It only make sense for Motley Fool to go beyond user forums and newsletters to take advantage of user generated content. To John’s point, there is obvious potential in this space to improve on Yahoo! or Google Finance.

Now, as Drama 2.0 points out, rating and ranking this type of information is a delicate balancing act to make it useful and to protect it from abuse.

Overall, social investing websites will have to overcome three top challenges to succeed:
- build a community while keeping spammers at bay;
- rank and rate information in a way that makes financial sense
- aggregate content beyond their own website.

See a more in-depth analysis on my blog: http://phc.type...l_investin.html

Article on a service, Motley Fool CAPS, that I’ve enjoyed playing with for the last month or so and possible stock price manipulation issues that might come from such a service. I’m currently a CAPS “All-Star” and am waiting for George to make his …

Can’t imagine that it would be cheap?

I think this web site is interesting, although I don’t invest in individual stocks. I’d like to see them do something like this for Mutual Funds!

Social stock picking is like nose picking. Just do it yourself.

Assuming the research behind the group prediction process is correct, that means that by providing stock picks from a selection of the overall crowd who are deemed “best pickers” you will do worse than average. Is there more information or data behind why this particular model is a better selector?

Dramo 2.0, I certainly agree with you that average investors need to be careful of those who are manipulating the market, and, as you point out in your Buffett example, exploiting short term inefficiencies isn’t the only way (nor the best way) to make money in the market. Many of us embrace the approach of identifying great companies and holding them for the long term. And CAPS is a great resource for those who take the latter approach. I know that a community of investors working together can generate market beating investment ideas. The goal of CAPS is to provide a tool for those interested in this type collaboration–a more powerful tool we think than traditional community models. Stock ratings are just one interesting feature of this tool.

Best,

jk

Since you quote him, it would be great if you we get Warren Buffett’s opinion on these types of services. My bet is that he’d call them fairly useless. Warren’s system is so simple that it defies the logic of people that study charts, use sophisticated trading programs, etc.: find companies that are undervalued. A service like yours might help people locate new ideas, but there are 1000s of other sites doing the same thing.

The “best performing and smartest Wall Street” investors aren’t using stock picking services or listening to Mad Money, they’re creating and manipulating the markets and trading off of information others don’t have. Don’t have your own hedge fund, but still want to make money? Here’s a good read:

http://money.cn...87505/index.htm

These guys got caught because they were greedy. Anybody that doesn’t think this type of stuff is happening everyday is a fool (no pun intended). Of course, the Average Joe can still make money in the market, but just remember that when you buy a stock, somebody on the other end is eager to sell it to you, and when you sell a stock, somebody on the other end is eager to buy it from you. Many times, the person on the other end is a lot richer and knows something you don’t, so the average investor paying $99/month for some stock picking service should keep in mind that he’s at a major disadvantage and easily f*cked with. Even “good” stocks are taken down by smart money so that they can force out weaker (retail investor) hands and then ride it back to the top, only to repeat and profit each way. Anybody that has looked at charts and watched Level II quotes for any length of time will tell you that they’ve seen some “interesting” things.

1. The financial markets themselves are the most efficient prediction market out there and therefore stock ratings are useless.

2. Hey, CAPS doesn’t follow the pure wisdom of crowds, prediction market model and CAPS players may have undue influence that corrupts the model.

With regard to the former, I’ll quote Warren Buffett: “I’d be a bum on the street with a tin cup if the markets were always efficient.” Without rehashing the specifics of his arguments against efficient market theory, let respond purely on mainstream consumer terms: Apple is trading at 74. Disney is trading at 31. What is the market telling you about where you should put your money? Yes, you can and should double-click behind these numbers to understand company fundamentals, technical analysis, etc., but stock rating services provide a useful basis for comparing stocks against each other. For example, on CAPS one of the two tickers above is a 3 star stock on CAPS and one is a 2 star stock. If for no other reason, stock ratings are valuable, IMO, as a second opinion to compare against your own judgments.

Moreover, understanding consumer sentiment is an incredibly valuable form of investment research–just ask institutional investors… Beyond just the stock ratings, on CAPS can I identify stocks that have a 4-5 Star Rating, negative annual return, and a market cap between 0-500M, and then sort the results by stocks with the most bullish sentiment.

