Miller, Tradestream Your Way to Profits

Zack Miller has written a book that with any luck will be out of date in a couple of years. But never mind. In the meantime Tradestream Your Way to Profits: Building a Killer Portfolio in the Age of Social Media (Wiley, 2010) takes the reader on a fascinating tour of Internet resources that offer the individual investor or trader opportunities to beef up his returns. The tour is organized around eight approaches to ferreting out investment ideas: following stock analyst blogs, piggybacking the pros, joining expert communities, crowdsourcing, screening, tracking inside moves, keeping an ear open to rumors, and doing co-lateral research.

By the way, although social media technology is new and constantly evolving, most of these approaches are tried and true. To give but a single example, Alfred Winslow Jones, who invented the “hedged fund” in 1949, was no stock picker. As Sebastian Mallaby writes in More Money Than God, “[H]e created a system to get the best out of others. Starting in the early 1950s, he invited brokers to run ‘model portfolios’ for his fund: Each man would select his favorite shorts and longs, and phone in changes as though he were running real money. Jones used these paper portfolios as a source of stock-picking ideas. His statistical methods, which separated the fruits of stock selection from the effect of market moves, allowed him to pinpoint each manager’s results precisely. Jones then compensated the brokers according to how well their suggestions worked. It was a marvelous technique for getting brokers to phone in hot ideas before they gave them to others.” (p. 32)

Today’s investors don’t need to pay big bucks to “subcontractors” for actionable ideas, which is not to say that everything online is free. But the trick is to separate the wheat from the chaff, where cost provides absolutely no clue about value. There’s an inordinate amount of material on trading and investing available online, much of it near worthless, some of it outright fraudulent. Some costs thousands, some is free. How does the individual investor sort through all the noise to get the kind of input that enabled Jones to produce outsized returns?

There are two basic approaches, probably best encapsulated in Thomas Paine’s famous dictum “lead, follow, or get out of the way.” (No, Lee Iacocca wasn’t the author.) First, get information so you can lead; second, follow the picks of gurus. The second, of course, is ever so much easier but not thereby to be decried.

Let’s take the strategy of piggybacking the pros, which has a proven track record. Where can the individual investor access information on what the pros are doing? AlphaClone is the obvious choice. Or if you prefer to join an expert community there is a range of possibilities, from kaChing and MarketGuru to Covestor and SumZero.

Miller highlights a handful of sites where everything is either vetted or capable of being vetted. He touts Seeking Alpha, with which he was involved early in its development. Wikinvest is another valuable source, dependent on collaborative activity.

Miller’s book is something of a travel guide for the investor. It’s written exceedingly well, as one expects of a travel guide. It explains an investor’s options: he can go on a guided tour, join a self-directed group, or strike out on his own. And it provides resources that the investor can tap into depending on which option he chooses.

All in all, I thoroughly enjoyed the book and consider it a must-read for anyone who runs his own money and isn’t yet generating alpha. Miller, by the way, writes the blog New Rules of Investing which is worth a look.