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Do Investors Need Twitter?

By Alex Dumortier, CFA - Apr 23, 2013 at 7:00PM

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A multibillion-dollar tweet.

Solid gains for U.S. stocks today, as the S&P 500 (^GSPC 1.86%) and the narrower, price-weigthed Dow Jones Industrial Average (^DJI 0.00%) both rose 1%.

Consistent with the S&P 500's daily gain, the VIX (^VIX 2.74%), Wall Street's fear gauge, fell 6% to close at 13.48. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.) Last week's spike in implied volatility is now well behind us.

A multibillion-dollar tweet
Today's trading provided an unusual example of the rise of microblogging platform Twitter, and the way in which is has become embedded in the information infrastructure that drives financial markets. At roughly 1:07 p.m. ET, the Associated Press's Twitter account put out the following tweet:

Breaking: Two Explosions in the White House and Barack Obama is Injured.

The stock market reaction was instantaneous and unmistakable, with the S&P 500 losing 1% and gaining it back within the space of less than 10 minutes. The tweet turned out to be fake -- the AP account had been hacked. The market's response was as brief as it was sharp, so it's easy to dismiss it; however, bear in mind that that downward spike represented billions of dollars of trading activity -- much of it automated.

Can Twitter make you a better investor? As with any new technology, this question tends to attract polarized views; some commentators believe it's an utter waste of time, while others think it's revolutionary and indispensable. The reality lies somewhere in between.

Twitter is a platform for sharing information and opinions in a highly condensed format. As such, it certainly has value; in my capacity as a financial commentator, I use it much like a Reader application that provides me with a customizable feed of content created or curated by people I respect. It also has the added benefit that it allows me to interact directly with the people I follow.

However, the value of one's Twitter feed is dependent on the people one follows, and that is a matter of one's judgment. It's entirely possible to put together a Twitter feed that has zero (or even negative) value for investors. In that sense, it's a bit of a chicken-and-egg problem: Smart investors will know to create a higher-value Twitter feed than will mediocre ones.

Should you try to trade based off Twitter? Certainly not! Machines can do that faster than you can -- you'll be left holding the bag. Can you invest based on Twitter? It's a useful tool that can aggregate good sources of opinion and data; ultimately, however, superior investing comes down to hard thinking about complex topics. Twitter can help provide and organize the inputs to that process, but it won't provide you with any instant answers.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$31,261.90 (0.00%) $0.00
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,973.75 (1.86%) $72.39
CBOE S&P 500 Volatility Index Stock Quote
CBOE S&P 500 Volatility Index
$29.26 (2.74%) $0.78

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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