Social Networks for Stock Picking? - Give me a Break

Today TechCrunch had a piece on a company called socialPicks, whose tagline is "Putting a Face Behind Every Investment Idea," and which labels itself as "...a community for stock market investors." TechCrunch provides more details on the socialPick's raison d'etre:

Users enter their stock trading activities and thoughts then befriend and rate other users. Reputations are built according to a user’s percentage of winning picks, quality of insights as judged by the community and number of trades made. With commenting, feeds and a list of popular stocks that looks like a tag cloud (just charming really) this site has got most of the requisite features of a standard social network. SocialPicks believes that an emphasis on individual reputation instead of aggregate information will prevent much of the gaming that critics of social stock sites often critique.

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The company is also of the belief that many people want an easy way to share their knowledge with a small group of their friends in a structured way. They are aiming for a del.icio.us model more than a digg model, they say. That’s the main part of their approach that prevents pump and dump activity, they plan to institute activity monitoring that will notify users of suspicious behavior as well.

Needless to say, there are variety of other sites trafficking in this space (with confidence-inducing names such as Feeling Bullish, Bullpoo, Gradr, Stocktickr and Digstock). I don't know if I've been living under a rock or something, but this whole social-networking-for-stocks phenomenon has completely passed me by. And for good reason. It's both stupid and potentially dangerous.

It is particularly interesting to read some of the comments to the TechCrunch article. The diversity of comments pretty much represents that of the investing public - most comments have no appreciation for history or empirical research, a few are so far off the reservation (citing "wisdom of crowds" as the reason why such sites make sense) as to hardly warrant comment while a few actually raise the fundamental issues of indexing, risk management and diversification. The feel one gets from looking at these sites is that investing is somehow supposed to be FUN. For those of you who have lived in the markets for a long time, we all know this to be the kiss of death.

Investing life should not about being the next Jim Cramer - or if it is, may the force be with you. Investing in equities for long term profits is HARD, and unless you are professional (and, I might add, one of the few rare professionals whose record is empirically proven to be due to something other than pure chance), then it is best to get out of the way and to focus on the one thing that really matters to building and preserving personal wealth - asset allocation.

I could cobble together an entire research paper on this topic in an afternoon if I had the time, but the core principles off the top of my head are as follows:

1. "Wisdom of crowds" is the right concept in the markets, including the equity markets, and it already exists - it's called a stock price. Whatever makes you think you know better regardless of what some of your pals think is completely beyond me.

2. Asset allocation accounts for 90% of investment return across a diversified portfolio, e.g., picking the components making up the each of the building blocks accounts for only 10% of the portfolio return. Read: it's all about asset allocation, stupid.

3. Investing is not a game and shouldn't be viewed as a source of entertainment. If it is then call it what it really is - gambling. That's ok - use your brain and focus 95% of your efforts on 95% of your portfolio (meaning choosing asset allocation and using indexes to achieve your portfolio objectives) and mess around with 5%. Just know what you are doing and label each of your activities for what they are - investing and gambling.

4. Unless you have a staggeringly large data set it is almost impossible to attribute a stock-picker's success to skill and not luck. I wrote an entire post on this concept several weeks ago, and I encourage you to take a quick peek. Someone's posted results on a social networking site (even if verified as true and as having happened by members of the site) may or may not be indicative of that person's skill. The issue isn't necessarily the veracity of the claims (which is the big argument made by these stock social networking sites), but whether the claims are statistically meaningful and indicative of skill. If this is a game you want to play, good luck.

I spent over 17 years on Wall Street in M&A, Derivatives and Trading, and I personally don't feel comfortable trading single stocks. Because I'm stupid and don't understand the markets, valuation, and "the Game?" No. Because I am humble and aware of the barriers to success. If you want to play games and have fun on these sites, go ahead. But if you want to be an investor and increase your chances of building and protecting wealth, it is decidedly not fun and it's serious business. No fooling.

Comments

[stocksmantra]

There is one more attempt of capitalizing on social networking boom and leveraging it to get maximum profit out of stock market! Stocksmantra.com (http://www.stocksmantra.com) is a Collaborative stock picking platform aiming to create social network of rich investors. Investors/Traders can provide their views about market and recommend stock which they feel would give profit in near future. Every recommendation or tip given by community members helps to generate statistics that can provide decisions pointers on stock buy or sell! Stock Picks 2.0!

