Smartlife

These days, it seems like everything is being crowdsourced. Threadless uses crowdsourcing to make T-shirts, Amazon.com’s Mechanical Turk uses crowdsourcing to offer a virtual marketplace for intellectual capital, and the Democratic National Committee’s Flipper TV uses crowdsourcing to expose Republican flip-flops, contradictions, and “out-of-touch” policies. By letting the wisdom of the crowd guide decisions, organizations are finding innovative ways for both themselves and individuals to lower costs, achieve higher-quality results, and come up with groundbreaking ideas.

So what’s the idea behind crowdsourcing? As described by James Surowiecki in his phenomenal book, The Wisdom of Crowds, large groups of people almost always predict data better than any individual. A good example is the common game where players try to guess how many jelly beans are in a bottle. Almost always, the average of the guesses is as close as or closer than any individual guess. Extending this principle to the stock market, we can assume that crowds can guess stocks better than any individual can. So how can we, as individuals, leverage the intelligence of the masses to help us in picking the best stocks (“social investing”)? Fortunately, Motley Fool has done the work for us: they engineered a free, stock-pick-crowdsourcing engine called Motley Fool CAPS.

So how does CAPS work? It’s a simple four-step process.

1. Members rate stocks
2. CAPS keeps track of the data and gives ratings to users and stocks
3. CAPS gets smarter with more data
4. Repeat (back to step 1)

As you can see, CAPS’ utility depends on user input — and a lot of it. Fortunately, CAPS has a huge user base: over 120,000 users and counting. Assuming that CAPS predicts stocks pretty well, it offers you several benefits: less time spent researching, better performance results, and lots more sleep. Sounds too good to be true, right? Well, there’s only one way to find out: a test.

Starting cash balance: $10,000
Trial period: 3 months (October 31, 2008 to January 31, 2009)
Ending equity balance: TBD (hopefully a lot!)

Over the next few months, I’m going to invest $10,000 (monopoly money) in the highest-rated stocks on CAPS. I found my first three stocks to purchase by going to the Stock Search section on CAPS and searching for high-rated stocks. The first three that I chose are SM&A, TLC Vision Corp, and Chelsea Therapeutics. The results of my search are below:

As you can see, they have all been rated very highly, both as a stock and by several users. You can also see that the first stock had 181 users rate it: 179 gave it a high ranking, and only 2 a low ranking.

Using Virtual Stock Exchange, an online tool for testing personal investment strategies, I set up my profile with a $10,000 limit and invested $2,000 in each of the three stocks: 364 shares of WINS; 5,405 shares of TLCV; and 945 shares of CHTP. Over the next week, I’ll reevaluate and add more money to these or other stocks.

Over the course of the trial period, I’ll produce a number of posts reporting the performance of my CAPS stock picks. Did I make money? How did I do compared to the S&P 500, or compared to several popular mutual funds? This test will show the short-term results of crowdsourcing our stock picks. Let’s see how it goes!

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Suggested reading:
- “CAPS Takes ‘Wisdom of the Few’ To Stock Picking” (TechCrunch)
- “Picking Stocks with The Motley Fool’s CAPS” (Get Rich Slowly)

Similar services:
- PredictWallStreet, Stockpickr, SocialPicks, Cake Financial, Covestor, Marketocracy

Post updates:
- January 9, 2009 at 2:00 PM ET: Rather than publishing interim performance results, we’re going to publish just an overall, final one. Also, we had initial challenges with the Virtual Stock Exchange’s portfolio administration (stock orders didn’t execute properly), so we ended up having to pick a slightly different set of stocks: CRED, ACUS, SUPG, SEP, and EPB.

Tags: Investing, Personal Finance, Social Investing, Stocks