big data market prediction
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Copyright Bernard Lunn @bernardlunn 2010
What Will The Stock Market Do?
Big Data Powering The Future Of Prediction
Copyright Bernard Lunn @bernardlunn 2010
What Will The Stock Market Do, Mr. Morgan?
“It will fluctuate”
Copyright Bernard Lunn @bernardlunn 2010
Your Parents Recent Past Today
High Frequency Trading
Microseconds, maybe seconds
Days, maybe weeks
Momentum Trading
Fundamental Investing
Years, maybe decades
Warren Buffet Couple of techies in New
Jersey
Hedgies & Day Traders
Buy cheap stocks, hold
“the trend is your friend”
“latency arbitrage”
Copyright Bernard Lunn @bernardlunn 2010
The Automated Insight Funnel: Past
Market Prices
Models
Alerts
“know the price of everything and the value of nothing”
Copyright Bernard Lunn @bernardlunn 2010
Meanwhile In An Office With A Ton Of Paper….
Fundamental Value Models
But Beware The “Value Trap”
Cut & Paste From SEC Documents
Copyright Bernard Lunn @bernardlunn 2010
The Automated Insight Funnel:Near Future
Market Prices
Models
Alerts
The Commoditization Of Fundamental Analysis Will Bring Back Value Investing (Until Automation Squeezes The
Arbitrage Gap)
Fundamentals Via XBRL
Copyright Bernard Lunn @bernardlunn 2010
Predicting the future is a ridiculous idea, best left to science fiction writers
Copyright Bernard Lunn @bernardlunn 2010
Copyright Bernard Lunn @bernardlunn 2010
in
in
becomes
Complex Systems such as the weather can seem chaotic
Copyright Bernard Lunn @bernardlunn 2010
in
in
becomes
Complex Systems such as the financial markets can seem chaotic
Copyright Bernard Lunn @bernardlunn 2010
Brief History Of Weather Forecasting
• 1.0: farmers & sailors interpret local signs• 2.0: primitive systems that Eisenhower had to
rely on before calling the date for the Normandy Invasion
• 3.0: computer systems that can predict the weather in the next hour but take 2 hours to do all the calculations
• 4.0: reasonably accurate
Copyright Bernard Lunn @bernardlunn 2010
Why These Are Interesting Times
1. Massive cheap or free data sets
available online
2. Massive, cheap computational power
available online
Copyright Bernard Lunn @bernardlunn 2010
The Automated Insight Funnel:Longer Term Future
Market Prices
Models
Alerts
Traders Live On Numbers
XBRL Turning Text Into
Numbers
Copyright Bernard Lunn @bernardlunn 2010
3 Current Techniques
1. Sentiment Analysis
2. Finding the fundamental pin in the
haystack
3. Faster macroeconomic trend data
Copyright Bernard Lunn @bernardlunn 2010
Turning Sentiment Analysis Into A Tradable Number
• “What is the herd thinking”?
• We are still years away from the 80% accuracy needed as an input to decision-making
• At best this is a “soft” input (important for branding but weak for trading)
Watch: Stocktwits
Copyright Bernard Lunn @bernardlunn 2010
Finding The Fundamental Needle In The Haystack
• Real use cases
• signs that a company is about to default
• signs that a consumer product is about to explode
• This is very hard to do accurately
• But the pay-off is big & fast
Watch: First Rain
Copyright Bernard Lunn @bernardlunn 2010
Faster Macroeconomic Trends (employment, consumer spend)
• Current system is broken
• quarterly lag
• small sample
• Huge payoff
• The data is there, the algorithms are missing
Watch: ADP, Intuit, New StartUps
Copyright Bernard Lunn @bernardlunn 2010
3 Ways To Profit From This
1. Package & Sell Research
2. Trade on your proprietary data
3. Sell tools to the above 2
Copyright Bernard Lunn @bernardlunn 2010
Warren Buffet’s World Is Changing
• The Newspaper As Toll Booth Theory Worked…..Until It Stopped Working
• You cannot analyze Google Or Apple the same way you analyze Dairy Queen or Coca Cola
• Google, Apple & other high value stocks are complex, real time adaptive ecosystems
Copyright Bernard Lunn @bernardlunn 2010
Some “Eternal Verities” Remain
• Check the weather forecast….but also expect
the unexpected
• Build good ships (choosing the right investing
theme & building good models)
• and trust in good sailors (invest in good
management teams)