ComScore reported a whopping 25 percent annual growth in audience for its news, finance, and research oriented website for February 2007. Impressive growth indeed. The total internet audience in the US grew five percent in February alone to 175 million. As a person involved in running a financial research website myself, I am naturally curious about the emerging trends and the Web 2.0 spurred growth in internet audience. The mantra seems to be “build community, let people generate the content and interact". The concept has been extending into the financial world as well.

I have come across a number of traders’ blogs, which have done quite well in attracting an audience. These are typically musings of active traders (or professed active traders) which are logged on to the internet. Self-directed investors and individual traders are drawn to the blog sites, where they mine for information and leadership thoughts that will enable them to achieve that extra bit in their own trading performance. These users also leave their own views on the topics under discussion, creating a multi-way contribution and learning process.

Some websites have taken the community approach a step further. The most innovative concept I’ve seen is the practice of arriving at a price forecast based on an opinion poll of the audience. The belief is also that people working with each other in a community are likely to learn (to forecast the stock market) much faster than those working alone. Also, since the stock market moves based on the collective thinking of thousands of individuals, the expectation is this: the more the people who join the opinion poll, the more accurate and useful the predicted outcome would be.

I don’t think anyone can deny the benefits of collective learning. A regular sharing of thoughts with peers or individuals with greater experience is bound to accelerate the learning process and push a beginner up the learning curve. The benefits of an opinion poll to generate accurate forecasts also seem appealing at first sight. Yahoo recently carried an article on PayScale, a web-based salary comparison service which through opinion polls has built up a database of salaries which can be used to predict compensation for a given job profile accurately. Unfortunately, utility of both of these concepts is tenuous in financial markets.

Most of these websites poll only the end result forecast of their members rather than the reasons behind the forecast; blogs have the opposite characteristic of discussing the reasons but not arriving at a forecast. The learning benefit from mere aggregated forecasts is practically nil. For example, if someone falls ill, running an opinion poll is perhaps not the most reliable way to diagnose and treat the illness. However, if you discuss the reasons and the symptoms, there surely is opportunity for collective learning. Similarly, mere aggregate forecasts of stock market serve little purpose in enabling learning unless accompanied by reasons (blogs probably do). Also, the forecasts themselves are meaningless if the opinion contributors are not actually acting on their own opinions. It is well established that the markets are dominated by institutions – the so called smart money rather than individuals as a collective group. I can’t imagine any institution participating in such a poll. In the absence of institutional participants, any accuracy in the poll prediction can only occur by chance. In fact, financial market theorists talk at length about contrary indicators – where a consensus opinion of the crowd is a strong contrary indicator. In summary, I would not recommend any serious investor to rely on such activity for their trading.

Blogs are useful if they are written by thought leaders. Comments to blogs probably clutter the available information but searching thoroughly can still reveal some hidden pearls of wisdom in them. With these, blogs can prove to be great educational tools. However, blogs have two key drawbacks. First is finding real thought leaders. Every market participant is entitled to his or her own opinion. And there are a lot of less learned opinions based on less rigorous analysis, which can eat away the reader’s time. Second, blogs are often not actionable. They present a point of view and leave it at that. Are readers satisfied with that outcome? Some are. Many aren't. Ideally, the reader needs a service that explains the rationale for a stance (thus giving understanding and comfort), and follows with a truly actionable conclusion. Brokers’ equity research was designed to achieve these goals simultaneously.

However, riddled with conflicts of interest and soft dollar disclosure pressures, traditional equity research appears to be heading towards extinction with a lot of sell side brokers restricting or curtailing research. But research cannot be substituted with opinion polls and blogs. A number of independent research firms have emerged to take the positions formerly occupied by brokers and have been doing so quite successfully. Research undertaken by respectable independent firms tends to be rigorous and serves to clarify the issues for an investor or trader to take a position. Formal research provides an actionable conclusion and in most cases follow-through coverage. Blogs and opinion polls can at best add on to formal rigorous research, and even that assumes that the end client – the investor or trader – has the time for everything.