, buy quickly, and then hope the trend catches on with others.
Too much money is currently chasing such hot trends, and capital is being deployed in a tearing hurry. Gone are the days when research took weeks to reach a conclusion. Today, decision-making happens faster than ever before. Stakeholders now use technology as a support function to speed up decision-making. Artificial intelligence (AI) plays a bigger part in decision-making than human intelligence. AI generates research reports, and decision-making relies heavily on them.
While these trends sound very fancy and exciting, the core investment need for quality decision-making is not being served well enough. What is being delivered are faster decisions. The research is sugarcoated, overly positive, and always presents a bullish outlook.
In a rising market, this decision-making mode seems to be working well, judging by rising stock prices as validation. But speed in decision-making can only kill the quality of both decisions and investment ideation. We are now inclined to think more positively of any trend that catches the public imagination.
Relying on AI to form our basic assessments makes us reach conclusions without the rigour of hard-nosed questioning. In a rising tide, when all boats go up, every research effort based on AI looks like easy genius. Only when the tide runs down will these AI-sweetened research decisions be truly tested.
Right now, everybody is happily relying on instant research to make fast-paced decisions. Time will tell how this mode of investing will affect portfolios riding the high tide of market liquidity. Right now, everybody is swimming in speedy research and enjoying the tide of momentum driving the market.
