Google Searches: the New Investment Strategy?

Google Searches: the New Investment Strategy?

According to an article published this month in Nature, big-data researchers discovered that analyzing Google search terms over 8 years produced an investment strategy that clobbered even the best stock pickers.  Using the word “debt” in search phrases resulted in a strategy that gained over 300% vs. 11% for a “conventional” strategy.  Is this a new use for crowd-sourcing?  Time to fire your advisor?

Not so fast.

This article reminds me of the Texas Sharpshooter, a story that statisticians use to illustrate after-the-fact predictions.  The story goes like this:  a man stands facing his barn, closes his eyes and fires randomly.  He walks up to the barn and notices a cluster of holes that happened to land together.  He draws a circle around the cluster and proclaims that was his target.  He’s a sharpshooter!

Here’s the problem with the Google-search strategy:  they didn’t know in advance which search terms to use.  When they did the analysis after-the-fact, they discovered that “debt” produced the 300% gain.  But the next best outcomes used the search terms “color” and “restaurant”.  What terms will predict good outcomes for the next 8 years?  No one knows.

The Nature article actually highlights this problem, although the story in Businessweek didn’t pick up that subtlety, and implied that big-data scored another victory.  The researcher says investment professionals are interested:  “It may lead to change in their investment algorithms or strategies.”

Not me.  I’m no sharpshooter.