And, as counterintuitive as it might seem, I’m not sure that financial markets are pure examples of prediction markets. Prediction markets work best, IMO, with binary contracts (e.g. who will win the next election). Is buying 50 shares of Time Warner a binary contract?

In any case, moving on to argument #2, our objective is more to build the world’s largest stock research/ratings database and community platform than to create a prediction market. This was a deliberate choice on our part. We think that individual investors confront lots of problems that a prediction market model can’t solve. One problem is how to evaluate the variety of opinions on stocks and companies that they are exposed to on a daily basis. CAPS provides a transparent platform for comparing the performance of professionals and non-professionals alike (Wall Street and Main Street).

I’d say that our primary objective is to create a platform where people can compare picks, performance and analysis—in this sense CAPS is an extension the Fool focus on building great communities. We think CAPS is a giant leap forward in our community efforts because we go a step beyond in terms of harnessing community intelligence via our CAPS stock ratings, tagging, collaborative filtering, recommended analysis, and much more.

So, CAPS is not a traditional prediction market. Prediction Markets won’t identify and track the performance as a group the companies that the community thinks have “Disrupts-brick-and-mortar” business models (a tag performance group on CAPS). Prediction Markets won’t identify for you the stocks that people bullish on Apple also love. Prediction Markets won’t identify the really smart “amateur” in Topeka who seems to have insightful things to say and better performance than that professional you’ve been watching on t.v. Prediction markets won’t enable you to quickly retrieve the highest rated “bull” or “bear” argument for the stock that you are thinking of investing in…

I sometimes call the approach we take to aggregating community intelligence a “competitive forecasting tool.” Our weighted influence model is necessary precisely because of the transparency that exists on the CAPS platform. On CAPS every vote counts, but the smartest minds are always the leading influence over the CAPS stock rating. This is a partial answer to the concerns about players influencing other players and creating an “information cascade.” It’s not a complete solution, but, of course, it’s not like real world financial markets are immune to the same level of influence (ever heard of the “Cramer effect”?).

We’re excited to see how CAPS plays out over the long term. Whether a few years from now we’re most excited about our CAPS stock ratings or for creating a publishing platform for identifying the best performing and smartest Wall Street and Main Street investors remains to be seen.

And if you haven’t already, please stop by http://caps.fool.com and kick the tires for yourself. You might find a new investment idea (currently there are more than 1,400 stocks with ratings) or maybe you can just get a 2nd opinion on that stock your broker recommended.

Fool On!

John

Saul Weiner and Grace Liu are absolutely correct: the stock market itself is already an efficient prediction market (duh) so these services are of little use. They appeal more to the average frustrated investor who dreams of being able to piggyback on somebody’s picks that will make him rich. There are people that are very successful with their investments, but for the most part the people making big money on Wall Street are not daytraders and retail investors, they’re the guys that create the markets and/or have the leverage to move/manipulate the markets, and of course those with insider information. Anybody that thinks otherwise is likely the chump having his wealth transferred out of his bank account into somebody else’s when he buys or sells a stock.

And of course, the problem with a service like this is the small amount of data they have, which makes their statistics fairly irrelevant. Data over the long-term, including in different types of markets, is crucial to evaluating an individual trader’s abilities. Making money in trending markets, for example, is very easy if you simply bet on the trend and can recognize when the trend has been broken. Most investors, however, are horrible at trading in a sideways market. In fact, the average investor is better off taking their money out of the market when it’s sideways because 99.9% of investors are incapable of successfully timing highs and lows in choppy or range-bound markets (even “experts” are often incapable of doing this). Bottom line: anybody that would rely on this type of data in any significant way to make trading decisions is not likely to be happy with the results. Past performance is most often not indicative of future results.

What does that mean, to “study the market”? Look at what the customer market is telling you, by looking at the fundamentals of the stock (e.g. earnings and sales growth). Look at what the stock market is telling you, by using technical analysis (e.g. price and volume action over time). Fundamental and technical analysis combined gives you the complete picture and you can’t short-cut the process by looking toward “expert” advice.

Not to mention, it’s not just about what stock to buy, but also when to buy it and when to sell it.