My New Home

If you haven’t noticed already, I have moved to a new home at http://justinpaterno.com.  I’m proud to be part of the StockTwits Network and Dominic has done a bang-up job w/ the blog redesign.  If you subscribe to my Feedburner feed you should have already been getting the new posts but if not bookmark, or subscribe to the new sites feed.

As $AAPL and $GOOG get set to do battle on the internet TV landscape, many are overlooking the scraggly-looking underdog in the corner, $MSFT.  While I haven’t yet played with it, I believe the Microsoft Kinect could be the product to catapult Microsoft ahead in the war to merge the internet and your television.  Why? Because of great user experience.

Standard television is two-dimensional.  You scan up and down a row of channels.  Anything that adds a dimension, such as searching for a show, is a real pain in the ass.  There is a diminishing user experience of the standard television remote as the dimensions and complexity of what you’re trying to do increases.   Take the Samsung Blu-Ray Internet TV Platform that they are now advertising on Best Buy commercials (shown below):

Sure the UI is slick (kind of like and iPhone), but I can already tell that the UX sucks.  I’ve tried to search YouTube on a older version of this product and it’s a real pain in the ass.  While Apple TV has possibilities of a much better UX, with their ability to make an Apple TV “app” on the iPhone or iPad, this increases the cost of using such a platform at its full potential (as now you have to have an iPhone, iPod touch, or iPad to really  have a great experience).

I think Microsoft could win this one with their Kinect.  Kinect is like Nintendo Wii for the Xbox360 except there is no controller.  Instead there is a sensor that recognizes 48 points on your body.  You are the controller.  In addition to this, there is voice recognition software.  Screw having to type on remote or with your Xbox controller.  Just talk – how novel.   Watch below to see it in action:

The first time I saw this – I had one of those “a-ha” moments.  This device looks like a real pleasure to use.  Anyone who has used other Internet TV platforms knows that this is usually not the case.  Microsoft has thought deeply about the Internet TV since Web TV back in the 90′s.  They are already in a big chunk of living rooms, and if this device is truly a pleasure to use, and they execute it right with a killer platform, they could make a major move into the living room and have a major lead on the battle for the living room.

Today after browsing Inc Magazine’s website, I came to the realization that I haven’t read anything on Inc Magazine in quite some time.   Right afterwards I tweeted that Fred Wilson killed Inc Magazine:

Max Chafkin, a writer at Inc Magazine, came to Inc Magazine’s defense and, quite understanably, asked for me to clarify:

Since what I tweeted was a bit of an over-generalization, as Inc. is not really dead nor killed by Fred Wilson alone, and since I was at one time an avid Inc. reader (and subscriber), I believe I owe Max an explanation.

What I was referring to the Rise of Decentralized Expert-In-Field Media.

For many years, Inc. Magazine was the place to go for information and articles for entrepreneurs and those working in early-stage companies.   As someone working in the early-stage web space, each month I would look forward to the next issue and spend the day reading it cover-to-cover. Then everything changed.  Many VC’s and entrepreneurs began popping up with their own blogs.  Aggregators/Curators like Hacker News and Silicon Alley Insider popped up providing people with fast and wide distribution, and all of a sudden I didn’t have to wait each month to get this information from Inc.

This is all part of a larger movement going in media, that isn’t really new to anyone in the field.  It is stronger in some verticals than others but two main characteristics of this movement are affecting nearly every vertical:

Decentralized Content, Better Distribution

The new experts are building audiences on their own sites rather than simply publishing on sites or in magazines like Inc. Magazine.  Aggregators and Curators as well as Social Media are allowing them to quickly and easily distribute their content.  For example, I follow @IncMagazine on Twitter but still rarely go to their site anymore, as it is almost impossible for them to stay ahead of the story when the story is coming from decentralized sources that are distributed quickly.

First Person Expert-In-Field vs. Third Person Expert-Of-Field

It’s incredibly easy to post online now starting to get even easier to access distribution to the masses.   Why read a story on a person or company when you can hear directly from the person or company?  If you’re the expert-in-the-field, why go through a middleman when you can control your message? Maybe 3 years ago the audience you could reach would make the difference but not these days.  There is still a big place for third person, exposé-type journalism, as first person journalism introduces an inherent bias, but that can also be accomplished by experts in the field as the blogosphere is one ongoing conversation and who has better information than those in the field.

