Let’s “Ask the Audience”

On the popular TV show, Who Wants to be a Millionaire?, contestants have to answer a series of questions to win increasing sums of money. Along the way, if they have trouble with a question they can choose to use a “lifeline.” One of these “lifelines” is the ability to ask the audience what they think the answer is. The share of the audience voting for each multiple choice answer is then revealed to the contestant, who can then choose to go with the most popular answer or not. Any regular viewer of the show knows that the answer selected by the largest percentage of the audience is almost always right.

This week it was reported that a new index went live. It’s called the Market Prophit Social Media Sentiment Index. It is touted as the first “crowd sourced index” and is constructed by measuring sentiment on Twitter, selecting the 25 most talked about stocks in the S&P 500 with adjustments over time based on daily sentiment readings. Backtesting over the past couple of years shows a 40%+ gain over the S&P 500. The plan is to turn this index into an ETF in the future.

It’s likely that the confluence of some important trends, including the search for new smart beta strategies, global engagement with social media, and the refinement of big data mining and application technologies, will result in other information/behavior based approaches to “factor” investing. It will be interesting to see how these new approaches are viewed and reacted to by current professional money management and how they will impact the current debate between active and passive management.