Everyone wants an edge.
The entire reason for what we do is to educate readers so that they have an edge when making decisions about business, investing and life. To bring you the best information available, we’re constantly looking for better ways to understand what’s happening in the economic world around us, as well as forecast where things are headed tomorrow.
Now we’ve just added another volume to our body of knowledge: we brought on Ben Benoy, a U.S. Marine and the developer of a unique and successful investment system.
Those of you who attended our Irrational Economic Summit (IES) last month will recognize him as the writer of the Biotech Intel Trader. What makes Ben unique is that he monitors social media — Facebook, Twitter, etc. — searching for clues as to the direction of individual stocks as well as the general markets.
He’s perfected a system that muffles the distracting noise while giving more weight to those who have been right in the past. Social media is clearly the fastest growing part of the Internet, but until now we weren’t sure of how to incorporate it into our research.
Ben’s work allows us to weave this information into the broader fabric of what we do at Dent Research and to bring you his views on the markets as well as individual sectors and stocks in both Economy & Markets and other publications.
To welcome Ben aboard and bring you up to speed on how he operates, I asked him a few questions about his work. Our exchange follows.
Rodney: We know your initial career was with the military… why did you transition into the finance/stock market world?
Ben: I went into the Marine Corps after graduating college and knew that serving the U.S. was a very honorable profession, but I also knew that it alone would not support my family in a manner that would allow us to live our lives on our own terms. I treasure spending time with my wife and four kids, so I knew that by getting into finance and the stock market, I would be able to fast-track our financial independence.
Rodney: So why the focus on social media in finance as opposed to a more traditional route like technical or fundamental analysis?
Ben: Back in 2009, I made some bad decisions by reading a lot of online message boards and social media sites that supposedly had factual sources providing the intelligence. I realized that retail investors really had no strong and trusted sources of information. That was when I decided to build the social media collective intelligence system that act a lot like the same systems I worked on in the military, but with a different focus. Now we’ve got statistical evidence that shows the direct links between finance and social media.
Rodney: And what tweaks were essential to transform the military’s version of this system to one that would work in the financial world?
Ben: The biggest tweak was relating everything from “threat” significant events to “price movement” significant events. With threats in the military we’re constantly building up an assessment over time, so there’s actually a lot more data that goes into threat prediction. With stocks, things happen really fast. Having an instantaneous “battle damage assessment” by immediately seeing how stock prices move is great. A lot of times in the threat world, it’s very hard to tell if what you launched was effective.
Rodney: Can you give us a glimpse of what’s “under the hood” of your system?
Ben: We take in 2.4 million social media finance messages per day and pick them apart on our data center infrastructure. We only calculate indicators that we’ve found to mathematically predict stock price movement. These indicators are changes in message volume baselines, changes in sentiment (buy/hold/sell) baselines, user reputation and message manipulation.
Rodney: How does that insight translate into the buy/sell mode of most, if not all, investors?
Ben: Great question. So, most investors read content online and they process it as best they can. So, when we roll up millions of messages and process investor sentiment instantaneously, we’re able to see a wave of movement on a particular stock before it’s fully discounted into the market. I’m essentially providing an “intelligence” report of critical information tailored to bolster buy/sell decisions that, of course, allows investors to make better choices.
Rodney: When you refer to your system of analytics, how would you describe it in layman’s terms?
Ben: Analytics or metrics are the way we process and display large amounts of information in a concise and summarized manner. One example is how we capture and track the number of messages on a stock, which can indicate a major upcoming price movement. The average person isn’t going to count the typical number of messages that come out on a stock and then see if that changes. Our system does this through its analytics engine and alerts us when there are major changes.
Rodney: What stock did you first monitor with your system? And what movements did you perceive?
Ben: The first stock I ever tracked closely was StemCells, Inc. This is a very small-cap biotech that was one of our first use cases for relating message volume to price movement. I noticed that when there were increases in just chatter volume, we saw large positive price increases occur.
Rodney: How do you think your system works as opposed to mainstream methodology?
Ben: My system actually provides an overlay to mainstream methodology. Fundamental indicators such as earnings calls only come out every three months. We capture what happens in between each major fundamental market event and play off it in order to maximize returns with traditional fundamental and technical indicators.
Rodney: Based on your system, are there any predictions you have considering the current standing of the market in general and where it might be headed?
Ben: Prior to October we received eight negative indicators on the market as whole. Seven out of the eight indicators predicted a market correction of 2% to 3% over the next two to four weeks, including one before the big correction in October. We received three more negative indicators at the end of October and mid-November, so I believe the market is going to take a slight correction in late November or early December.
Rodney: Tell me about a failure when developing the system that led you to improve it.
Ben: When we initially developed the system we only displayed/tracked stocks that were moving with social media indicators. This ended up being about 750 to 1,500 at any given time, but people still wanted to know what was going on in their portfolio. We now track all 7,000+ U.S. stocks because it gives a much fuller picture.
Rodney: If the system is applicable to many different areas, why focus on biotechs?
Ben: Biotech stocks offer rapid price movements surrounding the release of information on the performance of drug trials. Often times, we can pick up disparate pieces of information ahead of time in social media that allows us to jump the gun on the direction a stock might take in reaction to this information.
Rodney: How far behind, in terms of time, is your competition?
Ben: Since 2012, most of our competition has just offered a raw sentiment score on stocks but no correlation with stock price movement. Our analytics have always maintained an 18- to 24-month gap between where we’re at compared to the rest of industry. By the time our competition catches up to our current system, we’ll have built version 3.0 with even more capability.
Rodney: Can you detail what picks you’ve had and what the gains have been since you started with your system?
Ben: Between October 2013 and September 2014, I had 112 documented trades on 45 positions with a 61.8% return.
Rodney: And what’s been your success rate?
Ben: 82.2% win ratio on 112 trades.
Rodney: Thank you Ben, and welcome aboard!
You can get more information on Ben’s Biotech Intel Trader here.