What Will The Stock Market Do?

Big Data Powering The Future Of Prediction

What Will The Stock Market Do, Mr. Morgan?

“It will fluctuate”

Your Parents Recent Past Today

High Frequency Trading

Microseconds, maybe seconds

Days, maybe weeks

Momentum Trading

Fundamental Investing

Years, maybe decades

Warren Buffet Couple of techies in New

Jersey

Hedgies & Day Traders

Buy cheap stocks, hold

“the trend is your friend”

“latency arbitrage”

The Automated Insight Funnel: Past

Market Prices

Models

Alerts

“know the price of everything and the value of nothing”

Meanwhile In An Office With A Ton Of Paper….

Fundamental Value Models

But Beware The “Value Trap”

Cut & Paste From SEC Documents

The Automated Insight Funnel:Near Future

Market Prices

Models

Alerts

The Commoditization Of Fundamental Analysis Will Bring Back Value Investing (Until Automation Squeezes The

Arbitrage Gap)

Fundamentals Via XBRL

Predicting the future is a ridiculous idea, best left to science fiction writers

in

in

becomes

Complex Systems such as the weather can seem chaotic

in

in

becomes

Complex Systems such as the financial markets can seem chaotic

Brief History Of Weather Forecasting

• 1.0: farmers & sailors interpret local signs• 2.0: primitive systems that Eisenhower had to

rely on before calling the date for the Normandy Invasion

• 3.0: computer systems that can predict the weather in the next hour but take 2 hours to do all the calculations

• 4.0: reasonably accurate

Why These Are Interesting Times

1. Massive cheap or free data sets

available online

2. Massive, cheap computational power

available online

The Automated Insight Funnel:Longer Term Future

Market Prices

Models

Alerts

Traders Live On Numbers

XBRL Turning Text Into

Numbers

3 Current Techniques

1. Sentiment Analysis

2. Finding the fundamental pin in the

haystack

3. Faster macroeconomic trend data

Turning Sentiment Analysis Into A Tradable Number

• “What is the herd thinking”?

• We are still years away from the 80% accuracy needed as an input to decision-making

• At best this is a “soft” input (important for branding but weak for trading)

Watch: Stocktwits

Finding The Fundamental Pin In The Haystack

• Real use cases

• signs that a company is about to default

• signs that a consumer product is about to explode

• This is very hard to do accurately

• But the pay-off is big & fast

Watch: First Rain

Faster Macroeconomic Trends (employment, consumer spend)

• Current system is broken

• quarterly lag

• small sample

• Huge payoff

• The data is there, the algorithms are missing

Watch: Intuit, New StartUps

3 Ways To Profit From This

1. Package & Sell Research

2. Trade on your proprietary data

3. Sell tools to the above 2

Warren Buffet’s World Is Changing

• The Newspaper As Toll Booth Theory Worked…..Until It Stopped Working

• You cannot analyze Google Or Apple the same way you analyze Dairy Queen or Coca Cola

• Google, Apple & other high value stocks are complex, real time adaptive ecosystems

Some “Eternal Verities” Remain

• Check the weather forecast….but also expect

the unexpected

• Build good ships (choosing the right investing

theme & building good models)

• and trust in good sailors (invest in good

management teams)