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The Power of Crowds: How Equity Crowdfunding will Revolutionize Retail Investing

Published on Seeking Alpha | SprinkleBit Investing BlogOur 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:
  1. 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.
  2. 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.
  3. Subscribe to the SprinkleBit Investing Blog and learn about start-ups that build products or services that you are interested in.
  4. 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?
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At SprinkleBit, founded in 2011, we believe that if you have a dollar, then you have what it takes to be an investor. Sometimes you just need a little extra help to build your confidence. With our virtual simulator and our 24 free SprinkleBit University chapters, you will be able to learn the ins and outs of the market risk-free. Once you're ready to dive into the real thing, the community will be right there with you to help you on your journey. Dive in and start taking control of your financial future. You won't regret it.

3 Comments

jake

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Hi
I’m new here and still learning what this site is about. “Crowdfunding”….hummm catchy.

Highly recommend all who are interested in this subjec to read “The Wisdom of Crowds” by James Surowiecki. Excellent book for anyone who wants to learn about crowd thinking. Good data and findings.

But here’s the catch. If you are small retail investor and only have $1,000 to invest, do you author, feel it is prudent for the investor to use “crowdfunding” as their investment vehicle. Not I.

If you only have $1,000 in your investment account, spare money so to speak, or money you are willing to gamble with as a venture capitalist I would think it better for you to enroll in your local community college or university and take a course about finance and investing. Use this money for your investing education. Or take that $1,000 and buy every book that Warren Buffet wrote and all the books that he has listed in his reference pages and buy them.

“Crowdfunding” is an interesting idea but I think education is even a better idea. After that, you might just decide to take your $1,000 and buy into a diversified passive index fund…. or maybe not. The odds of you or me or any smart guy finding the next Apple or funding the next Facebook is seriously against you, I mean big time. Why play such odds? If because it’s fun to play the lottery, then by all means,…enjoy. But if you actually think you can win the lottery when the odds are so stacked against you…well, that’s why I think its better to take a class on statistics.

Kathryn Wells

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Hi Jake, I totally agree on all of the points you make. First of all, great suggestion to read “The Wisdom of the Crowds.” I’m actually listening to that on audiobook at the moment. It’s pretty fascinating how a diverse group comprised of mostly non-experts can together, come to the same (or better) conclusion than the experts. The data that Surowiecki has compiled is pretty compelling indeed. As Surowiecki, and Alexander Wallin, and others have found, the “crowd” actually can collectively find correct answers and make solid predictions due to sheer numbers and averaging of varied empirical knowledge—and that they can usually do so with more accuracy than the “experts.”

If you had $1,000 to invest as your first investment, and you’re worried about the market, our investing educational portal (and community in general) encourages you to first know your risk tolerance. If you know your risk tolerance, aka “how much you’re willing to lose,” you can approach any strategy of investing with confidence and levelheadedness. Sure, $1,000 of your own money is a lot to put up for most people, so to that end, we encourage you to try investing with our virtual market. You get $5,000 in free SprinkleBucks for signing up, which you can invest in the actual market to practice weathering the ups and downs of the market without the risk (or gain). You can then practice whatever strategy you wish to try: long-term or short. We encourage long-term investing, but if you are curious about short-term, the virtual portfolio is a good place to try it out, because there’s no risk in using virtual money, and you can start to see how small commissions add up and deplete gains if you’re not watching out for them.

I agree that education is a foundational part of becoming a financially literate investor. But between equity crowdfunding, and receiving an education, I don’t think that the two are necessarily mutually exclusive. If I could put $1,000 into a company that I believed in that was making a product that I knew instinctively that would be in every home or garage in the next few years, I would. Before doing so, while I was learning about how to understand financials, I would ask my friends who were more experienced in investing, tell them my reasoning, look at the numbers with them, and crowdsource their impressions, advice, and know-how. Statistics and fundamental analysis combined with an eye for market trends—not just statistics alone—can help any investor spot the next big one. And of course, if you’re totally risk-averse, then low-risk index funds and blue chips might comprise the bulk of your portfolio—and that’s okay too. Crowdfunding is very young, and will be having to prove itself in the next 5 years before we can know more about how to incorporate it as part of a cohesive investment strategy. The potential it shows for high gains, however, is definitely an exciting game-changer for any investor, seasoned or new.

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