Can Investors Trust Wall Street's New Ticker Tape?
WHY YOU SHOULD CARE
Because, for better or worse, Twitter gives everyone a megaphone to share investment tips.
By Simon Constable
Simonomics: A regular look at the global economy from a former staff columnist at The Wall Street Journal.
It wasn’t long ago that IBM Watson emerged as a new kind of Jeopardy! champ in a battle of knowledge against two human quiz whizzes and proved what had long eluded scientists — that computers really could emulate human intelligence. Now one of the brains behind that same technology is playing a part in trying to shape a more democratic Wall Street.
Meet Social Alpha, a New York City-based startup created a couple of years ago by Prem Melville, who not only holds a Ph.D. in artificial intelligence but is also a veteran of the IBM Watson Research Center. Social Alpha’s programs are designed to scour Twitter in an effort to pinpoint hot investing tips — in real time — “to increase profitable trades and reduce investment risk.” How, exactly? Well, it attempts to pinpoint what analysts and investors are saying about stocks in your portfolio or how people feel about certain new investment opportunities, among other things that get discussed in tweets.
Researchers found the aggregate opinion from individual tweets successfully predicts a company’s forthcoming quarterly earnings.
By now, of course, Twitter is being used by investors both small and big, including business magnate George Soros and activist shareholder Carl Icahn. But with half a billion tweets sent per day from the microblogging service, there’s a lot of junk to sift through. For its part, Social Alpha’s speedy computers filter the noise by ranking sources “based on their ability to move the market,” says Melville. Theoretically, at least, a smart enough person could be in Granny’s basement tweeting moneymaking ideas in his underwear.
Indeed, people — and not just Wall Street’s trading machines — have changed the way they get data. Hedgeye CEO Keith McCullough sees Twitter as the new ticker tape, faster and more accurate than some mainstream news outlets and replacing the wire service he used to rely on. “Now I exclusively watch my Twitter stream,” he says. And, he argues, that’s fine, because the social media site encompasses all the traditional information he used to get, plus new sources that are added over time. “I’m not in the business of ignoring people who are accurate,” says McCullough.
But do these kinds of strategies actually lead to better-performing portfolios? Social Alpha, which hasn’t actually tested its model by buying or selling stocks in the market, says simulations using historical data shows an overall return of 152 percent between November 2012 and March 2014, the latest figures the company would share. That compares with a 34 percent jump in the Standard & Poor’s 500 index during the same time. Meanwhile, researchers at New York University, Arizona State University and the University of Toronto have found that the aggregate opinion from individual tweets successfully predicts a company’s forthcoming quarterly earnings and certain stock price reactions, according to a working paper they released in July.
In many ways, though, Twitter gives everyone a megaphone — and getting a handle on the consensus on Twitter can be a problem for investors, says Barry Ritholtz, chief investment officer of Ritholtz Wealth Management. “There is just an overwhelming amount of information,” he notes. Indeed, most of the digital chatter makes little difference to long-term investors like Ritholtz’s clients, who are looking up to 40 years into the future. For them, staying put and ignoring all the noise might prove to be a better strategy in the long run.