Tuesday, August 16, 2011

The Evolution of 'Social Investing' Part II (TWIT)

Part 1.
During the last three years of the ‘social investing’ revolution the average investor has gained access to information previously coveted & held close by ‘professional traders’. The markets have functioned without social media prior to 2008 with periods of volatility spaced out in YEARS not day’s weeks and months. Though in late 2008 we saw a near collapse of the last bastion of greed as social media was perking up. Interesting indeed…

That being said lets get back to my part I analogy of the Ferrari…. Since about April of 2008 the twitterverse has handed a Ford focus driver (the average investor/trader) the keys to a Ferrari and were told to floor it and to not worry about that paddle shift F1 gearbox (direct market access coupled with privileged information) just “learn as you go’. Some drivers (armchair investors) might really grasp the wheel and drive off into the sunset while others might get themselves into trouble they could have never EVER imagined before.

What type of trouble can you get into you might ask? Well for one most professional traders who were around before the twitter world exploded with traders exchanging information were trained to react to market moving information in a calm and constructive manner. Average investors were not using as many of the ‘exotic’ trading techniques professional investors have used for years.
These professional investors know how to handle ‘exotic’ trades in any environment and they do their best to preserve market structure and stability when trading in and out of the positions because their livelihoods are hinged on the efficiency and orderly function of capital markets.

In previous markets these Ferrari’s stayed within the white lines and rarely crashed, now we are seeing massive moves in short periods of time seemingly out of nowhere without any concrete agreeable catalyst. The culprit behind these moves could very possibly be the armchair investor trading out of (or blown out of by their brokers) trades placed when social media is at extremes in sentiment. The school of fish seems to swim with the leader of the school changing direction at the flip of a fin. What makes this school so dangerous is it does not matter if the leader of the school is right or wrong. The pied piper led the rats out of the city into the ocean via his whimsical tunes…. In my opinion modern day ‘social’ sounds are being generated by various social media personalities & it is not known or quantifiable (yet) which personality the school of fish is going to agree with and follow at any given time.   

It sure as hell seemed on August 4, 2011 the school of fish was in the buy the dip mentality when in reality the professional Ferrari drivers passed them at 200MPH in 7th gear destroying the Ford focus drivers already slim confidence and trading accounts for nearly 7 sessions of utter dissolution. And in closing….  gosh DAMN it our markets are not a sandbox where you can just smooth over your crumbled castle and start over….

Part 1
Stay tuned for the final installment. 

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