By Chris Taylor
NEW YORK, Sept 12 (Reuters) - By now, we all know what social media is best for: Instagram shots of your delicious brunch, videos of cute kittens and a twerking Miley Cyrus.
But could your Facebook and Twitter streams also be a rich mine of potential stock ideas?
The folks at LikeFolio.com think so. The service, which TD Ameritrade Holding Corp and Louisville, Kentucky, developer SwanPowers LLC launched in August, scans your social media feeds for the top five stocks that you and your buddies are talking about and spits out a hypothetical portfolio.
The service is free, but for it to work, you have to grant access to your Facebook and Twitter accounts, which might give some privacy activists a stroke (even though LikeFolio promises not to post on walls, share your data or spam your friends).
“It’s all about allowing people to use social media to extract greater value out of that dialogue,” says Nicole Sherrod, managing director of TD Ameritrade’s trader group. “It’s like the old Warren Buffett concept: Invest in what you know.”
A fun idea, that there might be some real wisdom in the torrent of tweets out there. But that notion alone is enough to give some personal finance experts the willies. “I find it terrifying, to be honest,” says Cliff Robb, an associate professor of personal financial planning at Kansas State University.
There is no doubt that the idea of leveraging Twitter for stock ideas has some investors and academics very interested indeed. Associate professor Johan Bollen of the University of Indiana’s School of Informatics and Computing has published studies of how moods prevailing on Twitter can affect share prices.
As a result, hedge funds have been trying to figure out how to turn billions of tweets into cash. In 2011, Derwent Capital Markets’ Absolute Return fund became known as the world’s first “Twitter hedge fund.” It later shut down, only to return earlier this summer as the Cayman Atlantic trading platform, with a broader, but still Twitter-focused investment approach.
Intrigued by the idea that my friends and neighbors might be founts of fabulous stock tips, I plugged my own information into LikeFolio. The top five stocks spit out: Facebook Inc, Apple Inc, Google Inc, Yahoo Inc and LinkedIn Corp.
A tech-heavy portfolio, perhaps because of the nature of the milieu. The good news: $10,000 invested in those stocks would have turned into $16,261 in a single year, garnering me 62.6 percent annual returns over the past 12 months. Maybe there was something to this idea after all.
LikeFolio even allows you to compare your own top stocks against those mentioned in celebrity social media feeds. In fields like music, sports, and entertainment, the minds of 162 top celebrities like Justin Bieber and Taylor Swift are probed for their musings on companies that are publicly traded.
Their top five results: Nike Inc, Google, Apple, Facebook and Viacom Inc, with a $10,000 investment up $3,887 in a year. Well-played, celebrities, but not quite up to the gains my friends and I would have generated. Take that, Lady Gaga.
Of course, underlying this whole venture is a troubling question: Do social media mentions actually translate into solid investing ideas?
To which Kansas State’s Robb clicks: Dislike!
“The idea that we could take this mass of tweets and suggest what qualifies as a good investment is very scary to me,” says Robb. “Just because something is well-regarded in social media doesn’t make it a sound investment.”
Robb suggests that newbie investors, targeted by LikeFolio, would be better served with broad-based, low-cost index mutual funds. Such funds would probably include the companies that pop up on Twitter feeds, without the risk of betting on just a few stocks.
And the idea of basing one’s investments on the chitchat of celebrities, who are not generally known for their financial acuity? A nonstarter.
“If it is purely for entertainment value, that’s fine,” Robb says. But from an investment standpoint, “I shouldn’t be concerned with what products Miley Cyrus is buying.”
But TD Ameritrade’s Sherrod says the ultimate goal of LikeFolio is to instill a general interest in investing among neophytes and get people in their 20s and 30s comfortable with the stock market after a harrowing decade of ups and downs.
That makes sense - brokerages are going to need a new generation buying equities. Once LikeFolio users’ investing interest is piqued, they are funneled to TD Ameritrade.
“When they are ready to take the next step, they can open a brokerage account and start to go deeper, like learning about fundamental analysis,” Sherrod says.
Speaking of such due diligence, another of the companies that pops up in my social media feeds is Yum Brands Inc, parent company of KFC. Maybe it is time to do a deep dive into its fundamentals, with a family-size bucket of chicken.