How ChatGPT Can Make You a Stock Market Millionaire
In this article I write about an AI constructed Portfolio that has vastly outperformed the S&P 500 and Nasdaq over the past 22 years
Artificial intelligence as arrived on the mainstream and is free to use for everybody thanks to Open AI’s new product, Chat GPT. (see my previous article to learn about ChatGPT and how you can make it your new sidekick when making investment decisions).
I asked ChatGPT how to turn $1,000 into $1,000,000 in the stock market in just 5 years. This a nearly impossible feat that not even Warren Buffett, the greatest investor of all time, was able to achieve.
$1,000 to $1,000,000 is a 1,000x return which requires a company annual return of 298% if done in 5 years. These types of returns are unheard of in the stock market, but I wanted to see if the oracle of the internet could do something the oracle of Omaha could not.
The magical internet robot came up with some strategies and insightful responses It also told me some exact ETF’s that follow the strategies mentioned.
In this article I dissect the key concepts mentioned by ChatGPT during our conversation, and put together a portfolio of the recommended ETF’s. I then back test the portfolio devised by ChatGPT to see how much money it would have made over the past 5, and 22 years. We find out that the portfolio did something that every money manager dreams of. The portfolio completely destroyed the S&P 500 and the Nasdaq in terms of absolute and risk adjusted returns.
Test 1: No Time Constraint:
First, I asked ChatGPT how I can turn $1,000 into $1,000,000 in the stock market with no time constraint and this was the response:
The AI gives some really sound financial advice here. Points two and four are pieces of advice that any good financial advisor would give. They also lead into an investment concept praised by Warren Buffett, that being dollar cost averaging into the S&P 500.
Dollar Cost Averaging
Dollar cost averaging is when you consistently invest a sum of money into a security over a period of time. The benefit is that you put your market timing on autopilot so you don’t have to worry about missing a good buying opportunity or investing when the market is too hot. This strategy greatly reduces the impact of volatility on your returns.
The S&P 500 is a diversified portfolio of the 500 best Companies in the U.S. with returns that have averaged ~7%/year. Dollar cost averaging into the S&P 500 has made countless millionaires and will surely continue doing so in the future. It is safe to assume the returns will stay around the average going forward due to its composition of top quality companies. The chart below shows that investing an initial sum of $20,000, with regular contributions of $2,000 will make you a millionaire in 20 years using this strategy, assuming the returns stay at the historical 7%.
Test 2: Five Year Time Constraint:
Next, I asked ChatGPT how I can turn $1,000 into $1,000,000 in the stock market in five years and this was the response:
There are three main concepts to unpack here: First being the relationship between risk and reward in finance, second being the investment into high-growth stocks, and third using margin (or borrowed money) to invest in socks.
Risk vs Reward
Making a 289% return simply cannot be done without taking on large amounts of risk. In finance, there is a direct tie between risk and reward. The more risk you take, the higher the potential reward because you need to be compensated for taking that risk. Understanding this relationship is key to becoming a good investor.
For example, a government bond is less risky than a stock because the payments on a government bond are essentially guaranteed. Whereas the future payments you expect to receive form owning a stock are often highly uncertain.
Think of it this way, if the chances of getting paid from your investment are lower, the potential payment you receive in the future needs to be higher. Or there is no point of taking that extra risk.
High Growth Investing
High growth investing ties into the risk vs reward conversation. High growth stocks carry more risk than other stocks because the income these companies are expected to generate in the future is highly uncertain. Furthermore, since earnings growth expectations are high, the growth stocks tent to be expensive. If the companies live up to these growth expectations you can make huge returns, if they don’t, however, you will see large and permanent losses of capital.
The best places to look for high growth stocks are in high growth industries. The industries expected to grow the most over the next 5 years are:
Tech
Healthcare
Renewable energy
e-commerce
Transportation & logistics
What you can do is get to know these industries well. Get to know which companies are the leaders, which are innovating & disrupting, and overall which are in the best position to capture more market share going forward.
