Posted on

Lunch price inflation: 8 strategies to profit in the age of social media

With the 24/7 nature of financial news, commentary and data,there are no more free lunches for investors.  In fact, given that access and dissemination have improved tremendously, lunches have gotten a lot more expensive. It’s harder and harder to cut through all the noise.

Financial content sites like Seeking Alpha and Stock Twits provide a window into long tail investment content.  Expert investment communities like Covestor and Wealthfront take this up a notch and provide real-time access to the tradestream — the collective flow of real, audited trades of investment advisors.

With these platforms, we no longer have to lose our lunch money.  We can play smarter by following the truly exceptional investors with well-documented, long-term investment returns.  Why recreate the wheel when you can copy others who are so successful?

I discuss these mimicking strategies at length in Tradestream.  In short, there are eight different types of investment mimicry, from cloning top hedge fund managers’ stock picks to identifying and piggybacking the next Warren Buffett.

  1. Blog bigwigs: The financial blogosphere has created a virtual stock research bonanza and enabled top researchers to strut their stuff.  These investment bloggers provide institutional-grade advice at the fraction of the cost.  How is $0 for your own, personalized stock research team?
  2. Present-day gurus: While most investors underperform, there are those few who are exceptional (for those interested, check out Forbes editor Matt Schifrin’s new book, The Warren Buffetts Next Door).  While you and I may not be gurus, Warren Buffett is.  Eddie Lampert is.  Seth Klarman is.  These superinvestors exhibit great long-term performance.  We can win, as well, by strategically  following their moves and tools like AlphaClone help a lot.
  3. Undiscovered experts: Thousands of people manage virtual and real portfolios, competing against one another for top performance.  As time elapses, expert investors emerge from the rabble.  Previously unknown and unsung top performers bubble up to the top.  Following their moves can lead to the promised land of profits.
  4. Rumor mills: Strategies can be developed to harness the information — or disinformation — inherent in most rumors.  Monitor these in real time or view them in the aggregate.  The information here is important even if you don’t trade on it.
  5. Insiders: Corporate insiders are notoriously good investors in their company’s stock, even when they trade legally.  And they should be: Given access to sales forecasts and operational metrics, these investors have a knack for buying low and selling high.  They too can be followed and followed profitably.
  6. Historical gurus: Stock screening allows investors to sort quickly through thousands of stocks for those select few that exhibit specific criteria.  Mimic screens allow us to search for the same parameters historical investors like Peter Lynch and Benjamin Graham used in their hunt for great stocks. Validea has created a whole business around helping investors do just that.
  7. Crowds: There is a lot of predictive power in the wisdom of the crowds.  Crowdsourcing can be used to locate good investments.  Here, changes in sentiment can be an investor’s key in determining the next winning investment.  Piqqem has made a lot of strides here and new firms like RecordedFuture (hear my recent podcast where I interview them)
  8. Co-lateral information: Not all tradable information is purely investment related.  Much of it exists in other forms.  Learn to recognize valuable resources that can be gleaned to aid our search for investing profits.  Google search data is just one example.

Some of these forms of flattery have been studied closely while others are so new that they’re just beginning to inspire research.  Regardless, all have been inspired by the sheer transparency that today’s Internet provides.

Posted on

The future of financial content, social media and investing (podcast)

tradestream radio, discussing investing and technology

In this week’s podcast, we interview Mick Weinstein, head of content at Covestor, a new investment platform that allows investors to shop for investment advisor like shopping for Pez on eBay. Mick was previously editor-in-chief at Seeking Alpha.

I’ve discussed Covestor and its do-it-yourself model at length both in my book, Tradestream, as well as on my blog.  Just as we’ve become accustomed to shop for mutual funds within a supermarket model, it’s been harder to do that within the investment advisory business.  Covestor and its competitor, Wealthfront, are changing all that.  And financial content will play a key role in the success of these types of firms.

Mick sits right at the edge of what’s happening in financial content and now brings his perspective to Covestor.  He’s working with the team there to build out its content platform beyond the transactional infrastructure the firm has invested in building.

We discuss:

  • how financial content is being used for lead generation in the finance field
  • Mick’s experience building and managing Seeking Alpha’s offering and content team
  • tips to building a successful financial content business
  • the compliance challenges for financial content when published by an investment firm
  • the future of investing

More resources

Learn more about Covestor and Mick Weinstein

Posted on

Want to make money in the stock market? Own it only when it’s closed

Great piece from the guys at Bespoke on a strategy they call Close to Open. While owning the S&P500 or its proxy, the ETF $SPY, since its inception in 1992, investors would have seen  a 193% return.

