Summary
In light of StockView’s April 1 release of their new crowdsourced equity research platform, dubbed “Research Room,” I wanted to write a brief piece about the notion of crowdsourcing stock portfolios as made popular by Seeking Alpha, StockViews, TradeStream, kaChing (the Facebook application turned mutual fund recommender now renamed Wealthfront), and even Reddit. Similarly, many companies seek to explore how social media can predict market trends such as Dataminr, Gnip, and DataSift. Stories are beginning to pop up all over the news about how various crowdsourced strategies have consistently beaten the indexes, and yes, even keep up with top analysts. I structure this post is first to examine a couple of examples of crowdsourcing successes in (at least virtual) investment management, then layout some of my commentary and reservations, and lastly open the floor for thoughts, experiences, and questions.
Is the “Great Crowd” really wiser than experts, after all?
Reddit: Back before Christmas, The Motley Fool ran an article on a Reddit user, PhantomPumpkin, who created a simulated portfolio, investing $10k in virtual currency in every positively discussed stock on reddit. Apparently, said gentleman was able to pull in just shy of a 40% return YOY, beating the Dow, S&P, and Russell 2000 alike. Motley Fool author Jay Jenkins was quick to point out that this simply comparison fails to note that the risk factor of the virtual portfolio is drastically higher than the indexes, and higher than most investors would tolerate, especially for a premium of only 4.9% over Russell 2000. Nevertheless, if something so rudimentary as gobbling up all positively discussed stocks from a social networking platform into a hodgepodge portfolio could deliver such admittedly impressive results, a more complicated crowdsourcing strategy for investment management may actually make some headway…
Seeking Alpha Ltd.: And that’s where we come to SeekingAlpha.com. SeekingAlpha.com, for those of you who are unfamiliar, is an investment research platform ran by Seeking Alpha Ltd. with over 7,000 contributing authors and 20,000 commenters (according to their “About Us” page, that covers over 3,000 stocks. Contributing authors are paid per 1,000 page views with the potential for bonus earnings for posts considered “Top Ideas,” “Small-Cap Insights,” or “Outstanding Contributions.” WSJ Blog ran an article March 19 about an independent academic research study in the performance of stock market predictions, namely, examining multiyear returns of not only the overall virtual portfolio that researchers created based on SeekingAlpha.com recommendations, but also the predictability of individual stock returns over against news articles. The fund performed remarkably, most notably growing even through 2008.
Author Yuliya Chernova notes that this is in keeping with the way crowdsourcing has revolutionized other fields, such as Wikipedia vs Encyclopedia Britannica. Chernova is not overzealously championing crowdsourcing, quoting lead researcher Dr. Hu, “I wouldn’t say [Seeking Alpha blog writers] are absolutely better than the highly paid Wall Street analysts.” Yet, clearly, there is information out there that is not only minable, but also informative and predictive for investing. At the very least, this trend should spur a paradigm shift in sell-side equity research as well as asset management.
My Thoughts
First off, I think the disclaimers noted by the authors of The Motley Fool and WSJ Blog articles that I mentioned above are highly relevant. We cannot simply look at multiyear returns against the indexes, but rather the portfolios should be risk adjusted and matched against carefully managed funds in similar risk brackets if we are to gain a true comparison of the crowd vs professional argument. Likewise, professional analysts aren’t going anywhere soon for many reasons, among which is accountability. When things go awry – to be trusted with billions of dollars are at stake, you have to have skin in the game, and not just your (often-anonymous) ranking or $0.01 per page view on an internet blog. Human nature demands terminable, black-ball-able directly responsible heads to cause to roll, and crowdsourcing removes this element.
All of that said, crowdsourcing IS going to change investment management in the short and long run. For starters, analysts will, in short order, be held to synthesize, analyze, understand, and make use of a much broader swath of data. Simultaneously, some investment management will move over (nearly exclusively in some isolated cases) to following a crowdsourced model—and the success of these funds will determine to what extent crowdsourcing becomes mainstream for fund management. This effect will be similar to how Wikipedia has gradually become academically permissible in some sectors, although it remains hotly contested and broadly denied in others. As with so many archetype-shattering innovations, I think the effect of crowdsourcing on investing is overstated by the technophile/open-source junkie yet understated by the anesthetized and comfortable traditionalist.
