How To Use ChatGPT To Analyze A Stock

How To Use ChatGPT To Analyze A Stock
Reda Farran, CFA

about 1 year ago7 mins

  • While ChatGPT should never be used in isolation to make investment decisions, it can help you more easily and efficiently analyze a stock if you ask the AI the right questions.

  • It can be used to gain a high-level understanding of a company, perform a SWOT analysis, summarize earnings calls, evaluate a firm’s ESG credentials, generate code to backtest buy and sell signals, identify key risks, and more.

  • But ChatGPT does have some limitations: it will struggle with smaller, lesser-known stocks, its data only goes up to 2021, and it sometimes spits out blatantly wrong responses.

While ChatGPT should never be used in isolation to make investment decisions, it can help you more easily and efficiently analyze a stock if you ask the AI the right questions.

It can be used to gain a high-level understanding of a company, perform a SWOT analysis, summarize earnings calls, evaluate a firm’s ESG credentials, generate code to backtest buy and sell signals, identify key risks, and more.

But ChatGPT does have some limitations: it will struggle with smaller, lesser-known stocks, its data only goes up to 2021, and it sometimes spits out blatantly wrong responses.

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With all the buzz about ChatGPT, it got me thinking: can you use the sophisticated artificial intelligence (AI) chatbot to analyze a stock? To test it out, first I asked it: “should I invest in Tesla?” And it gave me a very generic, basic answer. But after a lot of experimentation, I realized that the trick is to ask it the right questions – if you do, you get some fairly impressive responses. So here are six smart ways to use ChaptGPT to analyze a stock.

1. Gain a high-level understanding of a company

Buying into a company’s stock basically means investing in the firm itself. And before you do so, it’s crucial to understand the company really well. Now, you can get that by reading annual reports, investor presentations, and so on. But you can also use ChatGPT to get an initial, high-level understanding. For example, I asked it to “explain to me Tesla's exact business model”, and here’s what I got:

Source: ChatGPT.
Source: ChatGPT.

That’s a pretty good summary, telling me what Tesla sells and how (which is equally as important). Taking it a step further, you can use ChatGPT to figure out a company’s economic moat – that is, the firm’s ability to maintain its edge over the competition, protecting its market share and profit over the long term. Legendary investor Warren Buffett always checks out a company’s moat before he invests. So I asked ChatGPT, “what are Tesla’s economic moats”, and here’s what it told me:

Source: ChatGPT.
Source: ChatGPT.

Again, not a bad summary. You can get more creative too, asking specific questions to help you better understand a company. For example, I asked, “how easy is it for Tesla to scale”, and I got a thoughtful response:

Source: ChatGPT.
Source: ChatGPT.

2. Perform a SWOT analysis

You can also use ChatGPT to do a SWOT analysis – a fact-based, data-driven evaluation of a firm’s strengths, weaknesses, opportunities, and threats. This is a very useful exercise, but it can be quite time-consuming to do in real life. I asked ChatGPT to “write me a SWOT analysis on Tesla”, and, although quite simplistic, the response was a great start. Here’s what it said:

Source: ChatGPT.
Source: ChatGPT.

3. Summarize earnings calls

Earnings calls are a key source of valuable information for investors. During these hourlong calls every quarter, a company’s top brass goes over the firm’s recent performance, discusses the outlook for the business and industry, answers questions from analysts, and more. But it could take ages to listen to the calls for every stock you’re interested in. So why not ask ChatGPT to summarize them for you? Here’s how I did that.

First, I used Google to find the transcript of the specific earnings call I was interested in, searching “Tesla Q4 2022 earnings call transcript”, and that gave me a few links with the full transcript, including the management team’s prepared remarks and the Q&A session with analysts. I then pasted the link’s URL into ChatGPT and asked it to give me the 15 most important points. (Note that if you just ask it for key points without specifying a number, it’ll only give you five.) Here’s its response:

Source: ChatGPT.
Source: ChatGPT.

Useful, no? This was personally one of my favorite ways to use ChatGPT, but I did see some potential drawbacks. First, you might not always be able to find a particular earnings call transcript online (well, not for free at least). Second, actually listening to an earnings call allows you to gauge the management team’s tone, which can offer some valuable clues about whether they seem confident, nervous, evasive, and so on. That’s something that can’t be captured in transcripts. Third, there’s always the risk that the summary will miss some important details.

