Crowdsourcing investing

Wednesday, 24th June 2009

A number of websites have attempted to crowdsource stock-picking. This shows a fundamental failure to understand the markets. Attempts to crowdsource investment research are not much better.

Market prices are already set by the crowd. Investors who think the market price is to high will buy (pushing the price up), while those who think the market price is to low will buy (pushing the price up).

The market offers obvious strong incentives to get it right. Those who get things right increase their influence on prices as they will control more money: private investors because they become wealthier, professional investors because a good track record will tend to increase the amount of assets they manage.

As for investment research, good research requires opinionated non-conformists. The requirement is to spot what the crowd has missed. This is exactly what crowdsourcing cannot deliver. The work itself does not easily lend itself to loose collaboration: analysing a company cannot be divided up into discrete tasks that can be carried out with little communication — a close knit team can work, but that approach cannot easily be crowdsourced.

The market provides very good incentives not to disclose your best ideas unless you have already acted on them yourself, in which case you have a substantial conflict of interests.

The invisible hand beats web hollow.

Comments

Monevator
Monday, 29th June 2009 11PM

Great post. You see this on Internet investment bulletin boards, too. Bullish posts saluted and the odd bearish one shot down. And then peopke wonder when the buyers run out.

Chuck Wolber
Wednesday, 29th July 2009 4:37AM

There is an obvious contradiction in what you are saying. No stock can go up unless the crowd believes it should go up. A lone wolf who sees something everyone else does not, does not make the stock go up on his own. His only advantage is that he got in on a good thing earlier than the rest of the crowd.

Warren Buffett makes genuinely good picks and then relies on the cascade of other investors to see his wisdom. If he made bad picks, the market would soon figure him out and stop following.

What I think people miss is that Warren Buffet did not get rich picking stocks, he got rich selling very good 20/20 hindsight.

..Ch:W..

Graeme
Wednesday, 29th July 2009 8:34AM

There is no contradiction. Warren Buffet does not crowd source!

He makes good picks, and the prices would go up eventually even if people did not follow him; when he draws attention to a good buy that just speeds up the process.

Large funds definitely do move the price when they buy.

The key point here is that you cannot usefully crowdsource something that is already decided by a crowd that is larger, better informed, and with better incentives than any plausible crowdsourcing mechanism.

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