Communicating with the Future: How ChatGPT Helps You Invest
1. introduction
Almost everyone who keeps up with the latest technology news has probably noticed: OpenAI has released ChatGPT. By now, more than a million people have already tried ChatGPT [1].
"ChatGPT is a special language model developed by OpenAI and used for generating human-like text in chat conversations. It is designed to enable natural and fluent chat-style communication."
So far so good. It's not the first Artificial Intelligence trained to communicate human-like, so what's special about it? The specialness lies in the amount of data and influencing variables that were used to train the corresponding model. This allows a seemingly unlimited number of issues with which to approach ChatGPT: Questions about quantum mechanics, the right care behavior for your orchids, love poems, instructions about how to wash your car up to completely self-created code that solves a certain task.
Moreover, ChatGPT is free and anyone can try it [2]. It can take quite some time, because once you start, it's hard to stop. If you haven't noticed by now that the above paragraph starting with " and ending with " and the title of the post were created by ChatGPT itself, this is a good indicator of the excellent results created by the AI.
2. content
Now, this post is not intended to be about potential applications of this AI in the field of enterprises. Nevertheless, there is no question that there are a variety of exciting applications. Rather, I want to focus my attention on the opportunities that exist for us as individual investors, away from nonsensical questions like "What stocks should I buy next?" or "What are the best stocks?".
Rather, ChatGPT could serve as a kind of personal assistant when researching stocks. In the following, I would like to share with you sample interactions that should serve as a kind of inspiration to try out ChatGPT according to your own interest and benefit.
3. your personal reference book
Below, I'll document my real questions and ChatGPT's original and unadorned answers. Let's start with a simple factual question. Since I wrote an article about ROCE a few weeks ago, I am now interested in how ChatGPT would explain ROCE to me:
>>MScottInvesting: "Explain ROCE to me in the context of business valuation."
>>ChatGPT: "ROCE stands for 'Return on Capital Employed' and is a financial ratio that describes the ratio of profit to capital that a company uses in its operations. There is a formula to calculate ROCE:
ROCE = earnings before interest and taxes / total capital x 100%.
Total capital includes both a company's equity and debt. ROCE indicates how effectively a company uses the capital it employs to generate profits. A high ROCE indicates that the company has high profitability and is able to cover its cost of capital.
In the context of business valuation, ROCE can be used as a measure of a company's efficiency. A high ROCE may indicate that the company is well positioned and able to generate profits in the future. However, ROCE should always be considered in comparison with companies in the same industry in order to make a statement about the relative strength of a company."
Not bad, but nothing I couldn't have found after a cursory Google search. Let's try a somewhat difficult question:
>>MScottInvesting: "Then what is the difference between ROCE and ROIC? Which ratio should you prefer and when?"
>>ChatGPT: "ROIC stands for "Return on Invested Capital" and similar to ROCE, it is a financial ratio that describes the ratio of profit to capital. The difference between ROCE and ROIC is that ROIC takes into account only the capital invested by a company, while ROCE takes into account the total capital of the company, both equity and debt. The formula for calculating ROIC is as follows:
ROIC = Earnings before interest and taxes / Invested capital x 100%.
Invested capital includes all assets that the company uses in its operations, such as machinery, equipment and real estate. ROIC indicates how effectively a company uses the capital it invests to generate profits.
When to prefer ROCE or ROIC depends on the type of business and the purpose of the valuation. ROCE is more appropriate for companies that are financed primarily with equity, while ROIC is more appropriate for companies that are financed primarily with debt. ROIC is also generally a more accurate metric for valuing companies, as it only takes into account the capital invested and not the total capital, as is the case with ROCE. However, one should always look at both ratios to get a comprehensive picture of a company's financial position."
Ok the definition of ROIC is in a way gifted, because if ChatGPT can explain what ROCE is, so most likely what ROIC is. But what I personally find remarkable is the (not so trivial) explanation of when which ratio should be preferred. It is explained to me in a compact and understandable way. Nothing that could not be found with a (probably longer) Google search, but much more comfortable.
The following example concludes this section, but is of course far from the end of the line. You can let your creativity run free and ask ChatGPT something you always wanted to have explained.
This would make some questions here on GetQuin obsolete - but that's just by the way ;)
>>MScottInvesting: "How does a short squeeze happen?"
>>ChatGPT: "A short squeeze occurs when investors who have gone "short," that is, made bets that the price of a stock will fall, are suddenly forced to end their bets to avoid losses. This can happen if the price of the stock suddenly rises and the investors who went "short" incur losses. In such a case, these investors must quickly end their bets and buy the shares to minimize their losses. This may cause the price of the stock to rise further and a short squeeze to develop."
4. your personal assistant
So far, then, we've been using ChatGPT as our personal reference tool. It's certainly helpful, but probably not the game-changer compared to a Google or Wikipedia search. All the better that the application is not limited to "googleable" facts, but ChatGPT is even able to solve tasks and answer more complex questions. It is an advantage that the AI is able to react to the conversation history and present better solutions based on it.
The following conversation should serve as an example for this:
>>MScottInvesting: "What are the specific business valuation metrics for banks?"
