Wisest of the crowds

Yesterday the NYT’s David Leonhardt wrote an interesting piece covering new research from Christopher Malloy of London Business School, Andrea Frazzini from University of Chicago, and Lauren Cohen of Yale. Entitled “The Small World of Investing: Board Connections and Mutual Fund Returns,” the research basically finds that mutual fund managers are more likely to buy stocks and take larger positions in companies that are in their academic network. Further, these money managers perform substantially better than funds that dont buy stocks in their network.

The data:

Yowza! Over 8% per annum difference! These guys beat themselves up for small fractions of a single percentage point return.

The authors conclude thats its either insider trading, ease of information gathering by being in the network, and better manager selection by investors due to network relationships. Intuitively all seem correct but the split is, of course, the rub. (I blog about this some more here.)

So I find this really interesting because it assigns dollars to the value of networking. We all know its important but who would of though that the difference was so large? Sure some of this data includes illegal activity but I think we now have a solid benchmark of networkings value. How does 70% more money sound to you? Its easy to see why social networking sites have been all the rage and why it is imperitive that all you old-schoolers who think your physical network is all you need, need to think again - especially if you are selling lofts to hipsters and not mansions to grand ma. Come on, get connected and get rich!

The National Association of Realtors reported existing homes sales today (the press release). The data was scary and probably indicated the first quarter activity was a knee-jerk reaction by consumers who were sidelined the previous quarter. Of course this didn’t stop the NAR from spinning it as Matt Carter at InmanBlog noted in his excellent post, “Again with the weather”.

Here are the facts:

- Nationally, sales declined 8.4% versus last month and is down 11.3% versus last year.
- The West was hit hardest, being down 9.1% versus last month and down a whopping 16.7% versus last year.

- Median prices were up 1.6% nationally but down 1.8% in the west versus last month

- Inventory declined 60k units (1.5%) to 3.75 million units but because of faster declining sales, the number of months of supply actually increased to 7.3 from 6.8 a month earlier.
- This monthly decline was the largest since 1989 according to the Associated Press via MSNBC and the NYT

What does this all mean? Probably just that there was a “dead cat bounce” in interest in the first quarter of 2007 after the unbelievably slow fourth quarter of 2006. This happens all the time in financial markets where people attempt to bottom pick a falling market resulting in a series of rapid, but ultimately unsustainable, bounces. If this is in fact a dead cat bounce, look for prices to go substantially lower. From my experience as a trader, it will only be when people loose hope that a bottoms in prices gets set. Did you know that more people lost money in the 1929 crash buying stocks 50% below their peak?
Having said all this, markets are hyper-local and what’s true generally can be completely untrue for your neighborhood or street. If you live where new supply is negligible and high-paying jobs abundant and secure, don’t sweat it. If you live in a place where new construction in plentiful and excessive credit rampant, look out (sorry Florida)!

Side note: My-Currency markets are predicting lower prices in many san francisco zip codes over the next 3-6 months. An example for 94117 (Haight, Alamo, Ashbury Heights, Cole Valley)

Yesterdays New York Times had an article by David Leonhard (quoted above) entitled “Odds are they’ll know the ‘08 winner” that talks about prediction markets impact on the elections, the economy, and a host of other areas. The point is that markets are making things better. Better for business and better for people. It’s doing this because, as N. Gregory Mankiw is quoted saying

“Everybody has information from their own little corner of the universe, and they’d like to know the information from every other corner of the universe. What these markets do is provide a vehicle that reflects all that information.”

What is missing from this article, is nothing more that the fact that predicition markets are part of a broader movement towards using tools to capture distributed information, enable coordination, and enable collaboration. Examples? Wiki’s are markets. It is a location where participants buy and sell words and ideas that best capture knowledge, information, and opinions. Blogs? Same thing really. I write something, someone else reads it and they create a comment. That comment begets other comments internal and external to my blog that inserts all participants into a virtual conversation that has no border. Another example? What about open source development of software. Software developed by anyone and anywhere. Much of My-Currency is built upon open source software.

So My-Currency is just joining a broad movement to empower people and to use tools that don’t presume to know where information resides or who has that information. Markets and social media tools (blogs, wiki’s, answers, etc) enable solutions in a way that is cheaper and better.