As anyone who eagerly plunged into the likes of Facebook, Groupon or Zynga when they went public can attest, investing in hot social media businesses can be extremely hazardous to your financial health.
Groupon’s stock price has plummeted more than 80 per cent since the Internet coupon peddler came to market last November. Zynga, the social media game king, is down a mere 70 per cent from its initial public offering in December. And Facebook has lost almost half its value since its arrival on Nasdaq in May in one of the most ballyhooed and overpriced IPOs since the tech mania of the late 1990s.
In those days, a host of Internet-based companies, aided and abetted by compromised analysts and uninformed investors, soon showed that their main innovation was making record amounts of capital disappear in record time.
Today, though, investors have access to a potentially valuable research tool to keep themselves out of the social media quicksand – namely the social media themselves.
That’s the idea behind Alphamatician, which seeks to identify investment trends early by sifting through vast amounts of social media network chatter, tweets, blogs, regulatory filings, census data and other public sources of what the tech crowd calls “big data.” Which are definitely way beyond the capacity of your typical home or office software tools to capture, let alone process.
“In cases where we’ve back-tested data relative to a subsequent [market] move, it’s been fairly predictive of [future] behaviour,” says Floyd Greenwood, a former Wall Street analyst and data cruncher who launched the service about a year ago.
It’s aimed mainly at institutional investors, which happen to be the preferred targets of the IPO sellers (institutions accounted for more than 70 per cent of Facebook’s offering) and which need all the help they can get in brutal market conditions.
Mr. Greenwood says he has been thinking about doing something like this for at least a decade. “Every time it would come up, there would be something else I was working on that would take priority over it. I’m convinced there’s value in it that’s not being tapped right now.”
Academic research has confirmed his own findings that shifts in sentiment can show up in the social media world weeks or months in advance of market moves.
“Normal research is different in a bunch of ways,” Mr. Greenwood says. “Traditional sell-side research is basically some analyst’s opinions. It’s widely distributed and really reflects a person’s ability to get all the data and write a report.”
What Alphamatician does is aggregate huge amounts of information that an individual analyst could never manage to digest.
Monitoring a vast number of U.S. real estate-related sites, for example, showed that traffic was up 12 per cent year over year, while rental sites were drawing 4 per cent fewer eyeballs. Mr. Greenwood concluded that a turnaround was under way in the battered U.S. housing sector, well before the markets and statistics-gatherers caught up.
He tries to separate the wheat from the chaff cluttering the social media universe by avoiding certain web pages and forums, tracing links back to their origins and steering clear of discussions that are just spam or marketing or companies hustling their own stock. One red flag: users who have only set up shop in a particular forum in the past 24 hours.
At The Globe and Mail’s request, he monitored the social media universe to draw some inferences about the future of both the BlackBerry and iPhone.
As might be expected by anyone following RIM’s fortunes these days, “the news looks negative for BlackBerry,” says Mr. Greenwood, who once managed wireless data products for a large U.S. telecom provider before being lured to Wall Street during the telecom boom in the 1990s.
More surprising was his finding that although the iPhone attracts more positive comments, interest in Apple’s smart phones, including the soon-to-be launched fifth version, is beginning to wane.
“From what I can observe, Apple very effectively manages discussion about its products. Yet despite its enormous brand equity and very effective marketing engine, it [the social media buzz] is decreasing going into a major product launch. That’s a real surprise.”
His unscientific conclusion: The overvalued stock is headed for a major market correction. And it won’t take a product flop to trigger one. “It just has to not wow people.”
When it comes to general market conditions, his data-crunching won’t help lift the gloom. “One of my biggest surprises is how negative the market is. I see that very clearly in a lot of anecdotal ways, in the research I’m doing and the conversations I have and in the general discussions of stocks we monitor on social sites.”
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