CNN’s editors thought the tension between investing alongside guru investors (what I call, piggybacking) and following the crowd (which devalues individual expertise) was worth exploring (in 800 words or less). It was a great topic and one that I didn’t give enough verbiage to in the book.
Part of this was laziness, part of it was in effort to keep the text short, and part of it was that crowdsourcing investment ideas is still really in its infancy. While we can essentially clone hedge fund portfolios (with great tools like AlphaClone or great resources like MarketFolly), crowdsourcing tools are still finding their footing (I like Piqqem).
Here’s the crux of the matter:
So while it’s premature to say whether crowdsourcing can act as a standalone strategy, it may make sense for investors to tap the wisdom of the masses in addition to the other strategies they use to generate investment ideas.
The Internet and social media are truly changing the way we acquire information, research investments, and manage our portfolios. The playing field is more level than it’s ever been, and that’s a good thing. Happy tradestreaming.
Crowdsourcing, the collective wisdom of the crowds, has been show to have strong correlation to future results specifically in sporting events and election polling. Here’s how Tradestreaming addresses crowdsourcing.
Given the fact that academia stuck to its guns for SO long with the Efficient Market Hypothesis (that all information is embedded currently into a stock prices, making it really hard to ‘beat’ the markets), we’re just seeing relatively new research that is open to crowdsourcing investment ideas and some that finds that there is MAJOR outperformance.
For example, check out the Harvard Kennedy School’s “The CAPS Prediction System and Stock Market Returns” paper that studied results of the Motley Fool’s crowdsourcing CAPS platform. Specifically, the paper looked at the difference in returns between the most highly rated stocks and the lowest rated stocks. The paper found huge double-digit outperformance (18%).
3 ways to crowdsource investment ideas now
Piqqem: This site allows users to rate stocks on a 5 factor scale. More importantly, Piqqem has a portfolio tool that enables users to create and backtest strategies based on the changes in investor sentiment for individual stocks. Check it out.
Intrade: The mother of all prediction markets, Intrade does huge business in sports betting but also has contracts on financial outcomes. Intrade wagerers buy and sell probability contracts on Dow Jones and S&P predictions.