Piqqem: Tapping the Investing Wisdom of Crowds

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CAPS, which launched in October 2006, now rates 5,500 stocks that must have a market cap of at least $100 million, trade no lower than $1.50 per share, and have at least 20% of their opinions come from All-Stars—users with superior stock-picking track records. Weighting votes according to users' track records for accurate picks and returns in excess of the Standard & Poor's index of 500 stocks "enables us to calculate a community score for each stock and we can do a relative comparison that puts them into quintiles from a one-star [rating] to five stars," says John Keeling, general manager of Motley Fool CAPS. The weighting method corrects for what he calls a "positive selection bias" among relatively inexperienced and overly optimistic investors, and is important given that "we ask the community to become an analyst and rate as many stocks as it can," he says.

Piqqem's Winter: superstars crash

Investing site Covestor has migrated to a wealth management model through which users can, for a fee, replicate the trades of certain investors or professional asset managers whose allocation strategies they agree with—or who have proven track records of picking winners. Winter at Piqqem says he's not interested in identifying superstars for people to follow, because they are apt to crash and burn after a long hot streak.

It's not clear yet if investors should be making real trades based on Piqqem's data. Winter sees actionable ideas emerging as the site's managers zero in on specific data points to track, such as earnings surprises. As the data set increases, Piqqem plans to hire quantitative analysts to look for correlations around the sentiment readings, which may include whether sentiment is a leading or lagging indicator and if it's more relevant to the performances of large-caps than smaller companies.

Zack Miller, a one-time hedge fund analyst and former head of business development for investing site SeekingAlpha, is including a section on Piqqem in a book he's writing about the new rules for investing. "If it can get critical mass with the way they've built it, I think there will be some interesting analytical tools" that emerge eventually, he says.

Miller believes that rather than transform how people invest, Piqqem's sentiment readings will be one of many inputs investors consider when deciding which stocks to add to or remove from their portfolios. "It's something I would pay to get access to, to add to that investment calculus," he says. And just as CAPS incorporates CNBC stock guru Jim Cramer's stock picks into its data set, Miller says he would, too. "I may not agree with Jim Cramer, but it's important to me to know what he's saying about a particular [stock]."

is the market too big to be wise?

For now, the demographic breakout that Piqqem provides for stock sentiment is fairly basic—limited to gender, age, and professional categories. But Miller sees potential for more specific demographic analysis, such as what engineers or other professionals living in northern California think of tech stocks such as Apple, which might be more predictive of earnings strength. However, generating data of that caliber will require a much larger and more diverse data set than Piqqem currently has, he adds.

Winter's response to skeptics who say that the wisdom of the crowd is already reflected in a stock price is to respond that the stock market reflects the disproportionate influence of big-block traders and analysts and is more a clearing house for information than a predictive market. Other critics argue that votes should be weighted according to how much money users have actually invested in a given stock because people are less likely to try to game the system when they have more to lose if they're wrong.

Dr. Craig Kaplan, chief executive of PredictWallStreet, believes there may an advantage in simply asking people what they think instead of putting more faith in the actions they take. He's found that people tend to be more willing to tell you what they think about a stock than to trade it. "We're able to get a read on what people are feeling before it crosses their threshold where they're ready to act," he says. "If you wait until somebody has already acted, how much edge do you have on the market? The market is a pretty efficient mechanism, but it can only process information put into it through trades."

It's too early to tell if Piqqem will remain beholden to the collective wisdom of the crowd or—like rivals—start to place more credence in the opinions of its superstars. Perhaps this crowd is smart enough to know that sentiment data should not be the only tool in buying and selling stocks.

Bogoslaw is a reporter for BusinessWeek's Investing channel.

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