At StockTwits we are taking advantage of this trend in the finance vertical through all the amazing traders and investors on the streams, Chart.ly, and StockTwits.tv, and on the aggregation curation side with Abnormal Returns.  I believe we are still in the early innings of this movement and, unfortunately, most of the incumbents are not going to escape alive.  So while Fred Wilson certainly hasn’t “killed” Inc. Magazine yet, they are slowly dying by cuts from a thousand Fred’s.

Often on Wall Street and in the media, the worst thing you can do for your career is not have an opinion.  When I in training at Citi, they told us “no matter what have an opinion”.  This is, of course, because conviction sells.

This need to have a view is best displayed in the Economic and Macro arena, where economists and analysts come together for something resembling the combination of a circle jerk and a pissing match. Currently there is a big inflation/deflation debate reverberating through the markets and media.  This is an important debate and the side of the debate you are on will dramatically affect the composition of your portfolio.  But what if you’re just not sure?

It’s ok to not be sure.  I have no idea where we are headed and I don’t think I’m alone. Even the pros these days trading global macro strategies are having a hard time. Never (in my somewhat limited experience) have a seen such a bipolar market.

This can be visualized in the chart of the $ES_F.

The flash crash as well as the volatile range through the flash crash candle since May seems to indicate market participants who are both unsure and fearful of being wrong.

So what do you do when you don’t know?

Don’t Invest

One option is to get out of the market when you’re unsure.  Joe Fahmy (@jfahmy) has no problem doing this.  He often says if a market is not healthy, he doesn’t want to be in it.

This can have high portfolio turnover but  portfolio benefits (and health benefits) can offset those costs.  If you are actively investing in a market that you’re unsure of you’re more susceptible to mistakes and cognitive biases.  Not to mention stress eats you alive.

Invest in Both

One investment strategy that Taleb mentions in The Black Swan is to investing most of your money in T-bills and then putting a small percentage to take advantage of highly improbable events with asymmetric returns.   If you believe we’re going to move big, whether there be inflation or deflation you can bet on both.   If you structure a portfolio such that the return on one will outweigh the loss on the other, you can literally invest in your “I don’t know” thesis.

Perhaps the much-talked about strength in bonds is a sign that people are doing this, whether investors are aware of their uncertainty or not.

For some ideas on how to play both sides see these posts on Inflation and Deflation by @marketfolly as well as this one over at Pragmatic Capitalist.

Play From the Bottom Up

If you’re having trouble investing from a top-down perspective, perhaps you may want to look from the bottom-up.  Tadas Viskanta over at Abnormal Returns has been talking about the forthcoming Golden Age of Stock-Picking.  Even in an uncertain economic world, there will always be secular trends to emerge and invest in.  The recent strength in names such as $AMZN, $NFLX, and $GMCR shows that secular growth is trading at a premium.

Peter Lynch is famous for remarking, “Invest in what you know.”  Even if what you know is that you don’t know, there are still ways to invest.

If you follow me on Twitter, you are probably aware that I’m not the biggest fan of the idea of Facebook taking over the internet for a multitude of reasons.  The main way in which they are attempting to do this is through the “Like” button – a button that can sit on websites and allow users to inform their social network that they, well, like the webpage.  One has to wonder, however, if such an overly simplistic and monotone way to share information makes a dumber web.

There is nothing wrong about saying that you like something, per se, but one must wonder how smart a web can be that merely “likes” things.  On Facebook’s Internet how do you share content that you downright despise, or (even worse) content that you simply are not sure about.  As of now I don’t see any way. Compare this to Twitter where I can share a link and in 140 characters attach a range of emotions, feelings, thoughts, and ideas regarding it.  In fact, Twitter is an extension of the Google form of ranking the web, where the hyperlinks are a bit longer and shared in real time.

Even worse, on an existential level, this is perpetuated by the fact that not only are you sharing things that you like, you are sharing them with things that you want to be perceived as liking by your friends, “the other”.  You only share things that you think your friends would approve of you liking.    How parochial is Facebook’s Inernet?

When this news first hit, Chris Dixon, tweeted that we may be leaving the Golden Age of web when it was ruled by Google, the benevolent dictator, and entering the new regime dominated by Facebook.  I think we may be leaving the Golden Age of the web as a university and entering the web as high school, where we’re all, like, Valley Girls.