This is not difficult to do nor does it take a genius business mind. Company’s will literally tell you this information if you go on their website and read their annual reports, earnings presentations, and press releases.
Growth investing is risky, but you can significantly de-risk it by getting to know the industries & companies well. Just make sure you don’t pay too much or else you may end up in the growth investing graveyard with countless other people.
Leveraging Investment Tools
The investment tools the AI mentions are margin loans and options. These are tools that allow you to borrow money to buy stocks in order to boost your returns. Let’s make one thing clear, I do not recommend doing this due to the INSANELY HIGH RISKS. But it is important for every investor to know how these tools work.
A margin loan is when a broker lends you money to buy stocks. Margin loans amplify gains and losses. If you have $1,000 in your account they and they offer 50% margin, they would lend you $500. You can now buy $1,500 worth of stock. If the stock you purchased doubles you now have $3,000 in your account, you pay the broker back their $500 and you are left with $2,500 instead of the $2,000 you would have if you didn’t take the loan.
If the stock falls 50%, you are left with $750, $500 of which belongs to the broker, so you end up with $250 vs the $500 you would be left with if you didn’t take the loan. Furthermore, if the value of your holdings drops below $500, you need to add money to your account to pay the broker.
Options are contracts that give you the option to buy or sell 100 shares of a stock at a certain price (strike price) before a certain date (expiration date). The cost of the contract is called an options premium, which is significantly lower than the share price.
Options are beyond the scope of this article but just know they use leverage to significantly increase your buying power. The end result of buying options is typically a 100% loss of invested capital.
Using these tools can help turn $1,000 into $1,000,000 because instead of finding the one in a million stock that goes up 1,000x in 5 years, you need to find something that goes up a small fraction of this. For example, buying $1,000 worth of deep out of the money call options on Tesla stock in march 2020 and holding them until Jan 2020 (a period in which the stock went up ~10x) surely would have made you a millionaire.
These tools can definitely make you a millionaire in a short period of time in the stock market. Using them however, is no different from gambling.
The Portfolio
Putting together the above strategies by the AI we can see that it was recommending a diversified portfolio of high growth stocks, in high growth industries, with additional leveraged ETFs.
Asking the AI for ETFs that fit the above description we end up with the following portfolio:
Invesco QQQ (QQQ)
iShares Russell 1000 Growth ETF (IWF)
Invesco S&P 500 Equal Weight Technology ETF (RYT)
Invesco S&P SmallCap Information Tech ETF (PSCT)
iShares Global Tech ETF (IXN)
ProShares UltraPro QQQ (TQQQ)
Direxion Daily S&P 500 Bull 3x Shares (SPXL)
Barclays iPath Series B S&O 500 VIX Short-Term Futures ETN (VXX)ProShares UltraPro S&P 500 (UPRO)
5 Year Returns
The AI portfolio did not manage to turn $1,000 into $1,000,000 in 5 years. It did, however, do something that every single fund manager in the world attempts to do and thats beat the S&P 500. Some high profile fund managers that get paid billions of dollars were not able to do this. In fact, most hedge funds trail behind the S&P 500.
22 Year Portfolio
Using the same portfolio and backtesting over 22 years shows even more impressive results. The portfolio averaged a return of 10.5% over the past 22 years. It crushed the S&P 500 and it crushed the Nasdaq. Most impressively, it did so with a higher sharpe ratio than both of them. Meaning it generated higher risk adjusted returns.
10.5% annually may seem like nothing relative to an 1,000x return, but just think of it this way: Bernie Madoff managed $20 fucking billion dollars and grew to become the world largest hedge fund manager because he claimed he was making 9% annually.
If somebody ran a hedge fund using the strategy generated by this AI over the past 5 or 22 year they would rank among the upper echelon of hedge funds in terms of absolute and risk adjusted returns. So did this AI generated strategy turn $1,000 into $1,000,000 in 5 years? No, but if you opened up a fund using this strategy, it would have made you a multi billionaire.
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I hope you learned something,
Tom