top of page
  • Writer's pictureAlpesh Patel

After a 150% AI-Driven Stock Boost, We Turned to AI Again to Decide Our Next Move

Updated: Nov 15, 2023

In the investing world, there's no feeling quite like seeing one of your stocks skyrocket by more than double. But what do you do when you find yourself in this enviable position? The decision can be daunting, and with the potential for great reward comes great responsibility.

I am writing to you from about 37,000 feet, connected to the internet and, therefore, to ChatGPT4 too. By the way, dozens of my 150k TikTok followers asked the same question! What a world! Keep up – it's how things work nowadays. So what do you do next?

Back in January, one of the stocks I told people on my Great Investments Programme, part of my Campaign for a Million (www.campaignforamillion.com), that I was purchasing NVidia for my son's ISA and my SIPP Pension.



We did our usual analysis based on my proprietary algorithm measuring value, growth, income, and cashflows, and it was one of the few stocks out of 10000 we analysed to make the cut.

So we asked ChatGPT4 plus now at the end of May:

"Imagine you are an exceptional investor. Maybe you are Warren Buffett or Eugene Fama, or Bill Ackman. You have bought a stock such as Nvidia, which is now up 200%; what strategies are open to you, and how do you decide on the correct one suited to you? Lay out all the options with detailed explanations of the pros and cons and how to decide. Your audience is lay people."

Note: We use ChatGPT4 Plus with web access and plugins that access earnings call transcripts, SEC filings, and statistical stock data.

This is what it said:

"Absolutely! Whether you're a seasoned investor or a newcomer, making decisions when a stock has significantly increased in value can be quite complex.


Several strategies can be applied in such situations, and the best one will depend on various factors, including your financial goals, risk tolerance, tax situation, and market expectations. Let's go through some of the main strategies:

1. Hold the Stock: This strategy involves keeping the stock in your portfolio, expecting its value to continue rising.

Pros:

- Potential for further gains: If you believe the stock will continue growing, holding onto it could lead to additional profits.

- Deferral of tax liabilities: If the stock is held in a taxable account, you won't owe taxes on your gains until you sell. Cons:

- Potential for loss: If the stock's value decreases, you could lose some or all of your unrealized gains.

- Opportunity cost: By holding onto the stock, you may miss out on other potentially lucrative investment opportunities.


2. Sell the Stock: This strategy involves selling the stock and realizing your gains. Pros:

- Locking in profits: By selling, you ensure that your gains are realized, not just on paper.

- Diversification: The proceeds from the sale can be used to invest in different assets, reducing risk through diversification. Cons:

- Taxes: Selling the stock will trigger a taxable event, and you may owe capital gains tax on the profit.

- Missing out on future gains: If the stock continues to rise after you sell, you'll miss out on those potential profits.


3. Sell a Portion of the Stock: This strategy involves selling part of your holdings in the stock. Pros:

- Partial profit-taking: You can realize some gains while still keeping a stake in the stock for potential future growth.

- Partial diversification: The proceeds from the partial sale can be used to diversify your portfolio. Cons:

- Partial exposure to loss: If the stock's value decreases, you could lose some of your unrealized gains on the portion you still hold.

- Tax implications: The sale could trigger a taxable event, potentially leading to a capital gains tax bill.

4. Use a Stop-Loss Order: This strategy involves setting an order to automatically sell the stock if its price falls to a certain level.

Pros:

- Protection against major losses: The stop-loss order can help protect your gains if the stock's price falls dramatically.

- No need for constant monitoring: Once the stop-loss order is set, it will automatically execute when the conditions are met.

Cons:

- Loss of control: The order executes automatically, so you might end up selling in a temporary downturn.

- No guarantee of a specific price: If the stock's price gaps is below your stop price, you might sell for less than expected.

5. Hedge the Investment: This strategy involves using financial instruments (like options) to reduce risk.

Pros:

- Potential downside protection: Hedging can limit potential losses if the stock's price falls.

- Retain upside potential: You can still benefit if the stock's price rises.

Cons:

- Cost: Hedging strategies often involve buying options, which can be costly.

- Complexity: Hedging strategies can be complex and may require a sophisticated understanding of financial markets.



So how should you decide which strategy is right for you? Here are some factors to consider:

Your belief about the stock's future performance: If the stock continues to rise, you might choose to hold or hedge.


Your risk tolerance: If you're risk-averse, you might prefer to sell and lock in your gains. Conversely, if you're willing to take on more risk for potentially higher returns, you might choose to hold or even hedge your investment.

Your financial goals: Selling might make sense if the stock's growth has brought you closer to a financial goal (like saving for retirement or buying a house). Holding could be a good option if you're investing long-term and don't need the money right now.

Your tax situation: Selling stocks can trigger capital gains taxes, so it's important to consider the tax implications of your decision. If your tax rate is high, you might prefer to hold on to the stock to defer taxes.

Diversification: If the rising stock now makes up a large portion of your portfolio, it might be wise to sell some of it to maintain a balanced, diversified portfolio.

Every investor's situation is unique, so it's important to consider your circumstances carefully. It can also be helpful to consult with a financial advisor to ensure you make the best decision for your needs.

And finally, it's worth noting that even the best investors can't predict the future with certainty. Countless factors influence the stock market, and it's impossible to predict exactly how a particular stock will perform. That's why diversification and a long-term investment strategy are often the best defense against market volatility."

That's a good answer. Of course, I could have used this to write covered call options, but someone who knows how to do that knows to do that without consulting ChatGPT.

Instead, this is a good educational tool for the kind of general public shareholders out there. Not the financial expert who can engineer even greater returns with derivatives.

We love this and use it in our Programme because there needs to be more Financial Literacy. And this is a new kid on the block. We must be one of the first to use it to educate our clients on their options.

It removes the mystique behind the 'expert' and empowers the individual. It also takes 'search engine' to another level.

By the way, I've gone for option 4, selling portions based on drops, e.g., 10% sold after a 10% drop from the peak, etc.

Alpesh Patel OBE

Author: Trading Online (Financial Times)



Comments


bottom of page