I’m a sucker for Google Trends.  Ever since it first came out, I’ve loved to have fun with it.

Recently, I’ve noticed the word “double dip” seriously infiltrate the collective vocabulary and wondered what Google Trends had to say about it.  My suspicions were correct, as we’ve seen a massive spike in search traffic and news reference regarding this recently:

Compare this to the chart for “recession” during late-2007.  Similar spike on search volume and news reference:

Couple this with a nice spike in “unemployment” (which has been a pretty decent reliable indicator) and things look pretty bleak.

In some instances, searches are a great contrary indicator, such as for investments (look at the 2008 spike for Gold as an example).  For economic related searches they are many times leading.  Look at the spike for “recession” in late 2007.  While things were a bit rocky then, we weren’t in the throes in the recession.  In fact, the Google Trend for “recession” had stabilized by the time the recession ended. Since Google Searches are conducted by real people, when nobody is watching, I believe they are a great look into the mindset of the average individual, and right now appear to be painting a bit of a scary picture.

Yesterday, I came across a post by Jason Zweig on the Intelligent Investor blog.  The post basically outlines how humans are hardwired to herd, and thus we see it quite often in the financial markets.  This isn’t news to any student of the market and I agree completely.

I disagree, however, with the conclusion that he makes:

Thus, if you buy individual stocks, you should note which way the herd is moving—and go the other way. You should get interested in a stock when its price gets trampled flat by investors stampeding out of it. The list of new 52-week lows is a rough guide to what the voting machine has been trashing lately. Then run your own weighing machine, studying the company’s financial statements, products and competitors to determine the value of its business—while ignoring the current price of its stock. And make a permanent record that thoroughly details your rationale for making the investment. That way, you set in stone exactly where you stood before the herd began trying to sweep you away.

In my opinion this advice in dealing with the herd is far too simplistic. Betting against the herd can be quite profitable at times, but can be disastrous other times.  In fact, buying stocks at all time highs has a very attractive return distribution according to an interesting paper by Black Star Funds, Does Trend Following Work on Stocks:

Sean Park, a former trader and now an early stage financial technology investor often describes his investing strategy as “Skate Where the Puck Is Going To Be”.  I think this conclusion better fits the natural herding behavior in markets.  In markets, at all times you want to be in front of the herds next move.  As trends can often times persist, some times this involves a position amongst the herd with healthy skepticism of the underlying fundamentals and belief system of the pack.  Herds can quickly become mobs and trends can reverse sharply, thus other times a position in opposition of the herd is prudent with an awareness that you may be stepping in front of a stampede.

Investors must be aware of the state of the herd, the fundamental dynamics underlying both the herd and the counter-herd, and craft an investment strategy that takes advantage of the herds next move, not that herds are often times wrong.

“If you don’t like what I have to write go start a blog that no one will read”

-Anonymous

There has been a good amount of hatred of Business Insider out there lately. The latest, coming from 1938 Media is brutal:

While I agree with him that a business journalist should know who Peter Drucker is, or at the very least spend five minutes on Wikipedia researching him, his other complaints are nothing new.

Between the slideshows, ridiculous stories, and outrageous headlines, it’s easy to poke fun at Business Insider.  Whenever I hear a lot of haters come out on a new company or new product, I tend to get interested in what they’re doing, because it means they’re being disruptive.   There are many posts,tweets, and (now) videos laying out the anti-Business Insider Case, but many of these complaints are the side effect of disruption (and a good deal come from some of the people who are being disrupted).

Let’s look at some of these complaints through the lens of disruption and look at some of the things Business Insider is doing right.

They’re Hacking a Broken System…and That’s Good

It’s no secret that Business Insider is on ruthless quest for page views though their use of slideshows and ridiculous stories.  This transparency and “no-shame” approach causes many to attack the company itself, rather than the industry at larger.  Many are hating the player, instead of the game.

Like it or not, the online media business is a market for page vies. Content companies must go out mine as many page views as possible, and sell them to advertisers.  While one can opine about the CPM model until the cows come home (and I for one am not a fan), that is the system, and Business Insider is simply hacking it.

