Stock Tip Website Beats Wall Street Analysts
NEW YORK (MainStreet) Your best stock advice may come from a chatty stock tip website rather than a knowledgeable, Wall Street analyst. That's the conclusion drawn from a recent study conducted by a four-member team of researchers from City University of Hong Kong, Purdue and the Georgia Institute of Technology.
The study extracted stock opinions from Seeking Alpha, a popular investment-related social media Website that publishes user-generated content. Over the course of their 2005 through 2012 sample period, 6,500 articles and 180,000 comments were written regarding more than 7,000 companies.
Contributors to the site earn $10 per 1,000 pageviews and articles selected by editors for feature positions earn $500 or more. The submissions are frequently reviewed by an editorial panel in an effort to maintain quality without interfering with the author's original opinion.
"Arguably, financial securities are complicated products and perhaps best analyzed by investment professionals," the study, authored by Hailiang Chen, Prabuddha De, Jeffrey Hu and Byoung-Hyoun Hwang says. "At the same time, it is plausible that large crowds -- in our case, close to 200,000 users -- sometimes possess pieces of insight that are not fully factored into the earnings forecasts of sell side analysts (who number fewer than 1,000)."
The researchers contend that social media outlets are unique in that they enable direct and immediate interaction among users. They believe those interactions, combined with the seeming intelligence of the "crowd", may be one of the primary reasons social media platforms are able to produce value-relevant content that is incremental to that revealed through traditional news channels.
That thesis was apparently proven.
"We find that the opinions revealed on this site strongly predict future stock returns and earnings surprises," they concluded. "The predictability holds even after controlling for the effect of traditional advice sources, such as financial analysts and newspaper articles. Together, our findings point to the usefulness of peer-based advice in financial markets."
--Written by Hal M. Bundrick for MainStreet