Not too shabby.

But instead of just buying and holding (or “buying and praying” as I like to call it), if investors had bought the $SPY at the end of each trading day and sold it when markets opened the next morning, investors would have seen their holdings rise by almost 400%!

This raises the question — why even trade when the market is open?

You say, no frickin’ way.

Well, Bespoke says, way.

Like the fabled, flux capacitor, the implications of this are just mind-blowing.

Source

Who Needs the Trading Day (Bespoke Investment Group)

Posted on

PortfolioRunner: New portfolio analytics tool to leave beta

New portfolio analytics tool, PortfolioRunner, is readying to leave its beta testing and formally launch.  Well, it’s actually more than an analytics tool.  Portfolio Runner does 3 things:

  1. makes stock recommendations: using a variety of technical, fundamental and crowdsourcing algorithms, PR suggest additions stocks to buy/sell
  2. risk management: PR helps investors determine size of individual positions and suggests an exit strategy for each position
  3. news analysis: PR makes it easy for investors to follow breaking news on the fly, determining whether the news is positive or negative for the stock, and extracting relevant info.

Check it out and let us know what you think of it in the comments below.

Posted on

The new new carry trade in the age of derivatives

Investors have made money for decades by borrowing in one currency with a low interest rate and exchanging it into a higher interest rate currency.  Called the carry trade, it made a lot of people of lot of money.

A new paper out by Della Corte, Sarno and Tsiakas has found another way to profit off the carry trade.  These economists use the forward volatility in foreign exchange to derive a very profitable strategy.  According to their research, Spot and Forward Volatility in Foreign Exchange, investors can buy and sell what’s called a forward volatility agreement (FVA).

Simply put (kinda), thes FVAs attempt to predict future volatility in a certain currency.  More specifically, the FVA sets a forward implied volatility by making a guess about future spot implied volatility.  These guesses tend to be wildly off:

Forward volatility is a poor predictor of future spot implied volatility

So, if forward vol is a bad predictor of future vol, investors can design strategies to take advantages of this.

For example, buying (selling) FVAs when forward implied volatility is lower (higher) than current spot implied volatility will consistently generate excess returns over time.

Interesting idea — as for me, I’ll stick with momo stocks like $AAPL and $PCLN but this sounds like a promising strategy for forex traders.

Source

Della Corte, P, L Sarno, and I Tsiakas (2010), “Spot and Forward Volatility in Foreign Exchange”, Journal of Financial Economics, forthcoming. Centre for Economic Policy Research Discussion Paper 7893.

Posted on

When searching for stock gains, use Google (search data)

A wealth of information creates a poverty of attention

Smart investors avail themselves of all valuable resources as inputs into the investment research process.  I write about this faculty in my book Tradestream in the chapter “Co-lateral Research“.  What co-lateral research means is all the non-financial/non-traditional sources of information that can be used by investors to connect-the-dots.

I’ve written about Google Domestic Trends, search volume data Google has made public and overlayed on top of stock index charts.  GDT continues to be a good resource for investors.

And now, there’s more research to support using Google search data to auger where markets are headed.

In In Search of Attention, researchers found that Google’s Search Volume Index captures retail investors’ attention in stocks.

Among our sample of Russell 3000 stocks, stocks that experienced an increase in ASVI [me: abnormal search volume index reading] this week are associated with an outperformance of more than30 basis points (bps) on a characteristic-adjusted basis during the subsequent two weeks. This initial positive price pressure is almost completely reversed by the end of the year.

The paper also finds that increased search volume leading up to hot IPOs may be responsible for that big first-day pop! that such issues experience.

As the first paper that has really looked at search data from an investing standpoint, this should be piped and smoked.  In fact, the authors conclude the paper with a somewhat foretelling statement:

Search volume is an objective way to reveal and quantify the interests of investors and therefore should have many other potential applications in fi…nance. We leave those for future research.

Bring it on.

Source

In search for attention (Da, Engelberg, Gao), November, 2010

HT: Net//Worth

Posted on

New investment managers added to Wealthfront

Wealthfront announced the addition of 3 new investment advisors on their investment platform.

