Investing via social networks

Shrujit Debnath, a 46-year-old government employee, stuck to his investment in Satyam Computer Services when its promoter B. Ramalinga Raju popped the truth about falsifying company accounts. The stock had crashed to a low of Rs 11, and market pundits had stopped tracking the stock. At stockezy.com, a social networking website for investors, Debnath met investors who shared his optimism. He held on to the stock, which has now multiplied over 10 times from its lows.

Management student Jimeet Modi, 20, got a similar reassurance last October from the members of an online (Google) group, StockTalkS, comprising mostly analysts and experienced investors who were bullish on markets. Modi, who has been investing in stocks since the age of 15, bought shares of Reliance Industries Ltd (RIL) at Rs 950. His money has more than doubled as RIL shares are currently trading above Rs 2,100.

Debnath and Modi are part of a growing tribe of investors who no longer consult their neighbours or colleagues or listen to market pundits on business channels, and instead prefer to connect with likeminded people online for sharing investing tips and making investment decisions. At the heart of this budding trend is a clutch of social networking sites that, by virtue of their more focussed and targeted information and communication, are proving more effective than the online discussion boards and investing communities that have preceded them. Welcome to the world of social investing.

Over the past year, community websites such as stockezy.com, MoneyVidya.com and FourStocks.com have come up in India, seeking to bring together investors, traders on a common platform, much the same way Facebook or Orkut helps us connect with friends, relatives and former colleagues.

But the phenomenon of social investing owes as much to the new social networking websites as the several groups on Google, Orkut and Facebook. StockTalkS is one such prominent group that was started and managed by Mumbaibased investor Jagdish Bharwani five years ago. Its 1,000-odd members, comprising analysts, fund managers and investors, share research reports and take part in select discussion forums to exchange information about companies.

But what really prompts investors to flock to such forums and groups? Says Manish Shah, Associate Director (Business Strategy & New Initiatives), Motilal Oswal Securities: “Everyone is in search of a multi-bagger or a game changer for his portfolio.” The uncertainty attached to markets makes investors wander for that element of certainty. These sites at least provide the comfort of knowing what other investors are thinking or doing.

Unsurprisingly, the biggest draw on these social investing websites is the stock tips and recommendations section, which is modelled on the lines of international websites such as SocialPicks.com, zecco.com or covestor.com. Here, investors recommend stocks and are graded as ace stock picker or a stock guru depending on the performance of their stocks vis-à-vis the index. The rest of the community simply follows their stock picks. Though there is always a danger in handing out tips, for the website promoters, this feature is the biggest differentiator. “After making periodic picks and being on our leaderboard for an extended period of time, one can eliminate the ‘luck-factor’ and can say with lesser doubt that our member or analyst has a talent for picking winners ,” says Tejasvi Mohanram, a former derivatives trader and now the promoter of Tetra Media, which runs FourStocks.com. The website claims to have 16,332 users, of which 6,500 make stock recommendations.

Gautam Kshatriya, a former management consultant with Ernst & Young and the promoter of MoneyVidya.com, is convinced that the rating system on his website is more credible vis-à-vis the analyst or expert recommendations on television, who are rarely tracked for their previous picks. Tushar Makhija of stockezy.com says he has been getting registration requests from small-time portfolio managers in places like Rajkot to allow them to make recommendations on his website.

With markets charting a volatile course since 2008 and very few analysts being able to predict its course, it’s natural for investors to lose faith in the opinions of run-of-the-mill experts and find newer avenues for research. As a result, Debnath spends less of his time in reading analyst reports in his mailbox. Instead, he waits for a regular update from his wife about what’s being discussed on stockezy.com. “Being an investor since 2004, I know for a fact that news flows into the stock prices even before we get to know about it. By talking to each other we can discover opportunistic bets and rely on our own decisions rather than on the recommendations of analysts and experts,” says Debnath.

This credibility factor has also helped in roping in newcomers like 24-year-old lawyer Shashank Bijapur, who just wouldn’t entrust his family’s savings with any broker until he stumbled upon FourStocks.com a few months ago. “I got the first-hand experience of investing in markets by following the top stock pickers, who give their rationale for investing. Which broker would have had so much time to cater to me?” says a confident Bijapur as he recollects the number of FourStocks.com picks, which made money for him. He is confident that his faceless buddies on the website will be first to warn him about a free fall in stock markets.

Besides using the tips from these forums and websites for creating his personal portfolio, investors like Chintan Singhvi, a 29-year-old trader in plastics and polymers, have also benefited from a regular interaction in the StockTalkS forum. In early 2008, the rupee was trading at Rs 40 to a dollar, and the general perception was that it would go down to Rs 36. But Singhvi discussed it with other investors in the forum, who believed it could go down to Rs 48-50. He immediately advised his trading partners to book dollar payments at Rs 40 instead of expecting it to come down to Rs 36. The trading partners never had to regret the advice given by Singhvi.

But what has worked for Singhvi and others mentioned in this feature may not work for other investors in future. There is a two-fold danger: As the trend catches on, many investors are likely to become dependent on social investing websites and that may cause a proliferation of such online platforms some of which may be just online versions of tip-sheets. Therefore, investors need to be cautious, and not blindly follow tips and recommendations given by the websites.

Internationally, social investing websites have attracted institutional funding from private equity players. SocialPicks.com, for instance, was taken over by Financial Content, a financial data mining firm. The Indian website promoters are ready to take the next leap, but since they have only been around for a short time, it still needs to be seen if their model can survive a boom-to-bust cycle.

As of now, these websites do not charge any fees to the investors. MoneyVidya.com plans to monetise the website by charging users for the access to the top-rated stock pickers’ recommendations. A portion of this fee will be shared with the stock pickers. Makhija of stockezy.com, too, plans to introduce a community intelligence index, which will track the stock picks of the registered members and will charge users accordingly. “Our cost of developing the website is negligible as we have developed the software in-house. The idea is to generate money through subscriptions and advertisements,” says Makhija.

Since entry barriers are nonexistent, the existing players could lose their competitive edge as new players join the race. Also, a market crash could dent the subscription-based model and take away the eyeballs. Manish Shah of Motilal Oswal hopes that these websites do not just become a bull market phenomenon. Arun Jethmalani, CEO, Value Notes Database, a financial research and database firm which does retail investor confidence surveys, wonders how the thousands of eyeballs will convert into millions and become a sustainable community. “Most of the entrants don’t have a clear business plan to translate eyeballs into revenues. It’s easy to generate some initial traffic, but it’s much harder to outlive and outgrow all the competition,” says Jethmalani, who, however, believes that there could be a couple of big winners in the long run.