Social networking sites such as Facebook, Twitter and LinkedIn are used by hundreds of millions of people everyday and have revolutionised communication. Now, networking techniques are being employed by a growing number of websites that claim to be able to help you become a better investor.
Each does things slightly differently but the common denominator is that they bring investors together to share investment tips. Some call it “community investing”, others “financial Facebook”. There is a competitive element as the most successful investors are made favourites and attract followers who can see what they are up to and can buy and sell along with them. There are cash rewards for the best.
Javier Paz, a senior analyst at the consultant Aite Group, says: “The wisdom of crowds [the idea that many people are smarter than the few] is an ever present trend and this is one more manifestation.”
For fans, these websites are democratising investment, taking it back from highly paid fund managers who were recently criticised by the Institute of Directors for “an alarming lack of transparency that surrounds pay and practices”. They enable you to fulfil the goal of being a DIY investor, managing your own portfolio of shares, but with the help of fellow traders who have a better eye for screening stocks than you.
For critics, though, this is a case of the blind leading the blind, with people being encouraged to follow “star traders” on the basis of a run of good luck rather than skill. Consequently, the potential for disappointment is high.
How do they work?
These sites are a development of what many investors have been doing for years. The stock tip passed on with a nod and a wink to friends at the pub is the stuff of legend — mainly because the advice often proved misguided. Chat rooms that people use to share investment tips and opinions anonymously are as old as the internet, but they also have a flaw. It is difficult to separate the trustworthy from the ranters and pumpers and dumpers, who talk share prices up or down for their own gain.
Networking websites try to eliminate these problems by tracking the performance of participants’ tips and identifying the users who have generated the best returns. Other users are then encouraged to copy the trades of the most successful investors.
With Marketocracy, which was launched in 2000 in the midst of the dotcom crash, you set up an imaginary portfolio and you compete against others for the chance to run a real fund.
Ken Kam, the founder and chief executive of Marketocracy, says: “Users have to run a model portfolio for at least five years. Beating the S&P 500 for five years gets my attention. Beating the top mutual fund manager for five years gets you an interview. In the interview, you have to convince me that your performance was skill, not luck. In this regard, your track record means a lot more to me than where you went to school.”
There are 20 “Marketocracy Masters” running portfolios other investors can buy, out of 10,000 active members.
Rivals to Marketocracy include StockTwits, Covestor and Collective2, all of which are aimed at and primarily used by Americans, and consequently focus on US stocks.
One social investment networking site whose biggest market is the UK is eToro. Like many of these sites it allows you to trade in currencies and commodities as well as shares.
Yoni Assia, the chief executive and founder of eToro, says: “Users can see and copy investors from all over the world and can communicate with everyone on the platform.”
You can start with a practice account in which you get to speculate with $10,000 of virtual money. When you feel confident enough to trade, the minimum deposit is $50. If you attract copiers who want to mirror your investment strategy you are rewarded. Rewards include a 100 per cent rebate on all trading fees for the most popular traders. Click on “Copy” and choose your investment amount and your account will start copying their trades automatically.
The pros and cons
The best investors on these sites have track records that not only beat the markets but also trounce professional fund managers. They are also transparent about how they invest in a way that many fund managers are not, and each investor’s performance record is visible to the whole community.
However, there is always the danger that you are tying up your money with traders who have had a hot streak.
The Marketocracy Masters 100 Fund, which mirrors the model portfolios of the 100 top-ranked Marketocracy members, has not performed well. Over five years it is up only 18 per cent, according to Datastream, compared with an 81 per cent return from the S&P 500.
Cost is another concern. Most of the sites charge per transaction — eToro charges 0.1 per cent for stocks but more for currency and commodity trading— so if you’re following an investor who trades frequently the costs can add up. As they are priced in dollars there is also exchange rate risk to take into account.
That said, as some of the sites allow you to set up a “dummy” account and trade with virtual money they are a fun way to try out your investing skills without risking your savings. Mr Paz suspects many users don’t get much further than this — at eToro only about one in five users sets up a funded account.
Mimic the Experts
If you are not quite ready to throw in your lot with the crowd you can mimic the investing behaviour of acknowledged investment experts on websites such as meetinvest and Stockopedia. The latter’s “ExpertScreens” identifies the UK stocks that famous investors, such as Warren Buffett and Jim Slater, might include in their portfolio.
The Slater Zulu Principle Screen throws up stocks such as Solid State, which manufactures specialist electronic components, Telford Homes and Telit Communications while the Buffettology-esque Historical Growth Screen points to stocks such as Avon Rubber, the engineering company, Shire, the pharmaceutical business and Magnit PAO, which operates convenience stores and hypermarkets in the Russian Federation.
meetinvest also screens stocks to enable you to replicate the strategies of investing greats. Its founders, Swiss-based Maria and Michel Jacquemai, are so convinced of the effectiveness of the approach that they recently invested £1 million of their own savings in four of the portfolios focused on the most undervalued stocks in continental Europe and the US. Last month it introduced the UK-only All-Expert portfolio.
Mrs Jacquemai says: “This is a selection of the most undervalued stocks, screened from 68,000 worldwide, chosen using the published stock filters of investors such as John Templeton and Warren Buffett.
“From those that passed the filters, 99 were in the UK, and from these we selected a portfolio to ensure a diverse spread of investments to minimise risk but maximise returns.”
Current holdings include Rolls-Royce, ABF, Inchcape and Hiscox.