I used to loathe the term perpetual bull because, as a forecaster, I used to relish the times when I accurately predicted the market. I poured pride into those accuracy reports, illustrating cases of anticipated and happened and how it was both about shape and form of market timing. I grew up when I realized the world was not interested in prediction, it loved horse racing in the world of perpetual bulls and risk management was an alien word.
I reasoned with the narrative and believed it was there to soothe bruised egos when faced with a market downturn. "Why worry? It will eventually go up." But the majority of the investment business thrived on the illusion. The buyer did not mind the story. The bull is alive. The bull will never die. The bull has re-emerged. The bear was for intermission, a time to breathe and take a vacation. There was little curiosity in figuring out alpha, skill, luck, and all the statistics. Recently during a discussion with a portfolio manager in a rob advisor shop, I heard it yet again. "Mukul people don't care about fees when the markets are up." And when they are down, I assume it's the storytelling that keeps investors distracted.
Even if a bear market lasts for a decade, humanity's ability to endure sideways action is so high that a decade passes in the blink of an eye. After 40 years, when inflation strikes, society may wake up from its slumber, for a bit before the magical index construction conjures up the concentration, to keep the hope on float, creating an alternate reality where the perpetual bull story continues to flourish for eternity. Even in the face of inflation, mortgages, and bear markets, experienced investors claim, "We have seen this before". When you live through a 50% market Great Financial Crash, your brain has seen the recovery, and hence your appetite for risk increases. Every fall builds more resilience in the mind. The inability to cut losses and hold on to losers for future generations has married society to incorrigible optimism. The charging bull of Wall Street can now be also found on Dalal Street.
Some minority rationalists believe in the necessity of a Great Depression repeat. Another 1929 with a 90% collapse to bring an end to the contagious optimism. Frontier markets like Romania experienced a 90% collapse and still survived to become emerging markets. And more irrationals jump in the stampede with the bulls, loving that occasional maul as a sports injury. The excitement overrules everything transforming into a common street sense
Now, let's add AI to the perpetual bull. What would perpetual bull AI look like, and how would it transform the narrative into reality? I am referring to AI innovation here, not simply taking a .AI domain and becoming an AI company. When Soft Bank invests USD 150 billion in AI companies without showing much success, the failure educates a generation of smart investors to discriminate the real from the fake. Today, more data scientists have insight into LLM and backpropagation, a stark contrast to the days when few could differentiate between machine learning (ML) and artificial intelligence (AI).
Even if there is confusion about why neural networks require hidden nodes, we can put the same LLMs to task. Simply put, the world has changed, and imagination has transformed into reality. AI will transform the story of the perpetual bull into a reality of riches, not experienced by any of the previous generations.
AI's advantage lies not in high-frequency trading but in low-frequency investing. High-frequency trading was automated back in 2008 with companies like Virtu. Now order flow has become mainstream and startups are juicing the same orange for the last mile of ML-based high-frequency solutions. It's exciting to rebuild Renaissance technologies using leverage and AI, but the opportunity was in 1978 not when you can set it up with a few servers and openly accessible tools. There is no entry barrier. No moat.
Yesterday's day trader was a market maker during the day, but today's day trader has been fighting against machines for over a decade. I'm referring to the day traders who are still in the business. Unlike High frequency, Low-frequency investing (more than 12 months average holding) is the blue ocean that includes indexing, smart beta, long-short strategies, and eventually smarter inverse strategies. Machines don't have geographical biases. They can follow strict risk management. They can calibrate risk, can be trained to avoid LTCM blow-ups, and can generate higher than annualized 18% annualized returns (the Renaissance Technologies non-leveraged number).
For these machines, the stock market is like a train station. There's no point in running because there's always another train. These machines recognize the state to avoid in the five big market states: small gains, small losses, no gains, no losses, and big losses. They can grasp and train on regime shifts and interpret that excess returns mean low tracking error to the mediocrity of our indexes driven by the magnificent seven. They recognize that idiosyncratic risk diminishes beyond a certain basket size of components. These machines acknowledge that probability is a dynamic system. They comprehend that there is always a certain sector, asset, or region in the world that is either in or beginning a secular bull market. These machines also perceive that markets are not solely limited to U.S. equities; there are alternative assets, alternative energy, and alternative investments that are gaining liquidity as we speak. They can seek generality in context without worrying about the specificity of content.
Machines comprehend that index construction becomes skewed when the average year-to-date (YTD) return for Amazon, Apple, Google, Meta, Microsoft, NVIDIA, and Tesla is 84%, compared to the average YTD return for the rest of the S&P 500 at just 3.7%. They understand that when barely a tenth of stocks beat the S&P 500, and when a single company like Apple surpasses the combined size of 2000 small-cap companies, market indexes are designed for misrepresentation. Machines thrive in such skewness because they perceive inefficiencies and are designed to work unemotionally with one purpose: to extract order from disorder. We are re-entering the era of Perpetual Bull, where machines will consistently outperform the market and storytelling will become more exciting.