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Wisdom of crowds does not apply to stock picking
I have, over the last few weeks, read a few different articles about “social stock picking” which aims to apply the “wisdom of crowds” to stock picking. This is neither new, nor a good idea.
The problem is that securities markets already apply the wisdom of crowds. That is how markets price: the price at demand balances, which depends on the collective wisdom of all investors. They also apply it in a much more effective way.
The best incentive that social stock picking websites offer is the satisfaction of a more prominent position in the community. The markets offer solid money: lots and lots of it for people who can get it right consistently.
The idea (which these web sites seem to think they invented) of following the recommendations of the most successful investors is not new either: plenty of people try to follow what the likes of Warren Buffet think. It is highly unlikely that anyone on these sites is going to be in that class.
This actually leads to an even worse problem. If these sites actually become influential, then the highly rated members, who have a great influence on what others do, will have a strong incentive to use their influence to manipulate the markets (it does not take all that much buying to move the price of a small cap).
I have a nasty feeling this is going to be successful: for the websites, not the investors. There will be a lovely feeling of community, there will be stock pickers with apparently brilliant records (with enough people involved, some will do well through pure chance), everything you need to make the marks feel nice and comfortable. I suspect that, as usual, people are going to have to learn the hard way that there is no easy recipe to generating winning picks.
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