Can a sentiment survey of a bunch of individual investors actually predict stock price performance? Crowd Technologies—a neophyte online investing community whose Web site Piqqem enables people to vote on the direction they believe individual stocks will follow—has begun to collect data that shows a correlation between changes in sentiment over short periods of time and the propensity for earnings to outperform or underperform market forecasts.
Piqqem is based on the concept of the wisdom of crowds, the belief that a sufficiently big and diverse group of people will over time be more accurate in their estimates and predictions than even the most talented individuals. Jett Winter, Piqqem's chief executive, has a background in software and has headed multiple startups in Silicon Valley over the past 25 years. He also runs an investment bank, Winter Advisors, and is interested in the trading opportunities that will come out of crowdsourcing stock sentiment.
During the second quarter, Winter chose eight stocks that had reached a critical mass of activity and tracked changes in sentiment in each over the course of the quarter until the day before each company's earnings release. Feelings about all but McDonald's (MCD) predicted same-direction earnings surprises. But what he found most interesting were two stocks—Amazon (AMZN) and Microsoft (MSFT)—whose sentiment scores dropped as the earnings dates neared, even as the market continued to push their prices higher in anticipation of better-than-expected results. Both companies missed analysts' forecasts, and their stock prices fell after reporting earnings, showing that the crowd's intuition had been more accurate than the market's.
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Winter plans to expand from 8 to 20 or 25 stocks for his third-quarter analysis. After another quarter's worth of data, he expects to be able to start simulating trades. "We would buy a stock early on and sell it later [after the stock had appreciated with sentiment], or short it, and see how crowd sentiment is becoming a trading tool."
On Piqqem, users can vote by stock direction or can get more specific by choosing a price they believe a stock will reach by a given option-expiration date. The latter data gets factored into the site's sentiment readings—which are chosen as single or double up, neutral, or single or double down—and measure how strongly a user feels about a stock. Besides user votes, Piqqem pulls in Wall Street analysts' ratings from the Yahoo Finance web site as they are adjusted.
In his book The Wisdom of Crowds, James Surowiecki identifies four conditions that characterize wise crowds: diversity of opinion, independence (individuals aren't being influenced by others' opinions), decentralization (users share specialized and local knowledge), and aggregation (a mechanism for turning individual judgments into a collective decision). The errors each person makes in arriving at an answer will cancel one another out, leaving only the information component of each person's guess, Surowiecki writes in the book's opening chapter.
Because independence is a priority, Piqqem users aren't privy to how other people voted or the identities of the most popular stocks until after they have voted. Once participants have voted, however, they can revote as many times as they like, with only their most recent opinion counted in a stock's sentiment score.
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"The reason we allow revoting is because a vote has a life," Winter explains. "We believe people gain additional knowledge and insight and can [change their mind]." Each vote stays active for 90 days, and voters are alerted via e-mail when their vote is about to expire so they can renew it.
Piqqem's active voters tend to be concentrated on the East and West Coasts, especially in the San Francisco Bay and New York areas. The top professions among users are engineering and finance, while the dominant age range is 18 to 29. Winter plans to roll out a revenue model based either on subscriptions, advertising, and/or syndication to brokerages and financial-content sites within the next three to four months.
Winter is eager to make the data as statistically relevant as possible, which he defines as a critical mass of at least 50 votes per stock over time. To make it faster and easier, Piqqem offers lists of similar stocks whenever you vote on a specific stock. The aim is to keep people coming back and staying engaged.
With about 2,000 active voters, Piqqem has to grow considerably to catch up with PredictWallStreet—which pulls in tens of thousands of predictions every day through partnerships with TD Ameritrade (AMTD), the Broadridge Investor Network, and Zecco—and Motley Fool CAPS, which currently has 150,000 people rating stocks, including about 180 financial institutions.