Social media and the internet - The investor revolution!

Social media is all around us and is growing fast. With the landscape changing fast, Ben Jaglom reports on how it may impact investors.

There is a huge transformation taking place. The world’s largest social network is undoubtedly Facebook, the company started by the legendary Mark Zuckerberg and after a private placing carried out by Goldman Sachs, estimated to be worth up to £100 billion.

Starting out as a small project at Harvard University, more than one in nine people on the planet are now said to use it, with social networking sites including Vkontakte for the Russian speaking world, Badoo for Latin America and RenRen in China meaning that a very large proportion of the world’s population is now interacting using social networks and for investors the importance of using them cannot be understated.

The world’s markets were recently shaken by the IPO of LinkedIn, the social network for employers and companies that valued the company at an enormous $9 billion. The internet is redefining the way that investors use information and interact with each other with websites such as microblogging site Twitter breaking news stories at a pace faster than any conventional news outlet could ever manage and with both companies and individuals using the sites to gain access to original information as well as to share ideas.

Message boards
Private investors of old may have investigated a company through a conversation with trusted friends and confidants, the financial press or the use of investment clubs. However, today’s web-savvy private investors are more likely to use one of the UK’s online message boards where information on practically every listed company is available, with many of the most active discussions attracting hundreds of responses a day. The internet is transforming the opportunities available to normal individuals to access knowledge and numerous investors are taking advantage of this.

As Joe Everitt of Oriel Securities remarks, ‘At Oriel we all like to take a look at the message boards- they give us a feel of the market and what investors are thinking’ adding that message boards are often full of ‘extremely well informed people’ that often possess a ‘detailed technical knowledge’ on particular companies and sectors.
The UK’s most popular message boards are undoubtedly ADVFN and Interactive Investor – also known as ii,  which attract the eyes and attention of the UK’s private investment community, who head towards the sites in search of debate, entertainment and information.

ADVFN, which also operates a stock quote and charting software system, was established in 1999 by video games entrepreneur and current CEO Clem Chambers, who has also written for a number of publications as a tipster and columnist. The website boasts that it has over three million registered members and two million unique visitors a month.

Chambers is somewhat philosophical about the role and importance of message boards ‘Like all things it is very important to some people but very unimportant to others’ adding that while the message board function of his company is important ‘so are our charts and pricing tools with each layer of our product adding more to our business’.

While ADVFN is probably the best known website of its kind in the UK Chambers is keen to point out that it is also ‘the leading company of its kind in Brazil’ and is also growing fast in the USA which he insists will ‘soon be bigger than the UK’.

Message board speculation and rumour is frequently blamed for sudden lurches or surges in the share price of well-discussed companies such as Rockhopper and Desire Petroleum. This has particularly affected the fortunes of smaller AIM companies, who often have lower liquidity and as a result a few purchases in the order of £10,000 can move the share price very quickly. Chambers disagrees with this viewpoint, arguing that ‘The private investor does not move the price of a company like Rockhopper.’

Message boards are also famed for their robust nature, with numerous online personas frequently taking very strong opinions for or against a particularly company and often defending their particular point of view with what at times can be abusive or offensive language.

Chambers concedes that there are of course ‘mad threads with mad companies with people with ridiculous names that will insult you if you do not agree that the company they like is going to the moon’. However, he quips that this is ‘what you would expect on the internet’, though he adds that if either regulators or the police contact ADVFN they fully cooperate with any information that they are required to provide.

Chambers argues that despite the multitude of colourful characters, what message boards are particularly good at is providing a ‘crash course’ on the background and history of a particularly company’, adding that some threads on message boards contain people that ‘religiously collect’ information.

Regarding some of the users Chambers opines that ‘one of the dangers is that some people use investing as their format for gambling and are unwilling to listen to anyone that will not tip a company’. He laments that ‘everyone wants to make money quickly whereas I like getting rich slowly – something no one wants to hear’.

Regarding future opportunities, he sees potential in Japan, India and Germany. ‘We have basically broken through all the conceptual technical hurdles necessary for us to run globally and have a dominant footprint.’

One company unlikely to hope ADVFN achieve global dominance is its biggest rival Interactive Investor. Its head of technology Tim Huckle is clear about why private investors on message boards tend to be drawn much more to AIM than fully listed stocks: ‘In the UK the most interest is in the small-cap sector- this is because UK investors tend to look for some risk.’

