Web publisher John Dick may have hit on a way to predict the stock market, and his method is astonishingly simple.
According to Dick, all you have to do is ask a couple thousand investors where they think the market will be next week.
Financial textbooks say stock prices are based on future cash flows, nominal interest rates, and potential earnings -- factors that are difficult to predict. But in large part, they're also based on the collective gut instinct of thousands of individuals. So why not quantify an individual's perception, collect thousands of such perceptions in real time, and figure the average?
That's exactly what InvestorsForecast is doing, in the form of a stock-market game.
The site, which debuted in December, pays US$200 a week to the lucky punter who comes closest to guessing the Dow Jones Industrial Average close for the following Friday. Investors can also make predictions on 20 individual stocks, including GE, Microsoft, 3Com, and Yahoo.
It costs nothing to play. And the guesses are eerily good.
On 19 January, Tracy Paul of Ohio came within a quarter point of nailing the Dow's 29 January close, 9358.83. That was good enough for second place. Bob Camp of Florida pocketed the 200 bucks with a Nostradamian prophesy of 9358.66, only 0.17 points off.
Site publisher Dick dreamed up the idea for the contests first, and only afterward realized how valuable the resulting data might be.
"This is the kind of thing my friends and I would do all the time for fun," said Dick. He set up the site with money from relatives, his own savings, and a sponsorship from the Chicago Tribune's Business Week section.
The 25,000 online investors who played the site the third week of January were collectively more than 90 percent accurate on eight of the 20 stocks the following week. The collective guess on Intel, which made a 9 percent gain during that week, was 99.1 percent accurate.
Dick uses standard statistical models to weed out the nutballs. The site also includes a real-time mood index that expresses investors' bearish or bullish sentiments in numerical form.
"There is no index out there for the little guys online," Dick said. "This gives them a way to find out how other online investors are feeling, something they can't get from some analyst in New York or their newspaper."
Dick, who describes himself as a cautious online investor, warned it is too soon to tell if his stock game is going to maintain its accuracy over the long haul. He would also like to gather a larger sample from at least 100,000 players.
In the short term, Dick plans to add 20 or 30 more stocks to his list. He may also start charging $1 for the weekly chart and hopes to eventually bunch the top 10 most accurate investors into their own group and sell that information separately.
Of course, InvestorsForecast could have just gotten lucky in the past couple of weeks. Plus, it still hasn't faced a choppy market reacting to unexpected bad news. Nevertheless, people will be watching to see if the site is on to something.
