I received an email from the Wall Street Journal today informing me about their new, free service, the Market Data Centre. It is a worthwhile new service to be sure as it is full of useful market information. While I was on that site I followed a link to another service, http://www.stockpickr.com.

Stockpickr boasts that it uses social networking strategies to help users build effective investment portfolios. Here is what the company says it does:

What is StockPickr?
StockPickr is a free stock recommendation site that allows you to receive automated stock recommendations from thousands of portfolios, both professional and amateur, with a similar make-up to yours. Just enter your favorite stocks and within seconds you will receive new recommendations based on our internal algorithm matching your portfolio with the thousands of hedge funds, mutual funds and other peer portfolios (DIY portfolios) that have a similar composition. It also allows you to network, research and discover new great ideas in the financial market arena.

A quick visit to the site reveals a somewhat poorly designed interface with way too much going on. Still, the premise is an interesting one: Does a socially networked investment site give us an opportunity to improve our stock-picking?

Not everyone thinks so. Roger Ehrenberg of Information Arbitrage thinks the trend could be a disaster for investors:

It is particularly interesting to read some of the comments to the TechCrunch article. The diversity of comments pretty much represents that of the investing public - most comments have no appreciation for history or empirical research, a few are so far off the reservation (citing "wisdom of crowds" as the reason why such sites make sense) as to hardly warrant comment while a few actually raise the fundamental issues of indexing, risk management and diversification. The feel one gets from looking at these sites is that investing is somehow supposed to be FUN. For those of you who have lived in the markets for a long time, we all know this to be the kiss of death.

Ehrenberg is a highly-skilled investor so his opinion has to be given some weight. That said, the "Wisdom of Crowds," phenomenon he downplays is premised on some statistical truths. After all, look at the Iowa Electronic Markets exchange. They use markets to make predictions on the outcome of a number of different markets:

The Iowa Electronic Markets are real-money futures markets in which contract payoffs depend on economic and political events such as elections. These markets are operated by faculty at the University of Iowa Tippie College of Business as part of our research and teaching mission. We invite you to join us in this mission.

Political Markets
Economic Indicator Markets
Classroom Markets
Related Markets
Influenza Prediction

How successful are these markets? Well, in a word, very. Here is a news release from the University of Iowa, the institution who runs the site:

The IEM continued its track record of predicting election vote-share, predicting Bush's victory within 1.1 percent of the actual outcome.

At midnight on Nov. 1, the IEM's vote share market had Bush earning 50.45 percent of the popular vote, compared to 49.55 percent for Kerry. The actual vote count as of Nov. 4 showed 51.54 percent for Bush and 48.55 percent for Kerry. The IEM's average absolute prediction error for this election was 1.1 percent, below its historical average of 1.33 percent, according to Tom Rietz, IEM co-director and associate professor of finance at the University of Iowa.

The predicted margin of victory was very close throughout the summer and fall, with Bush leading for all days except for a few near the Democratic National Convention.

Operated as a research and teaching tool by six professors at the University of Iowa's Henry B. Tippie College of Business, the IEM is a real-money, web-based futures market at http://www.biz.uiowa.edu/iem/. Traders invested as little as $5 or as much as $500 to buy futures contracts based on the outcome of the presidential election.

Wherever you fall on the "Random Walk" scale of markets, social-networking is an interesting phenomenon when applied to stock selection. Still, we'll let Ehrenberg have the last word:

The company is also of the belief that many people want an easy way to share their knowledge with a small group of their friends in a structured way. They are aiming for a del.icio.us model more than a digg model, they say. That’s the main part of their approach that prevents pump and dump activity, they plan to institute activity monitoring that will notify users of suspicious behavior as well.

Needless to say, there are variety of other sites trafficking in this space (with confidence-inducing names such as Feeling Bullish, Bullpoo, Gradr, Stocktickr and Digstock). I don't know if I've been living under a rock or something, but this whole social-networking-for-stocks phenomenon has completely passed me by. And for good reason. It's both stupid and potentially dangerous.