An upcoming title: Biff’s investment firm cleans up with AI

VaselineAugust 14, 2024

0 3 minutes read

An upcoming title: Biff’s investment firm cleans up with AI

It’s only a matter of time before a story with that headline or something similar appears in the financial press. Recent news stories indicate that elite investment professionals have had amazing success trading securities for short-term profits by using artificial intelligence (AI) programs to chart the course of investments. This may be the future because computers can do everything faster than the human brain.

Somewhere in his parents’ basement, the next Sam Bankman-Fried—let’s call him Biff, after the buzz in the movie Back to the future* — uses an AI program to determine which securities to buy and when to buy and sell them. He founded Biff’s Investment Management and is making money hand over fist, not just for himself, but for his very happy clients. Until he doesn’t. Biff’s AI program might not have been as secure as he thought. Biff’s finger may have slipped and he shorted far more stocks than his AI program told him to sell. A disgruntled troll in Biff’s back office might make a series of blunders.

Biff is a fraud

Or, as I hereby predict, Biff has no AI program at all. The exchanges were never made. The profits never existed. His client reports were a series of postdated fabrications. Sound familiar? It should. Just replace “Biff” with “Bernie Madoff”.

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Madoff made his clients believe him by inventing a non-existent trading strategy that supposedly beat the stock markets. Each. Single. Month. But he never made any investment. How did he fool his customers? Towards the end of each month, his staff of contributors would pick a few stocks that actually rose in value that month, backdated fictitious buy confirmations for trades that were never made at the beginning of the month, and equally fictitious sell confirmations for the end. of the month. Clients received statements showing those fictitious monthly earnings.

Instead of investing his clients’ money, Madoff financed a lavish lifestyle for his family and later used investors’ money to pay any clients who chose to withdraw money. It was the largest Ponzi scheme in history.

Biff will tell his clients that his AI program has been tested on millions of hypothetical trading scenarios and is 97% profitable. (100% success would sound too much like an election result in a dictatorship.) And of course Biff can’t share the details of how the program works this magic, because everyone would use it and break the concept . In other words, it will simply modernize Madoff’s cover story.

What can you do to minimize the risk?

AI investment advice is a new application of a very new technology, with all the risks that entails. You shouldn’t put all your financial eggs in this basket. If you believe there is merit to the concept that an AI program can actually beat the market, how can you minimize the possibility of a bad actor like Biff misappropriating your cash and securities?

As we all know from reading our collection of Spider-Man stories, Uncle Ben told Peter Parker that “with great power comes great responsibility.”** The Biffs of the world will never get that message. It is your responsibility to take as many precautions as possible to avoid the possibility of your assets being misused. Regardless of where you get investment advice, make sure your cash and securities are in the custody of a broker-dealer registered as such with the SEC and a member of the Securities Investor Protection Corp. (SIPC). Your periodic statements from a registered broker-dealer will reflect exactly what cash and securities positions are held for your account. Monitor these periodic statements closely. In a world where monthly or quarterly statements are distributed electronically rather than by mail, it’s easy to ignore them. Moreover, this is not a foolproof system: Madoff defrauded both regulators and investors for decades. While his investors did not receive the fictitious profits they thought they had earned, Madoff’s victims received the net amount they deposited with him.
Identify any differences in your brokerage firm’s statements from what you understand your holdings to be. Do this in writing. Remember this: Phone calls are worth the paper they’re written on. If you talk about your account with someone, confirm the details of that conversation in writing. With email at your fingertips, there’s no excuse for not having a written record of any issues.
If you have difficulty contacting any investment professional, contact the SEC and your state’s securities commissioner immediately.

* Biff was most prominent in the 1989 film Back to the Future Part IIin which he used a sports almanac from the future to place bets on future games.

** Especially from Marvel Amazing Fantasy #15August 1962.

This article was written by and represents the views of our contributing advisor, not the Kiplinger editorial staff. You can check advisor records with help dry or with FINRA.

VaselineAugust 14, 2024

0 3 minutes read

Biff is a fraud

Vaseline

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