Ask YC: how could investing by crowd wisdom actually work?

[Tichy]

The idea to somehow leverage crowd wisdom for investing has been on my mind for a while, and probably on that of many others, too. So far I haven't acted on it, in part because of other projects, but mainly because I could not yet think of a way to avoid abuse of the system. For example, if users would invest together and vote on investments, somebody could vote on an irrationally high price for something he wants to sell outside of the group, and use the shared money to buy it.

Now I have been invited to a german startup in beta (sharewise) where people can give recommendations, predictions, and do the social networking thing. And it makes me feel even more clearly: why should I trust the projections of those people on sharewise more than the projections of the actual stock market? It costs nothing to create a projection on sharewise, whereas people "voting" on the correct price in the actual stock market better believe their projection, because they put their money on the line.

In general, if somebody (analysts for example) is projecting a higher value of some stock, why do they not buy it? Either they believe in what they say, then they should buy it, or they don't believe in it, then perhaps they should better keep their mouth shut?

So I guess it is back to investment clubs again? I don't know exactly how they work, I would guess everybody can speculate with the money they put in only, but wins and losses are shared? But even that seems to be exploitable in the same way as described above. Presumably one would only start such a thing together with trusted friends, but still?

At least there seems to be commercial software for managing investment clubs, and quite expensive, too, so perhaps there is still a market out there for web 2.0 style managed investment clubs. I just don't think that any of them will provide a magic bullet to outperform the market.

I should add that I don't know very much about investing etc. anyway, but I am always happy to learn more...

[jakewolf]

have you looked at caps.fool.com? several online brokerages are building communities such as tradeking.com. covester.com tracks your real trades and is going to allow others to follow successful traders for a free.

good luck, there are a lot of great sites out there already.

[Tichy → jakewolf]

Thanks for the link! caps.fool.com looks very similar to sharewise, and therefore probably has the same flaws (if they are really flaws).

And even tracking real trades might be open to abuse - trade a small amount on the tracked system, and then a large amount on some other system? At least I can see some incentive for participating, though: perhaps you are more likely to attract followers to your trades, which in turn increases the value of the stock.

At this point I am not planning a real startup (as obviously I don't have the right idea yet). I was contemplating to experiment a little together with friends, though.

[nextmoveone → jakewolf]

Hey I was going to work at Tradeking... too far though.

p.s. check out this site I am building:

http://investorscrystalball.com/

[bkmrkr]

hey, send me an email bkmrkr at yahoo.com

[davidw]

Index funds?