Many times a hacker in a system exposes its weaknesses and helps improve it. Those who chide Business Insider for doing this are missing the point – Business Insider could be responsible for the downfall of the CPM model. As advertisers wise up to the fact that the system is broken and other sites begin to mimic Business Insider’s behavior (slidehows are starting to spread!), the system will have to change, and this is a good thing. By shamelessly exposing the stupidity of the CPM model, Business Insider unfortunately becomes the poster child for this model, but in reality they could potentially be a major force in disrupting it.

“Scraping” Benefits the Consumer of News

A common complaint about Business Insider, and other aggregators, is that they are “scraping the web”, but from the POV of the consumer is that really a bad thing?

Would you say that the person who has to buy his groceries at 10 different specialized stores or at one supermarket is better off?  Those that argue against “scraping” are basically saying that the consumer benefits from having to run around and buy at 10 different locations.  The centralized marketplace definitely hurts the margins of the individual food distributors but transfers benefits to the consumer.  The Business Insider model, (and many aggregator/curator models) is as a centralized marketplace for news.

At this marketplace I find a ton of lesser known stories that I wouldn’t find on my own.  Increasingly , the blogosphere is the tail that wags the dog for the mainstream media and they are making that information available to the mass markets. Two or three years ago, unless you were a geek with a Google Reader account and a ton of curiosity, you wouldn’t access some of these writers, sites, and ideas. While some news producers many not like this, I can’t see how this is a bad thing for the news consumer.

Plus this is nothing new.  It was the major media outlets that first started “scraping” each others stories.  In a great podcast on the state of media, Dan Carlin points out that the major media outlets stopped “owning the story” years ago.  Whats the difference between Brian Williams on the evening news saying “According to ABC News…” and then reporting the exact story that ABC broke and what Business Insider does?  Where is the Brian Williams outrage?  He doesn’t even link to their broadcast! At least Business Insider does that!  The reality is that nobody owns the story anymore, and as long as that cat is out of the bag you can’t single out Business Insider as some sort of rogue rule-breaker.

They Understand Twitter and the Social Web More than Anyone Else in the Media

Most of the Business Insider staff are in their 20′s or 30′s.   The company is really one of the first media outlets composed entirely of a generation of people who grew up on the web.  Because of this they have a deep understanding of the new distribution channels the it creates.

Many people’s social media strategies fail because they don’t communicate on the web the same way they would at a party or social gathering. Older people whose physical life was interrupted by the digital revolution see a more difference between physical communities and digital ones than their younger counterparts.  Those that have grown up on the web see very little difference at all because they don’t really know a physical world without a digital world.  On the social web, people share the same type of information that they share in real life.  Those that understand this natural tendency can transform their readers to a major distribution outlet. Business Insiders young workforce understands this by nature.

In the physical world when you are hanging out with your friends you usually share interesting, sometimes absurd news. For whatever reason socially, it is a great conversation starter.  When meeting with friends in the physical world its not uncommon for someone to say, “Did you hear about the guy who runs through Grand Central station naked every day?”.  Why would this be any different on the web?  Business Insider publishes some outrageous content, but in doing so they give you something to talk about, and in doing so turn you into distribution for their content.  They know what people like to share online, because online sharing is in their DNA.

Business Insider = Paperboys 2.0

Remember the iconic picture of the paperboy on the street yelling “Extra! Extra! Read all about it!”?  Paperboys were news salesmen.  They would shout out interesting articles or stories in the paper, many times adding hyperbole to the actually story. By writing enticing headlines, parsing a story to find interesting tidbits, and getting the word out on Twitter first, Business Insider is the paperboy of online content.

As I mentioned earlier, they are a centralized marketplace for news and they are selling content better than most content creators themselves.   The competition for eyeballs is fierce online and I don’t see how having a sales force like them working for you is a bad thing.  Sure they take a “commission” in the form of page views, but in a time when content producers are having a hard time selling news why not do business with the marketplace with the strongest marketing arm?

This whole experiment could certainly fail and the Business Insider approach has some negative qualities, such as perhaps perpetuating what I like to call the “disease of the absurd” afflicting media, but Business Insider is doing a ton of innovative and interesting things some of which could positively benefit the news industry as a whole.  They are hacking the system and in doing so they will change it – I think mostly for the better.

Two big types of feedback we get at StockTwits :

1) There is a lot of noise on StockTwits

2) There needs to be a way to track performance and/or rate traders.

While we take all feedback very seriously both are valid and we are constantly building tools to filter and use the data and discover new traders, both miss the point of what StockTwits truly is – the second derivative of market data.