[Jason]

Perhaps you could write an article about stock social networks, and bash our site as well! EquityGroups.com

[john]

Your links all have an extra http:// in them :-)

Great article!

[Greg Battle]

Every social networking site devolves into the same phenomenon whenever you have that many people competing for finite acclaim; using social proof (number of friends, stock picking ability, picture ratings, blah) as a proxy for replication value. Yes, the best stock pickers on these Web 2.0 sites will be getting the most attention from the opposite sex in the hopes of having little Warren Buffets together. Don't agree, just look at the real average age of the social networking generation. Pump-n-dump indeed.

Anyone still believing that MySpace is an indie music site and a true "place for friends" needs to gently pull their head out of the sand.

[Roger]

Jason, I appreciate the sentiment and the mission, as long as you can remain pure to that mission and not get caught up in the go-go crap of Cramer and some of your "peer" sites. I think having a trusted platform for collaboration and learning is great, as long as the root principles still hold - this activity should be for edification and not viewed as a substitute for spending the bulk of one's efforts building a solid financial plan via asset allocation. I'm not a financial planner, only one who knows enough about the markets to know what is a fool's game and what represents worthwhile efforts spent.

[Jason Fang (Socialpicks)]

Yaser--

You raise an interesting point. Sometimes it does indeed make much more sense to outsource than to try and rally others to help you with a task. But this is a matter of personal preference, and others may appreciate the additional level of control and learning that they get from remaining active. People have different motivations for being active investors; we're looking to gather the people with legitimate ones and help to filter out the ones who don't (like the pump n' dumpers).

Our core mission isn't to become a hot stock site; it's to build a place where investors can benefit from one another's experience and specialty knowledge.

[Yaser Anwar]

The boards http://clearstation.etrade.com/ Y! Finance's http://finance.groups.yahoo.com/group/hottestchannelingstocks/#anscommunity & www.stockhouse.com's bullboards are one of the biggest "pump-&-dump" boards on the WWW.

Freedom of speech is great, but if investors have to rely on these message boards, then they'd rather just send a check to Redcross, instead of blowing their money in the markets. Atleast, Redcross would be less painfull & good on the conscience.

Jason Fang of Social Picks says, "investing can feel like hard work sometime, and one way of making work less tedious is to have friends to talk to as you go through it together."

Work with friends? If something is not in my circle of competence i'd much rather buy the market index ETFs or give my money to be professionally managed by a mutual fund.

Kudos to the spammers of dollar & penny stocks. Now they have a legitimate medium to parlay their schemes & fool newbie investors.

These sites should come with a universal tag line: READER BEWARE! INFO ON THIS SITE IS STRICTLY HAZARDOUS TO YOUR FINANCIAL WELL-BEING.

[Roger]

Greg, you're hysterical! It's clear from my writing and your posts which of us is the upstairs exec and which is the trader. As they say, "Those who can't do, teach," and suffice it to say that I'm the teacher! Thanks for the comment - very insightful and so true (at least for someone like you).

[Greg Battle]

The more noise introduced into the markets, the better. I pray that these sites become popular, promising even more mispricing in the market. I don't combat people's idiocy, I merely profit from it quietly. "Fooled by Web 2.0!" C'mon Roger, loosen up, this IS fun, not painful.

[Robert Passarella]

The potential for these sites to become online versions of "bolier room" operations is just too great. Anyone else remember the hype of stock chat boards in the 90's and iomega -- next thing I know we had irrational expectations, a bubble and a burst. Also this violates Rule #1 of Stock picking, If I have a great system and I am making abnormal returns why would I tell anyone? I would document my trades and returns, and look to run other people's money. Finding profitable strategies is hard work.

[Roger]

Howard, thanks for sharing my pain. Jeezus...

[howard Lindzon]

I read it and commented the same. It was such a bad piece of work tat i couldnt be bothered reviewing it.

He just barfed that one out :)

[Marshall Kirkpatrick]

Thanks for your thoughts on this. Much appreciated.