Image by: Robert Scoble
By Michael Sterling
Everyone likes to think they have psychic powers in the stock market. Some even make a good deal of money offering their “intuitive wisdom” to desperate investors seeking a direction. But recent studies have shown that with the help of Google Trends, not only can you be one step ahead of the pack, but your returns are nearly guaranteed.
What’s Behind The Formula?
Google search trends display what people are searching. By aligning themselves with keywords during searches, doctors were able to spot side effects of certain medications by seeing how many people have searched about it. Not only that, but they were also able to forecast the spread of the flu much quicker than before.
So the question became: Can the same idea be implemented with the stock market? Researchers from the University of Warwick Business School put this idea to the test.
Similar to how patients search for their own self-diagnosis, investors who become worried or anxious about the future of their assets tend to do a Google search to find answers. Researchers took this idea and decided to study the stock market history between 2004 – 2011, searching financial “terms” to see any correlations.
If the searches for financial terms went down, they pretended to buy stocks and take a “long” position, holding on to their stocks and waiting for its value to increase. If searches went down, they chose to “short” the market, allowing buyers to “sell” stocks they don’t own with the hopes of buying them later at a lower price.
In the end, researches increased their pretend portfolio by 326%.
How Can I Use Keyword Searches?
In order to make this strategy work to your benefit, you need to devise a structure for your search. Think about your long term goals and most importantly, the big picture your investment plan is going towards.
The top words these researchers used in the search study were “debt,” “crisis,” and “derivatives.” Though helpful as these words are, they only insinuate a searcher’s concern for failure. What about other, more positive, concerns?
If you search a company’s name alone, you may be able to tell how much attention they are getting from investors and consumers alike, and thus, be pointed towards either a good or bad direction. Take it to the next level by typing “return,” or “liquidity” next to the company in question. You might be able to spot what’s on the minds of other investors.
The more “bad” words being searched about a particular stock, the more likely that stock will inevitably decline in the coming days or weeks. Apply this formula to “good” words as well, but think outside the box and try not to be caught in the middle of the wishful thinking many investors often search about.
Beware Of Sudden Market Shifts
Markets have always had the tendency to adapt. Once everyone starts to use Google search terms to try and play psychic with the system, it’s likely the strategy will become less effective. Plus, these terms the researches used (debt, crisis, and derivatives) might not be relevant anymore.
To be sure, play a pretend game similar to the researcher’s. Create a strategy of keyword search terms that benefit your long term plan in the market. See if it shows any success on predicting returns. But remember to be relevant.
Anxious investors are always going to search about things which affect them. Yesterday’s news is no longer important. What is important is what you read in the morning’s newspaper. If your searches aren’t up to date, then you might as well be betting on an invisible horse. This is the only way to break away from the adapting process.