Wouldn’t it be great if you could pick up a copy of tomorrow’s newspaper today? Now that would be something, wouldn’t it? It would mean that you could know, a day in advance, all of the next day’s stock market’s closing share prices. Armed with the information you could, if you wanted, bet the farm on the winners, avoid the losers like the plague and know that you just couldn’t lose. Back to the future That might sound like the kind of thing you would expect to see in a science-fiction movie starring Michael J Fox. But academics reckon…
It would mean that you could know, a day in advance, all of the next day’s stock market’s closing share prices. Armed with the information you could, if you wanted, bet the farm on the winners, avoid the losers like the plague and know that you just couldn’t lose.
Back to the future
That might sound like the kind of thing you would expect to see in a science-fiction movie starring Michael J Fox. But academics reckon they may have turned science fiction into science fact. They believe that by judiciously mining online data – by searching specific financial terms on Google – they can predict investors’ behaviour.
Their theory is that people do more searches on terms such as “portfolio” and “stocks” when they are worried. Consequently, the stock market is likely to fall when investors get jittery and start looking up those key words. Conversely, they believe that when there are fewer searches for those terms on the internet, it suggests that investors are more confident. So the stock market tends to rise.
They have back-tested the data some nine years and think that they may be onto something big. They claim that a short-term trading strategy based on their findings would have delivered a return of 326% between 2004 and 2011.
A Tweet way to invest
Hindsight is indeed a wonderful thing. But if truth be known, there is nothing new about attempting to use social media to predict market behaviour.
Two years’ ago I interviewed a hedge-fund manager who believed that he could use Twitter to detect mood changes in the wider public that could in turn be used to second-guess how investors might behave. Apparently knowing whether the public was happy or sad, calm or anxious, hostile or friendly could help predict stock market movements.
Many of us are aware that emotions can play a part in the way that the stock market behaves. I am sure most of us are familiar with those sage words from Warren Buffett about how fear and greed can drive share prices one way or another in the short term.
However, the only thing that matters over the long term is whether the companies we have invested in are performing well or badly. If those companies continue to churn out profits year after year, then it would be hard for the market to ignore the performance even if investors are feeling miserable, jittery, anxious or hostile.
From the sublime to the ridiculous
Trying to second-guess the mood of the market can, if anything, even become counter-productive.
Consider the absurd situation if we started to second-guess the possible outcome of the second-guesses? Consequently, if we think that there might be an increase in the number of people who may search for certain terms then it’s quite likely that short-term traders may sell ahead of the event.
So the cause for the market fall would be precipitated not by an increase in the number of people searching for certain key terms but instead by people believing that there might be an increase in the number looking for those terms.
I believe that investing is hard enough without complicating matters with an extra layer of mind-games.
Our objectives in investing should be clear – to look for shares worth a dollar that are selling for 50 cents. What’s more, if social-media scrapers want to drive the shares down to 40 cents, then that’s perfectly alright too. In fact it should make us 20% happier because we can then buy those $1 shares for 40 cents.
This article first appeared in Take Stock – Singapore.
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