So, what do you guys think?
Sources:
Yuliya Chernova. "Study: Crowdsourced Stock Opinions Beat Analysts, News." http://blogs.wsj.com/venturecapital/2014/03/19/study-crowdsourced-stock…
Jay Jenkins. "This Guy Used Reddit to Build a Crowdsourced Stock Portfolio. The Results Were Actually Not Bad ... Kind Of." http://www.fool.com/investing/general/2013/12/22/this-guy-used-reddit-t…
PRWeb. "StockViews Launches New Equity Research Platform." http://www.prweb.com/releases/2014/04/prweb11718803.htm
Also Relevant:
SeekingAlpha.com
Zacks.com
StockViews.com
Yes, and no. Will crowd sourced portfolios be good at picking stocks everyone likes? Yes, will they be good at picking stocks that only those who look at the market every day know of. No. This is really nothing more than a techy way of looking at following the crowd.
Not to mention fiduciary responsibility will be impossible to enforce on these types of things. Someone with way to much time on their hand and some tech knowledge could troll the entire market to entice huge returns. Welcome to the new pump and dump.
@heister great points. I think there's a tad bit more to it than "just a techy way of looking at following the crowd," but I don't want to decompose into semantics. Indeed I agree that the changes that crowd sourcing will have on investment management and equity research have been drastically overstated by the tech-crazed Internet media--in a similar manner to how the impact of Wikipedia on academia and encyclopedia/information services industries.
great thread here about equity research. http://www.wallstreetoasis.com/forums/here-is-how-equity-research-works
on the question about performance of equity research analysts' picks, this topic has been discussed to death, they're notoriously terrible as a whole at generating any positive performance (read anything written by David Dreman for the data), so no argument there. in my mind, the real question is do they provide a valuable service to their clientele that can be easily replaced. for my money, the answer is no, what they do cannot be easily replaced.
personally, I am a PM running a balanced portfolio for private clients, and I find a lot of ER useful. I'm too busy dealing with client requests, marketing, strategy, etc., to listen to conference calls from the companies I own, tearing apart 10Ks and 10Qs, doing the math on various operating ratios, etc., I want the summary. I want someone to synthesize the data that the company provides into a format that I can use to take action, ER analysts do this. I can do the math no problem, but my time is better spent doing other things.
while nothing is impossible, I view ER analysts as highly skilled employees whose craft is not easily taught, so I would be very surprised if they became crowded out.
I agree with thebrofessor.
Another minor point is that those crowdsourcing tactics are basically technical analysis approach #23436. Many of them don't work properly on an ex-ante basis.
It may work, but it's not revolutionary - people may follow smart money, contrarians may look at magazine covers or politicians and all those neat things. Crowdsourcing will probably appear on page 837 of the CMT curriculum, some quants may make money out of it, and a lot of suckers may lose like they always did by following Internet forums hot tips and what not.
Great comments @Improving and @thebrofessor Side note directed toward @"Improving" I had never heard of CMT certification until you mentioned it. I read up on it a bit afterwards. Does anyone think that cmt certification would be useful for someone trying to make it in research? I'm planning to do CFA through level 3 (and will have MBA shortly), but just curious if cmt would be a value add?
I think CMT is one of the less valuable credentials out there for employability purposes.
Fundamental analysis is way more popular (as in number of available jobs that use it) and it's easier to explain decision to clients in fundamental terms. Also, a fair number of fundamental analysis users think technical analysis is a bunch of hocus pocus.
All in all, the CMT should add value (more or less depending on who's hiring you), but may also detract a little bit in some cases, since managers may fear you're the kind of guy who'll buy some thing because the graph resembles a dead cat bouncing.
So, for employability, CFA, top MBA, network and all that WSO stuff are much better. I think the time spent on other certifications such as the CMT could be better spent elsewhere.
If you want to improve yourself as an investor, the curriculum seem to have some interesting info. If you want a look try to grab Kirkzpatrick's Technical Analysis book - the main stuff seems to be in there. I think that does add value. Many fundamental investors do use some technical indicators to complement their FA skills. And, contrary to naysayers, the current state of academic research does support a lot of TA techniques - they're just not as magical as a lot of TA supporters seem to think.
Thanks for the tips and suggestions. I appreciate your time and input. I will definitely check out the book you mention.
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