Let’s face it, the markets are anything but efficient. The regulators failed in creating a marketplace where all investors have access to the same information at the same time. If you were a multi-billion-dollar hedge fund in the 90’s you enjoyed multiple advantages over individual investors. You already had access to satellite images and cameras installed around businesses in the retail space, so you could better estimate their sales ahead of the official earning reports. You also had the privilege of corporate access- something the average individual could only ever dream of.
Traditionally, self-directed investors would rely on charts, earning ratios, dividend growth, news (and some on technical analysis) to make critical investment decisions.
However, the old research process and resources have changed almost beyond recognition over the last few years and the famous saying “Buy the rumor, sell the news” is now more relevant than ever. This is because we are witnessing a remarkable trend where investors rely less on the fundamentals of a company and instead look for “online hints” for a real edge. In the institutional investor’s jargon these sources are often referred to as “alternative datasets”.
This trend has evolved rapidly, fueled by the declining cost of cloud computing and, of course, the mobile revolution which suddenly gave us all a traceable real-time GPS location and digital wallet.
Another example is the explosion of information and content published online, namely financial news, financial blogs, social media posts, tweets, newsletters, and analyst research. With an average of 120 articles published daily on an S&P 500 stocks, and millions of social media posts, investors no longer have the capacity to go through everything relevant to their portfolios. Increasingly, individual investors (just like institutional investors), have access to a ‘Sentiment Score’ for a short summary of all the relevant news. In the past, these investors were lucky if they spent their time on a reliable resource that told the right side of the story.
The most interesting part about these alternative datasets is that they no longer focus on pure fundamentals. These datasets cover a much broader range of interests. And that’s a wise decision because our data reveals that it is these other options that are of particular interest to millennial investors.
One of the reasons investors look at the fundamentals is because every stock page online (finance websites, online brokers, etc…) show as a default the chart and basic stats. However, when we tested what truly interests our TipRanks users, in terms of the main datasets that help them make an investment decision, we saw that only 14% of users visit the stats and charts page (when they are not directed to this page as a default). This is the about the same usage of the hedge fund activity page, where users see which “Market Gurus” have bought into this stock and how did they perform. This means that the average investor cares about the charts and stats of a stock as much as they care about Warren Buffet’s portfolio – we found that fascinating.
We also found that individual investors would go through the opinions of analysts before any other resource, even though when measuring the performance of sell side analysts they underperform other data resources (such as Crowd Wisdom or Insider Activity) . Forty-two percent of our users who answered a survey of how they make investment decisions answered they follow advice from Sell Side Analysts.
An example of an analyst rating interactive tool on a specific stock (Facebook)
This is in line with a test we did on our stock screener, where we were very surprised to see that more users clicked on Analyst Consensus, Price Target, News Sentiment and Crowd Wisdom than on the more obvious options like, Sector, Market Cap of Dividend Yield:
Stock Screener heatmap based on the activity of 100,000 users.
What Does This Mean for Your Business?
The good news is that your organization has probably noticed the trend over the last few years and started adding new research tools, maybe even removed the old ones like the PDF research reports.
New disrupting brokers such as Robinhood and eToro skip the deep fundamental display and focus on crowd wisdom and other sticky tools, hence their phenomenal growth.
The bad news is that if you haven’t been on the right side of this disruption, then you are likely missing out on the best ways to acquire and retain customers.
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