How to Use Social Media to Predict Market Trends

Interview with Jamie Wise

Douglas Goldstein interviews Jamie Wise, the founder of the BUZZ Index. He is also the President and CEO of Periscope Capital, a Toronto-based hedge fund manager. What is the BUZZ Index, and does it really work?

Douglas Goldstein:I am very excited to be talking to Jamie Wise, who is the founder of the BUZZ Index. Jamie, what is the BUZZ Index?

What Is The Buzz Index?

Jamie Wise: Let me give you an example, Doug. Across social networks or platforms, people are always talking about their social lives, where they go on vacation, what products they use, so on and so forth. In the same way, people talk about their investment portfolios too. There is a lot of input that you can gather by listening to the conversation, and understanding the sentiment around the individual stocks.

What we do with the Buzz Index is we listen every month to all of the stocks that people are talking about. We then choose from the most talked about stocks; the 75 most positively discussed stocks. We include them and weigh them by their positive sentiment and include them in the index each month.

Douglas Goldstein: Let's start with a very simple question. What does it mean to be an index as opposed to a mutual fund?

The Difference Between An Index And A Mutual Fund?

Jamie Wise: An index is really a rules-based methodology for creating an investment portfolio. Most traditional mutual funds have a manager that chooses the individual stocks that would go into that mutual fund holding.With an index like the S&P 500 index, it's rules-based. The S&P 500 is an example of a market cap weighted index. You can have indexes that are based on different sectors, different factors like value or growth, or our index, for example, which is a rules-based sentiment index that includes most positively talked about names.

Douglas Goldstein: Tell me about other sentiment indexes.

Jamie Wise: There aren't any, and that's why we created the BUZZ index. The feel of social media analytics was born about a decade ago, and that's when consumer product companies really noticed that their clients were all online talking about their products. Think about Proctor & Gamble or The Gap. They knew that their people were all over Facebook talking about their products and if they could listen to that conversation, it could help them drive product decisions and marketing decisions. That information was really valuable to them.

The same thing is happening with investment portfolios right now. People are online, and they are talking about that. The problem is they're talking about 5,000 different stocks. Where do you start and how do you think about positive and negative sentiments around any one stock? How do you build the new investment portfolio?

What we wanted to do was make it simple for people, and make it accessible by developing an index that has consistent exposure to the most positively talked-about stocks. We can then license that index to an exchange-traded fund and make it accessible and investible.

Douglas Goldstein: Why would you think that what people are talking about on Twitter or Facebook matters? Aren't these just people who are schmoozing?

Jamie Wise: It matters a lot, and the whole concept of being able to find wisdom in a crowd is perfectly applicable to social platforms. What really exposed that for a lot of people, this past year were two big events. First was Brexit and the second was the U.S. Presidential Election, where all of the polls seemed to indicate something would happen. However, the exact opposite happened in real life, and what we are realizing now, and this has been something that has been studied for a long time, is the faults and the problems in traditional polling techniques. There, you have first choices and you have a low incentive for truth-telling.

Social platforms are completely opposite because people have independence of thought, and they have a high incentive for truth-telling because they want to engage with other people online. They are looking for feedback, for validation, and those types of concepts that exist in the social environment allow you to gather data that is predictive. So it doesn't matter what Doug is saying about a specific stock or what Joe is saying about another stock. What really matters is that you have a large amount of conversation from a diverse group of people, and if you can take the average sentiment from that conversation, it really is reflective of what you will see happen to that stock over time. It is a real-time measure of fundamental demand.

Douglas Goldstein:Does this work? It seems to me that everyone is looking for the Midas solution; how to turn straw into gold. From what I understand, you're saying that you look at what people are talking about on social media, and you feel that that is accurate. You've said that people are being honest about what they are saying, and therefore they might actually be investing in what they are talking about. If they are buying these stocks, that's going to make the stocks go up. Does this really make money?

Does The BUZZ Index Really Work?

Jamie Wise: It absolutely does work, and it's been followed in a number of different ways. First we saw the validation of all those consumer product companies and the social media analytics that they were doing, and you can see how much additional value they can get by listening to what their clients are saying on social media. These companies talk about this often in their earnings releases and in their marketing materials.

Does it work for stocks? First, we see some other vendors trying to provide these insights. Vendors like Bloomberg or Thomson Reuters, recognized heavyweights in the industry, are offering social insights on their platforms for their user-base to incorporate into the investment process. For us, since we launched the index last April and the ETF that's based on that, we have a real-time proof of concept. We can show quite clearly that social momentum has proven to be a better performer than price momentum alone. If you look at the iShare MTUM products versus the Buzz ETF, we have out-performed that index quite easily since we launched, by over 3% and over 6% just in the last six months alone.

Douglas Goldstein: When did you launch the ETF?

