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.
- 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?
- 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.
- 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.
- 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.
- 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.
- 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.
- 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)
- 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.