4. Evaluate a company’s ESG credentials

Investing is about more than just returns: you can choose opportunities based on the effects they have on the world around you. There are several ways to go about it, but one of the most popular methods is via environmental, social, and governance (ESG) investing. And there’s evidence suggesting that firms with good ESG credentials outperform their peers over the long term. So with that in mind, you can use ChatGPT to see how good (or bad) a firm looks through an ESG lens.

For example, I asked it to “evaluate Tesla’s ESG credentials”, and I got a pretty darn good summary:

Source: ChatGPT.
Source: ChatGPT.

5. Generate code to backtest buy and sell signals

This is a more sophisticated way to use ChatGPT and one that’ll appeal to the coders out there. Say you wanted to see whether it’s a good time to buy a stock based on some technical analysis indicator – for example, the relative strength index (RSI). Now, remember, the RSI assigns a number between zero and 100 to an asset: below 30 means it’s “oversold”, potentially offering up an attractive entry point. (There’s more on the RSI here.)

Now imagine you wanted to see if it’s historically been profitable, on average, to buy a specific stock whenever its RSI dipped below 30. A simple question, sure, but one that’s quite hard to answer. The best way to do it though is via coding, but that’s a long and complicated process that requires some technical knowledge. Enter ChatGPT, which can write the code for you. I asked it “write me code to see how Tesla's stock price performs one month after its RSI dips below 30”, and it did (here’s some of that code):

Source: ChatGPT.
Source: ChatGPT.

It even gave me a neat summary at the end: “This code downloads Tesla's historical stock data from yfinance, calculates the RSI, identifies instances where the RSI dips below 30, and calculates the 1-month returns following a buy signal. Finally, it plots the cumulative returns for this strategy. Note that this is a simple strategy for demonstration purposes and is not intended to be used for actual investment decisions.” Not too shabby…

This is just one of hundreds of examples of technical analysis things you could test out. As another example, you could ask ChatGPT to write code to see if it’s historically been profitable to buy a stock when its 20-day simple moving average (SMA) crosses above its 200-day SMA.

6. Identify key risks

No investment analysis is complete without properly considering risk. The best investors out there are the ones who not only identify promising stocks, but also pay close attention to what could go wrong and hit the exits accordingly. If you’re not sure what the key risks are for a particular company, just ask ChatGPT for some initial ideas.

For example, I asked ChatGPT “what are the key risks associated with investing in Tesla”, and it identified ten main ones. That’s a great starting point.

Source: ChatGPT.
Source: ChatGPT.

Now, of the lot, let’s say I think the first one (market competition and new entrants) could do the most damage. That’s the one I’d investigate further. And I’d see that Tesla – along with several other automakers – recently slashed its prices as competition in the EV market has heated up, sparking talks of an “EV price war”. I’d view that as a key risk, and would look to see how price cuts would impact Tesla’s above-average profit margins – especially in light of its relatively high valuation (risk #8 from ChatGPT’s list).

Looks good, but what are ChatGPT’s limitations?

Needless to say, ChatGPT isn’t perfect – neither is any AI technology at the moment. And there are some important limitations to be aware of when using it to analyze a stock. First, it won’t be able to answer the questions we went through for every company – it’s going to struggle with smaller, lesser-known ones. I cherry-picked Tesla for all my examples specifically because it’s so well-known.

Second, ChatGPT’s training data only goes up to 2021. That means all its answers are missing at least a year’s worth of recent information, and that can be a big limitation if something major happened to the company or industry recently.

Third, the AI sometimes spits out answers that are – and there’s no way to sugarcoat this – blatantly wrong. Look at the example below, where it told me “Tesla is expected to benefit from increasing competition in the EV market”. It doesn’t take an MBA degree to realize that a firm rarely benefits from rising competition.

Source: ChatGPT.
Source: ChatGPT.

But despite the drawbacks, you can see how ChatGPT can help you more easily and efficiently analyze a stock. So while it should never be used in isolation, it can be an exceptionally handy tool that you can leverage to make your investing life easier. As the saying goes, work smarter not harder…

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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