As per the firm:

Towle & Co. (Value Strategy | Min. Outside Wealthfront: $500,000)
Towle specializes in a long-term, deep-value investment strategy that seeks to uncover significant discrepancies between stock market prices and underlying company values. Through Towle, you can invest in well-run companies with strong market positions and low price-to-sales ratios: a way to buy operating leverage and economic activity on the cheap!
Barton Investment Management (Growth Strategy | Min. Outside Wealthfront: $1,000,000)
Barton believes the market fails to appreciate and correctly value the full potential of enterprises that create new markets. Its concentrated portfolio of carefully-selected younger growth company stocks allows investors to capitalize on these market inefficiencies while supporting innovation.
CWC Advisors (Small Cap Strategy | Min. Outside Wealthfront: $1,000,000)
CWC began providing investment services in 2000 to high net worth individuals, and within a few years, attracted the interest of institutional investors. Its strategy consists primarily of contrarian U.S. companies with recent price under performance, corporate liquidity and/or fundamental valuations at historically low levels. Now you can invest with CWC, too.
Posted on

More commodity data/analysis available

Worldcrops.com just launched.  Headed by former Financial Times commodities editor Gary Mead, there’s more here than just commodity data porn.  Worldcrops.com is an offshoot of the VM Group, a UK-based advisory group focused on research and analysis of precious and base metals, energy, agribusiness, and renewables.

The site provides two differing levels of subscription — one (free) that gives access to raw data, news while the premium version provides a layer of analysis on top.

You can see the press release here.

Posted on

Investing in the next mashup

Technology continues to run riot over a variety of industries.  Nowhere has that been felt as acutely as in the music industry.  Apple’s ($AAPL) iTunes may have changed the distribution model (selling over $1B in the last financial quarter alone), basically unbundling CDs and selling individual songs a la carte.

Music, it is a changin’

But the migration from analog to digital has been accompanied by a much more profound change — the revenue model of the music industry is undergoing a transformation.  Where the model was previously selling musical media (artists generally made lots of loot by selling records/tapes/CDs), the model is changing to charging for music experiences (see my recent piece on the business of Broadway and concerts).

Artists embracing this change have shifted their model to almost giving away music (or charging fans whatever they want to pay) in order to capture some funds at the next concert.

Fast Company has a very interesting rundown on Girl Talk, a biomedical-engineer-turned-DJ who makes music by mashing up others’ tunes.  Simply, he takes hundreds of samples of music and weaves them together, creating cool sounds but even more enjoyable live shows.  He’s putting butts in the seats because he’s providing great live value.

IPOs, Social Media and the Era of the Mashup

We’ve all read how Facebook, Twitter, and LinkedIn are gearing up to go public sometime soon.  While these services seem novel, in essence, they’re all just mashups of technologies and platforms that existed before Zuck entered his first frat party (not to sound snobby, but there aren’t frats at Harvard).

Startups and traditional companies are making lots of money just copying Groupon’s model of group discount buying.  Travelzoo , a decidedly Internet 1.0 company, has a Groupon-like clone that offers expiring travel deals to its email list of over 20m and that 4-month old business is rumored to be valued at $400M.  Abe’s Market, an Etsy-like green marketplace founded by my friend, Richard Demb, is experimenting with live selling online with its Abe’s Live, combining the breadth of vendor-driven supply and the entertainment value of a QVC.

The future of business is the mashup.  Those companies who can climb to the top of the value pyramid — by leveraging and riffing on the work done on by those along the way — will win and that’s where investors should be looking to place their bets, IPO or not.

More Resources

How Girl Talk Mashes Up the Music Biz (Fast Company)

Download Girl Talk music

Posted on

Financial voyeurism and the tradestream

Voyeurism drives a lot of our activities online.  Admit it — you’ve definitely googled or facebooked an old friend with no intention of reconnecting.  You just wanted to peer into their lifestream.

Venture Capitalist Michael Eisenberg told me once that many of today’s successful online businesses are winners because they incorporate some level of voyeurism.

If investing is about learning, we’re always interested in what others are doing, but sometimes it’s hard to figure out.  To see what a large asset manager is doing, we can check public portfolio filings.  Other times, we pick up what others are investing in over a game of pickup basketball.

Regardless of how we get this information, we place a value on it (sometimes, even a value greater than our own opinions). The collective tradestream (and dissemination tools like StockTwits and SeekingAlpha) allows us to drop in on the investing party our friends are having — at any time.  Not only can we get ringside seats into smart investors’ every activities, but we get their rationales for doing so.

It’s pure learning — both cognitive and the emotion set behind the trade.