>>ChatGPT: "There are many metrics that can be used to evaluate banks. Some of the most important ones are:
1. return on equity (ROE): this is the profit a bank makes per share, relative to its equity. It provides information about how profitable a bank is and how well it is using its equity.
Tier 1 capital ratio: This is the ratio of a bank's high-quality equity (such as core capital and retained earnings) to its risk-weighted assets. It provides information on how well a bank is prepared for risks and how strongly it is able to absorb losses.
3. non-performing loans (NPL) ratio: this is the ratio of a bank's bad loans (i.e. loans that are not serviced by debtors) to its total lending volume. It provides information on how well a bank manages its loan portfolio and how likely it is to suffer losses on its loans.
4. net interest margin (NIM): this is the difference between the interest a bank earns on its loans and the interest it pays on its deposits. It provides information on how profitable a bank is and how well it is able to optimize its interest rates.
5. cost-to-income ratio: this is the ratio of a bank's costs to its income. It gives an indication of how efficient a bank is and how well it is able to control its costs compared to its income.
There are many other ratios that can be used to evaluate banks. It is important to note that none of these metrics should be considered in isolation, but always in the context of the entire company and its industry."
>>MScottInvesting: "To what extent are these metrics applicable to insurance?"
>>ChatGPT: "Many of the above metrics can also be used to value insurance companies, although some adjustments may be needed to apply them to the specific characteristics of insurance companies.
For example, an insurance company's return on equity (ROE) could serve as a measure of profitability and effectiveness in using equity. Tier 1 Capital Ratio could serve as a measure of an insurance company's financial stability and ability to absorb risk. The Non-Performing Loans (NPL) Ratio could serve as a measure of the quality of an insurance company's risk management. Net Interest Margin (NIM) could serve as a measure of an insurance company's profitability, while Cost-to-Income Ratio could serve as a measure of efficiency and cost control.
However, there are also some specific metrics that can be used to evaluate insurance companies that are not relevant to banks. For example, the combined ratio (the ratio of premiums and claims payments to an insurance company's revenues) could serve as a measure of an insurance company's profitability. The loss ratio (the ratio of claims payments to an insurance company's premiums) could serve as a measure of the effectiveness of risk management. The Expense Ratio (the ratio of an insurance company's administrative costs to its premiums) could serve as a measure of efficiency and cost control.
As with banks, it is important that none of these metrics are considered in isolation, but always in the context of the entire company and its industry."
>>MScottInvesting: "How do I calculate the NPL for banks and how for insurance companies when I have the balance sheet in front of me?"
>>ChatGPT: "The Non-Performing Loans (NPL) Ratio for banks is calculated by dividing the volume of bad loans (i.e. loans that are not serviced by the borrowers) of a bank by the total volume of loans of the bank.
To calculate the NPL ratio, you first need the total of all bad loans that are on the asset side of the bank's balance sheet. This figure may be hidden under various items on the asset side, such as "non-performing loans," "loans in arrears," or "bad loans." Once you have determined the total bad loans, divide it by the bank's total loans on the asset side of the balance sheet. The result is the bank's NPL ratio.
For insurance companies, the NPL Ratio is defined a little differently because they are companies that hedge risk, not lend. Instead, for insurance companies, the NPL ratio could serve as the ratio of claims payments that an insurance company has not yet made to its claims reserves. To calculate this ratio, you need the total claims payments that an insurance company has not yet made that are on the liability side of the company's balance sheet, and divide that by the company's claims reserves, which are also on the liability side of the balance sheet. The result is the insurance company's NPL ratio."
One can see here that the AI is able to respond contextually and conditionally to the conversation history. In particular, the AI recognizes that the NPL ratio must be calculated differently for banks and insurance companies and also explains why this is the case.
Taken individually, this may not be a quantum leap. Note, however, that this is the same chat bot that answered the question "Write me Python code that outputs the second smallest element of a list." with a corresponding Python script and explains how the code works. It is also the same AI that gives you a sound answer to "Explain to me the effect of Pablo Picasso on people in the 1920s.". (Anyone interested in the answers to these questions, please go to [2] and try it out for yourself).
5. conclusion
As mentioned earlier, the question of use cases in industry and business is not what was at the forefront of my consideration. Rather, it was about a small experience report on how to use ChatGPT as a kind of personal assistant to get useful explanations when investing. Used correctly, ChatGPT can even actively support research on a company and thus serve as a kind of "foreman".
It is also possible to give the AI smaller calculation tasks, such as "How much will my assets be in 10 years if I have €1,000 now and it earns 8% interest annually?" or "What annual dividend growth does an increase from €0.80 to €1.50 in 5 years correspond to?". Try it out yourself and share your experiences here at #chatgpt
The following is meant to be the somewhat humorous conclusion to this post:
>>MScottInvesting: "Write me a teenager style disclaimer that the post is not investment advice."
>>ChatGPT: "Yo, what's up? I want to clarify here that this post is not investment advice, it is only meant to be a source of information. Any type of investment carries risks and it is important that you thoroughly research and seek advice from a financial advisor before investing in any type of investment product. I assume no responsibility for any potential loss or damage resulting from your investment decisions. Peace out!"
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