Our intrepid leader, Alexander Wallin, contributed an article today on Seeking Alpha
that will give beginning investors a primer on the array of crowdfunding options
available to investors today, including investing with equity crowdfunding
He predicts that in the coming year, there will be a shift in the marketplace the likes of which we are just beginning to see. The "Network Effect" or power of the crowds will be in full force, and it will change the way we collect and analyze information as individuals. He attributes the power of the Network Effect to a sheer numbers game:
Collectively, we are more intelligent and capable of making better decisions than the smartest individual among us, as long as the given group is large and diverse enough.
He then explains how staggeringly effective the crowd can be over even the most capable of individuals:
I researched this issue during my time at UCSD, and found that with the right application of crowdsourcing, an investor could create a portfolio capable of outperforming the S&P 500 18 out of 20 quarters and pick outperforming stocks with an 87% certainty. These results line up with other similar studies.
Along the same lines, a study by Bollen et al. (2011) used Twitter sentiment to predict stock market fluctuations with an accuracy of, believe it or not, 87%. Another by Chen et al. (2011) found that activity on a popular finance blog could predict stock returns and earnings surprises: the more activity an article had, the stronger its effect. Yet another study by Yi (2009) found that mentions of a stock in social media could boost its trading price.
If you are interested in beginning your 2013 with a new investing strategy, but aren't sure where to start, Wallin offers this advice:
"[B]udget $1000 for the year to invest in a handful of your favorite startups and small businesses. There are a lot of talented people and great ideas out there. The JOBS Act promises to give those great ideas the opportunity to develop into full-fledged, profitable companies."
So if you took that $1000, and invested into in 10 promising start-ups this year, contributing $100 to each, you could see some dramatic returns if one of them takes off. It doesn't have to be a huge investment for you to see potentially dramatic returns. Alex demonstrates this with a real analogy from the investing arena using Facebook (FB
) as an example:
If you had invested $100 [in those early years of Facebook's initial round of seed funding], how would your investment have performed? Well, if you had sold your investment [of $100] at $40/share during the IPO, your $100 would have been worth $1.4 million. Most would agree that this is not a bad return.
So how do you find out about the next Facebook or Linkedin or other promising startups before they get big?
Here are 4 tips to help you find information to help inform your strategy to invest with equity crowdfunding for startups:
- Join a social investing network like SprinkleBit.com to connect with other investors who share similar interests or are experts in an area you would like to learn more about.
- Follow SprinkleBit investors and see what they're trading, and follow potential companies you're interested in to track their financials before deciding what your next steps are.
- Subscribe to the SprinkleBit Investing Blog and learn about start-ups that build products or services that you are interested in.
- Attend technology press conferences run by trend-spotting news outlets like Tech Crunch and subscribe to blogs that have we featured here on the SprinkleBit Investing Blog, like VentureBeat.
Those are just some of the ways that you can leverage the power of crowdsourcing to improve your financial literacy and learn about investing tips to better your personal wealth.
Now we'd love to hear from you: how do you make your financial decisions? Do you consult peers or family? Were you surprised at the results of the studies above?