StockTwits is market data with a semantic layer on top.  It is a centralized stream of information and ideas consisting of decentralized analysis.  Using this context let’s address the points above:

Regular Market Data is Noisy

StockTwits is data and information, so of course there is noise.  Market data is mostly noise so why wouldn’t the second derivative of market data consist of noise as well.  Standard market data is an older and more established form of noise that has been around for a while and already has the tools to filter and analyze it so people don’t see it that way. Most of the daily ticks, trades during the day are immensely noisy, yet people pay top dollar for this data and extract alpha from it.  Our job is to build tools and enable others to build tools to be able to transform  and use this new second derivative of market data.

Noise is Relevant

Real time data is very contextual and real time which adds to the noise factor for someone who isn’t there.  Just like “you had to be there to get the joke” you have to be on StockTwits to understand the information coming through.  The more time you spend the more signal there is.

StockTwits is Work

Anyone who has spent any time investing or trading know that its work and a full time job.  Whatever your strategy is there is a lot of time conducting and reading research, testing models and looking for ideas.  I fear that many people think that StockTwits is the “easy”.  It’s not.  Nothing in the market it easy.  StockTwits is the second derivative of market data.  It’s market data refined to a usable form.  Just like there is a lot of work needed to take refined oil and make your car run successfully, there is work that needs to be done to take this refined data and ideas and put them to work in your portfolio.

As a student of the stream, I know that certain traders are better in certain markets.  I know that @wwwstockrake awesome in markets that are volatile and turning (like this one).   I also know that swing traders like @zortrades and @traderstewie are better in trending markets.  I know to discount information from them depending on the type of market you are in.  This is something that I have picked up after spending time watching StockTwits.

Just as a portfolio puts in work to calculate the information ratio on the stocks in his portfolio, someone using StockTwits must do the same.  Using StockTwits information may be a bit easier and different, but it is still work.

There is Nothing More Transparent than a Someone’s Stream

This week a very respected and uber-transparent trader in our community, @johnwelshphd, proposed a ratings system for traders.  He’s not the first to have this suggestion and we’ve had many people request performance for traders, and while perhaps in the future we may implement something along the lines, there is nothing more valuable and transparent than a user’s stream.

There is nothing more transparent than someone’s StockTwits stream.  If someone only tweets exits it takes only a minute of reading their stream to see this.  If someone never tweets losing trades it only takes a few minutes to see that.  Any rating system can be gamed.  Sites like Investimonials, while a great idea and somewhat useful are getting gamed hard. Heck, the ratings agencies that are the backbone of the debt markets were gamed hard (and contributed to the fall).  Gamed ratings systems obscure reality and sometimes create false realities.  Often times less is more, and there is nothing more transparent than a user’s stream.

Plus, ratings systems shifts the focus away from the ideas and information and towards the trader themselves.  New and even bad traders can sometimes have great ideas, and vice versa.  The great thing about golf is that even the worst golfer can often times hit a shot like a pro. Focusing on the individuals is what CNBC and the mainstream media do.  Each day they trot on a hedge fund or mutual fund manager who is a better salesman than investor who goes on and talks their book.  In the investment world, celebrity brings liquidity and the guru becomes a self fulfilling prophecy.  Focusing on the idea and not the individual is much more democratic and disruptive.

Tom Brakke writes in Cave and the Flow:

These days, it is not hard to be pulled into the flow of information.  Digital devices bring it to wherever we may be, at all hours of the day or night.  The flow is a raging river that sweeps us along.

The question is whether or when or how often to seek higher ground and retreat to a cave of our own.

As someone whose mission is to create original ideas, I know that I will do my best work when I spend a lot of time in the cave.  But I must also heed the lessons of the river, so I need to gaze down upon it to gauge its features, to approach it close enough to hear the roars of the raging waters, to reach down into it for a handful of water to taste, and sometimes to take a dip in an eddy of information.  And yes, occasionally I need to swim out into the main current, hoping that it doesn’t sweep me into raging rapids of confusion or over a waterfall of wasted time.

StockTwits is a place where various market participants come out of their caves and add ideas to the flow.  In addition, for those willing to work, it can provide great fodder for those who are going back to their cave to perform analysis. It’s our job to foster the building of tools to make this process better.

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