Huckle argues that the increasing popularity of message boards runs parallel to the rise of social networking sites such as Facebook, arguing that people are increasingly looking for a community to share information and experiences. ‘Message boards in my opinion provide a shared journey in which you can together experience the ups and downs of being an investor.’

Regarding the users of message boards he concedes that ‘there are of course people attempting to manipulate the price’ – a process known in message board lingo as ‘ramping’ to increase the price or ‘deramping’ if seeking to reduce the price. He adds that on ‘another site’ there was ‘someone that even went as far as faking an actual news released to try and move the price’.

However Huckle argues that the website contains a community where ‘users tend to police themselves’ adding that Interactive Investor has a ‘neighbourhood watch’ system in which you can report posts of concern. However he insists ‘most people are careful and sensible and as a result you find that this is a community in which everyone looks after each other’.

For the future of the website Huckle, who mentions that research in the US has shown that investors tend to value the opinions of online peers more than either the media or analysts, will come in developing the recognition that will be given to individual message board users.

‘We will have a system where you will be able to look at a poster’s patterns and see what they have recommended’ adding that a good poster ‘will be seen like an analyst’. He also adds that there are plans underway to verify if posters have bought the shares in a particular company, something that will enable certain users to have a ‘badge of trust’.

One man who is less trusting of message boards is Broker Man Daniels. An anonymous blogger, he started off writing on message boards as a poster and ended up getting banned due to what he explains were a ‘number of allegations made against him’. He now runs a website on which he writes about commodity companies on AIM and which has proven to be a hit amongst many in the private investor/AIM community although he alleges that some of his critical remarks about market makers and others have led to threats of violence and death.

He argues that when he first started out the majority of those using message boards ‘were going in blind without doing much research and that people would subsequently invest on that basis’. Indeed he notes that ‘many investors do not even investigate the basics such as recent director dealings or the past performance of the directors on the board’ although he himself ‘always invests in the fundamentals of a company’.

He argues that message boards are often ‘infiltrated’ with those seeking to manipulate the price, adding that the sector as a whole is ‘heavily weighted against the private investor with stocks being manipulated, delayed trades and a system that is designed to make the market makers the most profit while taking away from the private investor – who are seen as little more than cannon fodder by many in the City’

Daniels, who suggests that ‘some boards on particular companies have substantially more gravitas than others’ adds that ‘having spoken to brokers I know that all of those involved in the AIM market will read the boards on a company that concerns them – if only to get a sentiment of what the market is thinking’

In the future he opines that the ‘massive industry’ behind the message boards ‘could well see video hosting and more interactive interaction’ with Daniels quipping that ‘in a few years time the technology we are using now will seem like we have come out of a cave’.

Today the internet provides a multitude of information that for previous generations of investors would be unimaginable. Message boards’ hundreds of different threads on companies often contain detailed information on the exact workings of a business with posters that are frequently better informed than many of the analysts and commentators and with updates and interpretation taking place within minutes of a major announcement.

Nonetheless they do contain their dangers. Unlike analysts and journalists, the posters on message boards are anonymous, and do not have to disclose any conflict of interest that may present themselves. Furthermore, their anonymity often leads to language that ranges from the rude to the libellous as they are unaccountable for their actions in a way that an analyst or journalist would be.

Operating in a new era, investors of today are fortunate enough to have access to a variety of websites and tools that give them the power to research and monitor companies as well as keep in touch with fellow investors. These include Facebook – giving them the power to build bonds with others and instantly share information, Twitter – which creates a democratisation of power in which companies can be accessed and discussed at unparalleled speeds and of course the message boards – surely an essential part of any investors research into a company in the 21st century.

With technology changing at an incredible pace and with endless innovations allowing information to travel through what would have once been impermeable barriers we would urge investors to embrace this opportunity.

Guide to message board terminology:
Poster: Someone that writes on a message board
Thread: A particular topic on a message board
Alias: The name used to post on a message board
BB: Shorthand for bulletin boards- another word for message boards
Ramping: A term used to denote one that attempts to manipulate the price of a share upwards. Deramping is the same attempt but in the opposite direction
Trolls: An expression for internet users that attempt to engage in the deliberate antagonisation and provoking of other users
Blog: a website where people share their thoughts/opinions and feelings on a particular topic
Social network: online service that focuses on building communities among people
DYOR: Shorthand for do your own research – used to indicate caution should be used when investing
IMO: An acronymn short for ‘in my opinion’