Social Media in Making Stock Investment Decisions
If you’re an entrepreneur and a stock investor like me, you’re probably investing all of your time and intellectual capital to your startup. So you might not have all of the time you wished to process all of the information regarding the stock investments you may want to make.
With the deluge of information in the social media blogosphere out there about stocks, it’s easy to get overwhelmed. Here are 5 tips to follow when considering using social media and the blogosphere as a source of information when considering buying or selling a stock or other financial instrument.
1. Since there is so much information out there, it is impossible for an individual to digest and comprehend it all in any meaningful way within a reasonable amount of time. So try to focus on sources that have a lot of rich content and that have been largely accepted by the community as viable ones to capture a lot of information and deliver it to you easily. It’s more convenient than scouring around for hundreds of individual sources. Essentially, pick a few rich and credible sources of information.
2. Once you have picked these sources of information, try to find tools that can aggregate that information in an easily understandable way.
3. Don’t always trust everything you read. Again, because the barrier to entry for posting information is non-existent, you need a way to check the credibility of the person who posted a message, wrote a blog, or a contributed article. There are many ways to do this and it does require homework on your part, but keep the following points in mind:
- The popularity of the individual doesn’t always mean that they provide accurate opinions or have a solid performance track record.
- Look for conversations between other trusted individuals you have identified and see if the person you are researching is connected to them or is mentioned by them. The financial community is a tight-knit one, and word of mouth can be very powerful sources for establishing credibility.
- Look for quantitative metrics of past performance. While past performance is no indicator of future performance, it is a metric that can be used to get a better sense of how accurate a person’s opinions were in the past.
- Finally, the hard part — but can prove to be very beneficial in finding the “mavens” in the crowd, do research on the web about individuals you are considering listening to. Have they written previous articles? How have their predictions fared? Do they have a long publishing history? What is their background? There are many more things to look out for, but this list can definitely this is something that can be very helpful in identifying credibility.
4. After narrowing down the list of people who interest you, make sure that there is a critical mass of the folks that you are following. The phrase, “wisdom of the crowds,” doesn’t always pan out to be right (e.g. the majority of the crowd got it “wrong” last week when they expected the Feds to begin their tapering of their QE program); it is important to make sure that there are enough diverse opinions from people that you are following and listening to so that you can reduce the potential noise in the conversation. There is no hard or fast rule for what that number should be; nor does it mean that the crowd is always right, but it is something worth considering, so that you can feel that you have a large enough community of folks with diverse opinions that are representative of what’s going on in the market.
5. Probably most importantly, don’t rely solely on information in social media channels for making investment decisions. While sentiments in social media can be a relevant source of information that, at times, might not be found in other traditional media channels, it should only be used as a supplement to your other research tools and for determining which stocks to buy or sell.
Remember, with the democratization of information, everyone can be a reporter and have an opinion published. Even as the noise level grows, there are certainly many credible, reliable sources of information to be discovered — just remember to “trust but verify.”