Editor's note: Don't let the artificial-intelligence ("AI") hype fool you... With the development of tools like ChatGPT quickly gaining momentum, many people are bullish around AI today. But according to Vic Lederman and Joe Austin – editorial director and senior analyst, respectively, at our corporate affiliate Chaikin Analytics – this excitement is masking huge flaws in the AI megatrend... That's why they stress caution... To protect your wealth, you shouldn't allow the excitement surrounding AI alone to guide your investment decisions. In today's Masters Series, adapted from the October 4 and October 15 issues of the Chaikin PowerFeed e-letter, Vic and Joe detail how you can use a clear head (and good data) to identify winning stocks as the AI craze unfolds...
Don't Put Blind Faith in the AI Revolution By Vic Lederman and Joe Austin, Chaikin Analytics When Chaikin Analytics founder Marc Chaikin recently called me (Vic Lederman) about a trading setup he spotted, I knew he'd found something good... "Vic, the technical setup here is near perfect. I want to get this one out as fast as possible." Marc had identified a trade opportunity for our Chaikin PowerTrader newsletter subscribers. And "as fast as possible" is as tight of a deadline as you can get in our business. On top of that, Marc made the task even more challenging... He had picked a company that's so "boring," most investors never think about it. I pondered how to tell this story in an exciting way. And I knew that I needed to start immediately. My first step? I bought a book. Now, I realize that doesn't sound exciting at all. And on its face, it's not... You'd expect financial analysts to do a lot of reading. I'm no exception to the rule. But the book I bought had a major problem. And that's the big point of today's essay... Put simply, the author filled the book with pages and pages of AI-generated slop. The cover promised an in-depth look at the company Marc had spotted. I hoped to find exciting stories – and more importantly, interesting data – to use as a springboard for my research. Instead, I found nothing more than ChatGPT-style summaries. I won't name the book. After all, I can't prove that the author "wrote" it with evil intent. But it's one of the worst examples of bad data I've come across in my years in this business. And it proves the value of trustworthy information in our increasingly digital world. Just look at what happened at Sports Illustrated last November...
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The magazine first published 70 years ago. It was long known as one of the most reliable names in sports coverage. But even it allegedly fell victim to the lure of "easy" content... Tech website Futurism reported that Sports Illustrated used AI-designed headshots and bios for several authors. Sources told Futurism that Sports Illustrated published AI-generated articles as well. (Sports Illustrated's parent company blamed a third-party contractor.) This example should make you wonder... How much bad AI data is out there these days? This problem doesn't end with the book I bought and the Sports Illustrated scandal, either. People have caught ChatGPT and other AI models regurgitating all kinds of bad data... Alphabet's new AI search feature told users that cheese stays on pizza better with "nontoxic glue." And it said that geologists recommend "eating at least one small rock per day." That may sound ridiculous to you. But this nonsense represents a huge data problem. You see, Google trained its latest AI model on everything it could scrape off the Internet. That included online message board Reddit and satire website The Onion. Bad data got in. And it messed up the output. Sure, I'm sharing silly examples of data gone wrong. But in finance, data quality is as serious as it gets. It drives hundreds of millions of dollars' worth of decisions every day. And Marc knows that... It's why he built his decadeslong career in this business around learning to retrieve data from the most dependable sources. Along the way, he also learned to interpret it correctly. Some of Wall Street's most powerful names trusted Marc to provide everything they needed when it came to data and analysis. When faced with a drawdown in a stock they own, investors are more likely to sell their winners and buy more of their losers. Psychologists call this the "disposition effect." When we have a gain, we get greedy. And we want to lock it in. But when we have a loss, we become hopeful. We're inclined to double down. Famed investor Peter Lynch likened this to bad gardening. In his famous book, One Up on Wall Street, he said "selling your winners and holding your losers is like cutting the flowers and watering the weeds." But when a stock goes down, we have to make decisions in a vacuum. No company is going to hold your hand... or give you a heads-up to sell. And in that void, emotions take over. So how can we make rational decisions? We have to listen to the market. And luckily, the Power Gauge is here to help... For decades, "buy and hold" was gospel in investing. Big names like Jack Bogle, Warren Buffett, and even Benjamin Graham all lived by it. And it worked. Companies that did well one year tended to do well the next. And even if you were wrong, the market bailed you out. A strong market tended to lift weaker stocks. But blindly following the "buy and hold" mantra can be dangerous. A great example of this within the S&P 500 Index is food giant Kraft Heinz (KHC)... Back in 2015, Kraft and Heinz merged to form one of the largest food companies in the world. Warren Buffett loves it. Berkshire Hathaway (BRK-B) still holds a roughly 27% stake in the company. Kraft Heinz sells lots of brands we all know. For example, aside from its well-known namesake ones, it also owns brands like Maxwell House coffee, Oscar Mayer hot dogs, and Capri Sun juice. Kraft Heinz is a household name. It makes products everyone recognizes. So you would think the business would be stable. But that's not the case. Since the merger, the company has had huge problems. First, it had too much debt. Then came healthy eating. Processed cheese and ketchup weren't part of that trend. Now, many supermarkets are increasingly focused on private-label products. The stores own and sell these goods themselves. The bottom line is that private labels are cheaper. And in today's cost-conscious world, consumers are going cheap. When it comes to the stock, a look at the Power Gauge shows how the company's struggles have played out in recent years... In short, things haven't looked great over the past five years. As you can see, the stock has mostly held a "neutral" or worse rating in the Power Gauge. Right now, it has a "very bearish" rating. Meanwhile, its relative strength versus the S&P 500 has been weak overall. Yes, KHC shares are up about 54% over the past five years. But the broad market is up a whopping 94% over that same time frame. That shows massive underperformance. So, there's not much winning here for Kraft Heinz. But the company is far from alone when it comes to weak stocks in the S&P 500... Based on the SPDR S&P 500 Fund (SPY), the Power Gauge is "bullish" on the broad market right now. And it gives 137 holdings in SPY a "bullish" or better rating. But amid all those highly rated holdings, our system also sees 77 "bearish" or worse stocks. Put simply, it's not enough to dump money into a big-name company that seems "good" on the surface... and then hope for the best. Today's market demands a more active and analytical approach to find the traps. And nowadays, good data makes the Power Gauge an incredible tool for investors... Folks, the world is changing quickly. And AI is surely a powerful tool. But as we've covered today, it still has its limitations. Put simply, where you get your data matters – especially when it comes to making good investing decisions. Good investing, Vic Lederman and Joe Austin
Editor's note: Understanding where to get your data isn't the only aspect of your investment strategy you must work on. You see, Marc sees a seismic shift approaching the markets right now that could cause a financial "disconnect" for stocks. That's why on Tuesday, October 29, he's going on camera to reveal exactly how you can prepare for the stock market's biggest shift of the year. Learn more here... | 
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