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Anti-social-There are always new investment approaches but only one has stood the test of time

28/01/2013

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

A headline on the subject of social media recently posed the question “can DCM capital turn tweets into gold?” and, while we suspect there may be a one-word answer to that, we will be kind and consider the matter in more depth.

The background to the news story is that, in 2011, London-based DCM capital set up a hedge fund that would use Twitter sentiment as a basis for its investment decisions. The idea was, in DCM’s own phrase, to “mine tweets” – buying shares in companies that were trending favourably on the social media site and selling shares in those that were trending negatively.

After raising some $40m (£25m), the fund closed within a matter of months, with DCM learning some lessons from the experience – though possibly not the ones you or we might suppose. The company’s own conclusions were that Twitter was insufficient on its own as a reflection of sentiment and it has now returned to the market with a proposal that not only “mines” Twitter but also Facebook and other social media operations.

What has not changed is DCM’s desire to track human emotions, which stems from the idea the stock market is driven by fear and greed. However, we would suggest a desire to be greedy when others are being greedy and panicking alongside everyone else is the exact opposite of what investors ought to be doing.

Value investing, of course, also looks to profit from human emotions – but that is through buying when panic has led to cheap share prices and selling when the market is euphoric and prices elevated. This contrarian approach has more than 130 years of data to support its success and, as such, doing the polar opposite is likely to leave investors with egg on their Facebook.

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Author

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials.  In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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