Social investing sites

Introduction

Social investing sites are community-based web sites where investors sign up and give their opinions about stocks they think are buys or sells. These opinions are aggregated and every stock is then ranked using the users' aggregate opinion as a sentiment indicator. Each investor who rates a stock as a buy or sell also has their overall return tracked, and users can also rank (and track) the best investors (or any investor that a particular user deems valuable).

Most of the social investing web sites are based on fake-money stock picks, but the more advanced sites are integrate real-money trades, either by connecting to the user's brokerage account, or because the broker itself offers social investing functionality (such as Zecco and TradeKing).

It should be noted that "social investing" sites, where investors aggregate their opinions about stocks, is a completely different area than "socially responsible investing" (also known as "SRI") where investors only invest money in ethical companies and avoid investing in companies which engage in socially irresponsible activities (alcohol, tobacco, gambling, etc).

History

Marketocracy, created in 2001, was one of the first web sites created with the express purpose of aggregating and tracking investors in order to find the best ones. A few years later, in 2006, Motley Fool created their Motley Fool CAPS community where Fool users could get together to share their views. Around this same time, the "web 2.0" business model which utilized user-generated content became very popular, partially due to venture capital flowing into the industry. This led to the creation of many new social investing companies, such as Cake Financial, Covestor, SocialPicks, StockPickr, Vestopia, and BullPoo.

Although most social investing sites concentrate on buy and sell signals for stocks, WikiInvest is one of the few social investing sites to concentrate on pure research where users post information about different companies and industries. Collective2 is also another unique social investing site because it focuses on mechanical trading systems. StockTwits, one of the most popular social investing sites, is one that has leveraged the Twitter business model to become successful.

The social investing sites that offered real money tracking of portfolios initially got a lukewarm response from the investing community because so many people were concerned with security issues. But things those worries seemed to have gone away.

After the stand-alone social investing sites started popping up, online brokers realized that they were missing out on the trend so they many of them integrated social investing functionality directly into the brokerage sites. A few of the more popular broker-based social investing sites are the TradeKing Trader Network, ZeccoShare, and MyTrade, which is part of TD Ameritrade/ThinkOrSwim. Scottrade and E*Trade also have less-popular communities.

As competition in the sector grew, there was inevitable consolidation. StockPickr, started by James Altucher, was bought out by thestreet.com. Some of the weaker sites closed. Cake Financial was bought out by E*Trade and was promptly shut down. Vestopia seems to have disappeared for some reason unknown to me.

My Opinion

Social investing web sites are one of the most useless resources available to investors, for many reasons. A few of the reasons have to do with major design flaws of these sites, while others have to do with execution:

First, the purpose of social investing sites is so that there is an arena where investors can aggregate their individual opinions in order to create a collective consensus, which can then be used to gain an advantage. But we already have an arena where a collective consensus is calculated - the stock market itself. These sites' key success factor is scale, but paradoxically scale is also the factor that will make these sites useless because if the sample size of users gets large enough then the sites will BE the market.

Second, social investing sites reinforce the instinct of amateur investors to look to other investors for answers. Successful investors aren't successful because they follow other people's ideas and strategies. These social investing "communities" reinforce dependence on others and tend to be nothing more than security blankets for most users. Ironically, the desire to gain a better return by mimicking other investors' actually leads to the exact opposite outcome. I've seen some writers (mostly financial planners) state that "investing isn't a contest." Well, it actually is a contest if you are choosing individual stocks, whether you want to admit it or not. A positive alpha for one investor must come as a result of a negative alpha from another investors, and making investment decisions that are in line with the majority of other investors leads to definitively average returns. Users of social investing sites harbor the naive opinion that all investors can sit around holding hands, singing Kumbaya, and make higher-than-average returns.

Third, fake money trades don't mean much at all. Being first on a list of paper traders only counts for so much.

Fourth, the research derived from these sites is very low-quality because very few of the users explain their rationale for buying a stock. This means users don't actually learn anything, which is what is most important.

Fifth, the research quality is low also because of the sheer volume of information on these sites. Whenever I search through one of these sites I just see a blizzard of stock symbols, dates, and ratings without any meaning. Social investing web sites have one of the lowest signal-to-noise ratios of all investing resources.

Sixth, the investors who are most likely to post their investing opinions on social investing web sites are also the most likely to be bad investors. Most readers may think that the reason for this is that successful investors are not interested in giving up their edge. I think a better reason is that successful investors simply are busy actually doing first-hand original research and have better things to do. The users of social investing sites generally value talking more than researching. To a large extent, social investing web sites are just a more sophisticated version of the stock bulletin boards of the 1990s like Silicon Investor and Yahoo Finance boards.

Being a webmaster myself, I know that the majority of these social investing sites were created by entrepreneurial webmasters who simply wanted to cash in on the popularity of the new "Web 2.0" business models that use user-generated content. I know this because I had an idea myself for a social investing web site before any of the others came out. I didn't end up creating it because (among other reasons) I didn't think it would actually help investors.

The Future

The whole genre of social investing sites is very young, and most social investing sites still don't seem like they know exactly what they want to be and do. Some of them seem like they want to focus on research while, at the same time, want to segue into managing money (since that is where the profits are). They also seem like they have been focused on just building their brands and userbase while not focusing so much on their strategic purpose. It's possible that these sites may morph into helpful resources in the future after they become more focused, but for now I recommend people don't waste their time.

Many of the social investing which have grown and become very respected (such as Marketocracy) have expressed plans to manage real money portfolios based on the theoretical premise that the highest-rated users of the communities will outperform the market averages. As the years go by, I think it will be interesting to see if these theories are validated.

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Social investing sites

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My Opinion

The Future

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