Brunswick Review Issue 7

Online Only: Piecing Together the Digital Mosaic

For analysts and investors, making investment decisions involves gathering many disparate pieces of information and assembling these nuggets into a mosaic that ultimately guides their choices.

While the influence of digital and social media on investment decisions still ranks below that of more traditional key factors, such as one - on- one meetings with management and analyst research, digital media is rapidly becoming an entrenched part of the mosaic.

In Brunswick’s first investor survey in 2009, one respondent captured the consensus view, saying “Using new media isn’t worth my time to derive what would be the 50th data point of incremental value.” This is no longer the consensus view. Social media is rapidly coming of age in the investment community.

In October 2010 an associate professor from Indiana University discovered a tight correlation between stock market sentiment on Twitter and stock price returns. Fast-forward one year:  Derwent Capital Management, a small hedge fund opens its doors with the goal of gaining an edge and beating the market by basing its investment strategy on this finding.

The strategy worked. In fact, it yielded returns significant and consistent enough that the firm decided to pivot its business model to pursue a bigger opportunity. Instead of running and marketing a hedge fund, its founders created a stock trading platform, complete with sentiment-based research tools.

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