Crowdsourcing vs. Piggybacking: An ongoing debate

Just returned from a mini-tour for Tradestreaming which ended with an editorial of mine appearing on CNNMoney.

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.

You can read the whole article on CNNMoney , Follow the smart money — and the crowd

Photo courtesy of futureshape

3 ways to crowdsource investment ideas now

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

  1. 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.
  2. Motley Fool CAPS: The subject of the paper above, CAPS has evolved into the Fool’s flagship product.  Check out the highest and lowest rated stocks in the CAPS community in the Top Ten Lists.
  3. 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.

Source:  “The CAPS Prediction System and Stock Market Returns” (Harvard Kennedy School)

Crowdsourcing stocks, Piqqem adds missing link for investors

2009 saw crowdsourcing — as a movement — making big strides in practice and PR in a variety of different fields.  For investors looking to purely crowdsource stock ideas, Piqqem has been on the forefront of helping investors tap the wisdom of the crowds.

Having users rate stocks on a variety of different factors — much like The Motley Fool’s CAPS program — Piqqem has been producing sentiment indicators for thousands of stocks over the past couple of years.

I’ve written about Piqqem rather favorably in the past.  Here is a short interview I had with them in late 2008 and here’s a recent BusinessWeek article about crowdsourcing in general in which I was quoted.

My stance had always been that while what Piqqem was doing was cool — literally, getting crowdsourced ratings on a slew of stocks — it was never clear that this was actionable information.  Meaning, can an investor make sense in a change in sentiment towards Apple (AAPL) leading into an earnings period?

Investors looking to utilize this information should be a lot happier after Piqqem’s launch yesterday its new Sentiment Trading Simulator.  In short, the trading simulator allows investors to create rules (buy when sentiment rises above 50, sell when it sinks below) and back test them on stock performance.  This is absolutely the missing link needed to help make crowdsourcing stocks more widely accepted.

With the simulator in hand, investors can attempt, via trial and error, to create certain strategies that work for them.  The tool was just launched and as such, is relatively crude.  I expect that the startup will continue to hone the tool.

Right now, the tool allows users to:

  • Create new strategies
    • by creating buy and sell rules pegged to Piqqem’s sentiment ratings
  • Rub a simulation of those rules
    • on single stocks or multiple stocks
    • over different time periods (bull/bear markets)

Users can see how their rules fared over specific time periods and tweak timing, rules, and stocks analyzed to optimize strategies.  When I say the tool is somewhat rudimentary, I mean that outside of hitting correctly via trial-and-error, I’d like to see the system help with identifying optimal strategies.  In fact, I’d bet people would be willing to spend something to access these rules.

I think this launch is a huge step in bringing crowdsourcing to the broad investor community.  I’m interested in hearing what you think.  Let me know in the comments below.