Crowd Sourcing Versus Playing The Crowd

Last week, I was tough on CrowdInvest Wisdom ETF (WIZE) which invests in stocks based on Apple fan-boys who somehow are able to stumble onto sponsor’s iOS app (no Droid, no Windows – an interesting approach to sampling) and who are sufficiently non-apathetic to vote bull or bear. I’m not feeling at all guilty for having bashed the idea. Actually, I’m doubling down. But I can’t help but keep thinking there has to be a more sensible way to detect and invest based on what the crowd really is saying.

I Know, I Know, The Rabble and All That

I made it clear last week that I’m fully aware of the dangers of following an ignorant Wall Street mob and in fact, have dedicated much of my career to finding stocks the crowd isn’t seeing, or is seeing but ignoring. But the day I stop learning is the day I stop living, so I’m always on alert for indications that what I once believed may no longer be quite as iron clad as once seemed to be the case.

The world of the stock market is a world of supply and demand, so even if the reasons for surging demand are dumb, we don’t necessarily help ourselves by being blind to them. And the fact that you’re reading these on-line words, and might even share them via Twitter (hint, hint), are just a couple of ways information is revolutionizing the investment process to the point, perhaps, where one might dare suggest that Mr. Market could be innocent until proven guilty. (I love you Warren B but come on, we really do have to wonder if Ben Graham would have at least adapted edited his iconic tale of the archetypical manic-depressive investment idiot known to us as Mr. Market had he been ware of what the information age has become.)

That said, I part company with the folks at WIZE because I refuse to naively accept that anybody should ever buy any stock because some unknown (possibly wise, possibly stupid, possibly expert, possibly clueless, possibly honest, possibly crooked, possibly diligent, possibly frivolous) folks vote. My intent, however, is to not merely whine. I want to try to more effectively identify some crowd shortcomings of the naïve voting approach and see what we can do about moving toward solutions.

Reimagining Crowd Sourcing

Let’s start with the frivolity problem. We don’t know if any votes on the CrowdInvest app are for real. I know the three I cast were bogus; the first two involving unfamiliar tickers as I indulged my desire to learn the app, and the third, an erroneous short vote on Apple because my finger went to the wrong spot and I couldn’t figure out how to remove the bad vote). What about the other voters?

After I published last week, CrowdInvest founder Martin Mikus and CEO Annie Wyatt (who may or may not have seen my post) told another Forbes contributor Ky Trang Ho their objections to market cap weighted indexes and active mangers. That’s all well and good. I’m with them on that. (Although about that active manager thing: What if the sub-microscopic number of voters whose votes generated the actual WIZE portfolio consisted entirely or largely of tech savvy curious active equity managers? In that, case, the WIZE portfolio would be attributable to the very same kinds of people you told Ky Trang Ho investors should steer clear of.)