The Fourth Factor

Fama and French wrote “The Cross-Section of Expected Stock Returns” in 1992, unveiling their three-factor model. They expanded on CAPM, which boils down stock returns to just one factor, beta. Fama and French took this a step further, finding that the vast majority of a stocks returns can be explained not just by beta, but by size and book-t0-market as well. Twenty-three years later Igor Gonta, CEO of Market Prophit has found the fourth factor, and that factor is us.

Here’s how it works: Market Prophit ranks financial tweeters based on the accuracy of their tweets. According to S&P Dow Jones, their index provider, Market Prophit “uses quantitative algorithms to rank and score financial pundit/blogger performance based on the accuracy of their stock market commentary and track record of predictions.”

You might be thinking this sounds pretty silly, but get this. The index was launched in May 2015, but has data going back to July 2013. The index excludes ETFs, penny stocks and any stock that has a market cap of $1 billion or less. The performance has been nothing short of spectacular.

crowd

Will CROWD be another case of a great looking back test that doesn’t work in real life? We’ll see, there certainly will be some real life obstacles, taxes, borrow, etc. I’m excited to see who rolls out the ETF and how many assets it will attract.

Further Reading:

Twitter Chatter Packed in New Index (ETF.com)

Hey Finance Twitter, You Are About to Become an ETF (Bloomberg)

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  1. MIKE commented on Oct 16

    Seems like causality could go the other way, people tweet and stocks go up. Didn’t see how many “bloggers and tweeters” they follow, did you? Lastly, this reminded me of Bringing Down the House, the MIT card counters – keep track of the conditions and then make a play.
    Nice post Mike

  2. Joseph Markel commented on Oct 16

    Interesting article Michael. Have you read The Wisdom of Crowds by James Surowieki? This “fourth factor” reminds me of the ideas in that book.

    • Michael Batnick commented on Oct 17

      Nope, will put it on my list. Thanks for reading, Joseph.