The personal investing landscape has changed radically over recent years. A culture that was once defined by information scarcity, secrecy and hoarding has been dramatically altered by the increased data availability and openness brought by the Web and social media. As a result, we find ourselves in an age of information plenty and more and more investors are turning to social networks and platforms as critical channels for investment strategies and action. The challenge has become managing the signal to noise ratio to identify and take advantage of accurate and valuable information.
“Stockpicker007” might have some interesting things to say and may sound convincingly as though he’s had some success – but on the other hand, he might just be full of it. Investing with algorithms provides incredibly powerful tools for separating the wheat from the chaff. By testing trading strategies against historical market data, investors can evaluate strategies before putting any actual money at stake. You can evaluate how right “Stockpicker007” has been over the last six months, before you decide whether or not you want to adopt his models.
Beyond assessing the performance of individuals, algorithmic investment also helps take advantage of one of the most powerful aspects of social investment: that there is often wisdom in crowds. Looking at data in aggregate can reveal information and trends not possible to find through looking at individual opinions or strategies. Estimize is an example of this type of crowdsourcing at work – earnings estimates provided by multiple sources are often more accurate than individual data sets.
One way to validate aggregated social information is by comparing Twitter sentiment with stock performance. It’s interesting to see what Twitter has been saying about company X over the last two years, but how predictive has that chatter been of stock direction? By running different scenarios against market data one can begin to judge the value of Twitter insights and determine whether they hold water or not.
Being able to test ideas and validate information are two ways new tools are allowing investors to make the most of social investing opportunities. Investors are increasingly seeking capabilities that let them test theories, share ideas, refine strategies and ultimately put their concepts to the true test of the market. Integrating the social network with a development and trading platform – essentially integrating the idea creation, research and executional elements – merges the strengths of each system into one platform.
This is an incredibly exciting time to be an investor. The rise of social data, combined with testing and execution platforms like Quantopian, has created a powerful force for democratizing the finance industry and enabling more investors than ever to explore and share new ways to view, participate and profit from the market.
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