Like everything else on the Internet, investing on the Web is turning social. A far cry from the early days of disorganized off-message message boards, investment Web sites are now taking cues from social networks, hoping to harness the multitude of users to offer the best data and advice to investors. The trouble is that these sites confront the same problem that faces twentysomethings in other realms: While networking may be the key to getting ahead, few actually know how to do it right.
More or less, the sites employ one of two strategies—they try to emulate either Facebook's heavily socialized approach or Digg's wisdom-of-the-crowds model. Using Facebook's framework helps strangers connect with one another and get one-on-one advice from people they otherwise never would have met. The Digg route, meanwhile, is a more macro approach, telling you what others are buying to better inform your own decisions. Based on the sites that are already out there, the Digg model is far superior; marrying an investment network to Facebook never quite fits. Here's why.
Start with BullPoo—the most ingeniously named site and the one with the highest hopes for one-on-one mentoring. Registering with BullPoo is simple enough, as is setting up a profile to start networking. But that profile barely has any social information. You fill out your "investor type" ("self-directed," "delegator," or "validator"), investing experience, investment interests, and an optional "About Me" box that many leave tellingly blank.
From there, you're given $1 million of play money to build a portfolio. This is a common—but not universal—characteristic on many of these sites. (By contrast, Cake Financial, Covestor, ThinkorSwim, TradeKing, and Zecco all integrate social networking into real-money trades.) The fake-money sites set up a gold-filled sandbox for you to buy the thousands of shares of Google that you've always wanted but could never afford. The stocks in your portfolio thus become the equivalent of your favorite books, movies, and TV shows on Facebook.
The process of finding a "friend" on BullPoo and some of the other Facebook-style sites is handled deftly. BullPoo offers an "affinity score" that tells you how similar another user's profile and portfolio is to your own. It's a wise and necessary innovation, and it helps alert users that they have enough in common to start up a conversation.
That's especially important in social networks like these, which are like Newcomers' Club mixers—nobody knows anybody, and everybody is wondering whether to stick around long enough for the free food. Facebook-style sites need to get their users to trust one another if they hope to create a real community. That's tough when your users are wary of getting swindled, but without trust, one-on-one networking is close to useless.
BullPoo's co-founder, Simon Lee, told me that the goal of the site is to help people make personal connections with other investors so that they can turn around and make better decisions … on their own. That contradiction spotlights the limitation of social networks for traders: Ultimately, the buck stops with the person bankrolling the portfolio. The Facebook model doesn't jibe with investors' mentalities, even on the Web. Investors are on the Internet to become better investors, not to list their favorite CEOs, brag about their $1,000 day on a friend's wall, or leave a status message about how the Bear Stearns merger ruined their day. (A bloody portfolio page is proof enough.) The frivolity that Facebook so expertly captures doesn't work when you're handling millions of dollars—even if you're using a fantasy bankroll.
That's why most sites lean toward the Digg model, which aggregates users' portfolios to report which stocks the community regards as good bets. It treats users' opinions as a market, and then tracks the undulations within. These stats are good page-view draws for the sites: unique content that changes dynamically.
Take Motley Fool's Caps, for example. The premise is simple: Channel your inner Jim Cramer and start rating stocks as overperforming or underperforming against the S&P. From there, Caps uses your pick and changes the stock's standing within the community. The better picker you are, the more influence you have to vault a stock to the top of the momentum charts. From there, the "hottest" stocks bubble to the top, just as stories, videos, and photos do on Digg.
Watching the Caps charts soon becomes no different from reading the same stock-picks column every day. Investors are given information about what the rest of the market is doing and then are given the choice of joining the drooling throngs or cutting against the grain. You can get analysis via Caps' users blogs just as you would from a friend whom you respect or a highly recommended money manager. Similarly, drawing upon Caps' users' data, you can sort for stocks that meet your needs, like bankers do with their firms' proprietary databases and software. It's another voice adding to the cacophony of suggestions about which stocks to buy and how long to hold them, and this voice is as momentum-driven as usual. But Caps momentum is different than market momentum. On Caps, users are still reacting to the market, but the market isn't reacting to the users. It's a one-way relationship: The market is the celebrity and Caps is just the adoring fan who obsesses over its every move. For all intents and purposes, the market doesn't even know Caps exists.
Of course, just because Caps is a good Digg-style site doesn't mean that it's especially good at fostering social contact. It quickly turns into an ego-driven fantasy sport by offering awards and incentives to continue improving your score. You might stroke your ego by picking up "Lucky Charms" for a job well-done only to realize that you're nothing compared with the top user. Again, a mirror of real-life trading: The best traders, after all, are the ones who get the top bonuses come Christmastime.
This doesn't breed a friendly environment, which Caps seems to accept. Its in-house lingo is far from Facebook's: You don't become friends with somebody on the site—you become their "groupie." Similarly, your fellow Capsters aren't people; they're "players" whose performances you should track if you yourself want to become a better, more influential cog in the Caps machine. You're never quite interacting with anybody; you're merely playing off them. Unlike a social network, you aren't actually fostering relationships. It's a distanced connection, far from the intimacy that BullPoo and others try to offer.
But the stock market was never founded on intimacy. Caps' terminology alludes to the actual realities of the market, in which trades are being made without buyers and sellers ever meeting face-to-face. Everyone is trading within the same network, but nobody is actually socializing. If that's how it is in the real market, then that's how it should be on the Internet, too.