Jamie Wise: The ETF was launched in April 19 of 2016.

Douglas Goldstein:One of the things that I've noticed as I speak to fund managers, hedge fund managers who are kind of elusive, is that, when they come up with an idea for how to make money, they don't share it. They'll just do it and leverage it up so they can make a lot of money on their own, with some new idea before everyone comes in. Why did you choose to expose this idea and make it an ETF as opposed to trading it on your own?

Why Jamie Wise Chose To Share His Idea

Jamie Wise:We're trying to think longer term here, and I think what you can tell from these types of non-traditional data analytics with respect to finance, is that it is happening in the market today and it is going to become a bigger and bigger component of people's investment decision-making process.

There's no reason to hide something if it's a good idea and it works. The IP and the code, the algorithm, that is certainly our property and that doesn't change even when we've launched this index and ETF to millions of people. The code still lives with us. We understand how to listen to social conversations properly and analyze those millions of data points. What we're doing is sharing that, the output of that technology, with everyone and allowing them to invest in it.

The index re-balances every month. You can see the new names that come in and out.I'm a big believer in transparency and accessibility.I think the structure for those products - and we're seeing it - and the proliferation of ETFs over the last 20 years, is the way forward for people and there is no reason to hide those insights.

Douglas Goldstein: Let's talk about the theory behind this. Everyone's got a freeze on Wall Street and in your case, it sounds like you're following along with the tradition that “the trend is your friend', meaning that you're looking for the trends going on and you want to jump on that bandwagon. On the other hand, the other great more contrarian strategies, famously called “the dogs of the Dow” is to try to find stocks on the Dow Jones that have been hit terribly. That's often considered a contrarian strategy and also has done pretty well over time. My disclaimer for everything you and I are discussing though, is that past performance is no guarantee of future returns. But why is it that in your case “the trend is your friend” seems to apply and it doesn't seem terribly contrarian?

Jamie Wise: Again, it comes back to how we're measuring the data. If you think about a classic price momentum strategy, that's another “trend is your friend strategy,” but that is really backward-looking, right? You're looking at what stocks have out-performed and therefore they will continue to perform.That's one approach, but it doesn't do us well as sentiment momentum. When we think of sentiment momentum, you have to have some flexibility in your strategy to always have exposure to those names that have the greatest positive sentiment behind them.

Think about an ocean that's got a normal ebb and flow to it. That's the normal sentiment around any given stock. If you can identify a wave building in that ocean, they just don't stop and turn on a dime. A wave gradually builds; it builds and it carries forward for some amount of time, then it crests and comes down. And that's what we're trying to identify - our securities that are building that sentiment wave. Now we have access to data that is independent and free of forced choices, and all of the other problems that you see in polling. We've all been conditioned in financial markets for decades now to think of sentiments as the ultimate contrarian indicator. When the crowd is bullish, it's the top, and vice versa when they're bearish. That's not actually the case if you think about it, because that can be predictive. It doesn't suffer from all the problems of polls, which have traditionally been the measure of sentiment of the market.

Douglas Goldstein: Interesting. Last question. With your model, what do you see coming up in the market, with the New Year and new administration?

James Wise's Thoughts On What Lies Ahead

Jamie Wise: Of course, Trump is on Twitter and on all other social platforms, talking about companies directly. For us, what we always say is, it's not about Donald Trump's sentiment. He's just one voice. He does have influence, but he is a diminishing return of influence because we get conditioned to expect him to talk about stocks.

What he serves is as a catalyst for a bigger conversation online. When Trump talks about General Motors, or Boeing, or Lockheed Martin, what he is doing is driving tens of thousands of people to go online and voice their own opinions about that stock as an investment. They can agree or disagree. There's real value in listening to the follow-up conversation, not necessarily the individual thread about Donald Trump. Outside of all that, we see that real trends and technology are identified by investors online.

Companies like AMD and Innovidia have been great performers and top holders in the BUZZ Index for the last year. They have done well because we've been able to listen in to the excitement that people have, as it relates to these companies being able to deliver graphic processors, GPUs, that are the cutting-edge of all of the advancements of artificial intelligence, that the world is going to be more and more relying on going forward. We see that and we hear that in the market place, and of course those names get positioned in our index.

Douglas Goldstein: Jamie, it's been interesting to see how someone comes up with a new idea for an index and actually makes an index and an ETF out of it. That is certainly different from the Dow Jones Index, which has been around for a hundred-plus years.

In the last few seconds, Jamie, tell me, how can people follow you and follow your work?

Jamie Wise: We have lots of content on our website, which is buzzindexes.com. The ETF is always accessible and you can find that at buzzetfs.com and its New York Stock Exchange listed, ticker symbol BUZ.

Douglas Goldstein: Jamie Weiss. Thanks so much for your time.

Jamie Wise: Appreciated. Good talking to you Doug.