Can Twitter predict stock prices?

A few groups out there seem to think there may be an opportunity to translate the world of tweets into actionable buy/sell recommendations. DCM Capital, a London based trading house, is one of these firms. Launched in January, this social trading platform claims to harness the power of twitter to make buy/sell recommendations. 2.5 billion Tweets are analyzed each week to predict market sentiment. The output is a 0-100 rating; a high rating indicates positive feelings from social media which presumably suggest that that the stock is a good buy.

Will we see millionaire social media stock pickers in the future? Answer: “Heck no, and twice on Tuesday.”

If there is one thing The Lance Dance (an awesome UW finance professor) taught us, it is that the capital markets are incredibly efficient. If there is an opportunity to beat the market, everyone will jump on it, eliminating the ‘leg up’ these social trading platform claim to provide.

Recommendation: Keep the money you would otherwise spend at DCM Capital in a boring tangent (diversified) portfolio. Use the time you would otherwise spend in your pajamas analyzing the DCM reports on important stuff, like knitting or gardening.

Social media plays an awesome role in society, just don’t count on it to fund your retirement.

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