Twitter's new status: Investing tool

By Jon Markman

It's 1:15 a.m. in early January, and I'm in a hunt for a big trade. Energy is running out of gas; tech is tired; drug makers are comatose. Gotta keep looking -- the market opens in a few hours.

Then an e-mail pops up in my inbox. It's from an economist in Hong Kong. Says Taiwan's exports were down 47% in December from the year before and that half of the decline came from plunging Chinese demand. I didn't know that. Sounds bad enough to make iShares MSCI Taiwan Index (EWT, news, msgs) a good short-selling candidate, since the exchange-traded fund had been up lately. But is that fresh enough news to be tradable?

Only one way to find out now, and that is through the Web's newest 24-hour global information collective: Twitter. When you absolutely, positively have to know something at 1:20 a.m. and don't know whom to ask (or if you do, they're probably asleep), or have a burning ambition to make a quick comment that will be widely and instantly seen, this is the solution. And lately, a lot of traders, investors, analysts, journalists, executives and other early adopters of all things financial and digital are turning to this remarkable resource.

Eavesdropping for dollars

Created by a couple of young Web developers in 2006, originally to provide personal status updates -- in no more than 140 characters -- for a Bay Area delivery business, Twitter has evolved into an amazingly flexible platform for short bursts of real-time conversations by groups of people involved in niche activities.

• For more about online investing tools, play the video to the right.

Now considered to be the heart and soul of social networking, otherwise known as Web 2.0, Twitter serves traders focused on swapping buy-and-sell ideas side by side with teens sharing angst, pastors sharing sermon notes, firefighters sharing dispatches, as well as artists, politicians and zookeepers.

Unlike other social-networking sites, such as Facebook, that put up walls among groups, the beauty of Twitter is that you can eavesdrop on any conversation and even contribute when you've got something to say that can be compressed to about 20 words or less. If you want to hear what New York Times or BusinessWeek reporters are saying to their editors and readers, and chime in with your own thoughts, go right ahead by clicking "Follow" on their personal Twitter pages. If you're obnoxious, the folks you follow can block you, but if you mind your manners you can have a front-row seat to some of the globe's most engaging conversations in dozens of languages.

For some people, Twitter is merely an amusing distraction. But for many investors, it has become as essential as the Internet itself, serving as a worldwide squawk box in which trade ideas are blurted out, analyzed, opened in real time with real money, observed and closed in an endless loop of symbols and passion. Somehow, and no one is quite sure why, the conversation has not yet devolved into the sort of mean, grubby, spam-filled vipers' nests that Web bulletin boards and chat rooms became a decade ago. It's still a place for well-mannered gentlemen and ladies who simply try to learn from each other, collaborate, commiserate and celebrate.

Because the ethic is to help, collective ideas are not shouted out merely to be heard. To gather enough followers so that his or her comments are heard, each Twitterer, as users are called, must find a way to build his or her reputation. A common type of "tweet," or post, is a short link to a news story, blog entry or chart topped with a five- to 15-word explanation.

You gain in reputation if a post is found valuable enough to be "re-tweeted," or passed along by your followers to theirs. That new circle will then have its interest piqued in your ideas. If some folks in that circle decide to follow you, you're off and running in building a "Twitterverse" for exchanging views.

Essentially, tweeting is a combination of micro-blogging (posting quick, time-stamped ideas in a public journal), instant messaging (posting to people receiving in real time), texting (posts must be as short as SMS cell phone messages), high school (posts must be cool if they're going to build your reputation and attract followers) and mass communications (posts can be seen by a single follower, if you're just starting, or thousands, if you're as cool as venture capitalist Fred Wilson.)

In every phase of the Internet, one company has come to represent a single big idea and reaped the rewards. Amazon.com is shopping. EBay is auction. Google is search. Facebook is personality sharing. And now Twitter is status updates.

Each has generated big ecosystems of companies focused on extending the concept, from eBay power sellers to third-party Amazon Merchants. It's the same with Twitter, which has germinated dozens of desktop software clients (e.g., TweetDeck), iPhone clients (TwitterFon or Twitterrific), authority graders (Twitter Grader or Twithority) and more tools to enhance and profit from the experience.

Continued: The business of tweets

The business of tweets

One of the buoyant, well-informed ringleaders in this new ad hoc world for investors is Howard Lindzon, a serial entrepreneur, venture capitalist and trader based in Phoenix. The creator and executive producer of a popular Web-based financial television show, "Wallstrip," he stumbled upon Twitter a year and a half ago and quickly realized its potential for useful, real-time conversation about financial trends and stocks among his far-flung friends, friends of friends, and friends of friends of friends.

One new acquaintance, currency trader Soren Macbeth, figured out how to use Twitter's application programming interface to group the system's discussion of stocks on a single Web page, and a new business was born: StockTwits. Now everyone who comments on stocks is encouraged to put a dollar sign in front of ticker symbols -- e.g., $MSFT -- so that it flows into the StockTwits Web site. There, conversations on stocks are organized, and people who do the best job with timely recommendations are highlighted. Newsletters and blogs are planned.

Lindzon is well on his way toward creating another Web content hit. StockTwits is basically The Motley Fool for Web 2.0 -- a home for the attention-deficit-disorder crowd that considers analyst reports longer than 25 words a little stuffy. "Twitter is an art form," Lindzon said in an interview last week. "But it's also a fascinating, charitable community. Each person has to build their own reputation by saying things that are interesting, or it's just noise and no one will follow you. StockTwits is a 'human ticker,' a social Bloomberg, a giant filter that helps people hear more signal and less noise. We're building the next-generation publication platform."

Paul Kedrosky, a San Diego investor and finance-tech blogger who has built a big reputation on Twitter for a stream of smart, acerbic comments and links to academic papers, told me he believes the revolutionary twist of Twitter is that it allows "mass, real-time conversations in a scalable way," permitting "a constant, dynamic, 'eavesdroppable' conversation about capital markets" that's similar to the running commentary and wise-cracking heard on squawk boxes at brokerages during the trading day.

Kedrosky marvels at the civility but assumes it will go away once more people discover the medium. "The more successful it is, the less useful it will become," he mused.

The brevity of each individual message is part of the charm, not a limitation. "For me, it's immensely liberating," Kedrosky said. "At 140 characters, there's no obligation to flesh things out. And you also discover that it forces you to be concise; if you can't force your idea into 140 characters, maybe it's not worth saying. These kinds of constraints are valuable."

Kedrosky is right, of course, which is why sonnets have only 14 lines, haikus 17 syllables, blues songs 12 bars, and billboards seldom more than six words.

Rising from Wall Street's ashes

Joe Donohue, a 46-year-old former hedge fund manager who now day-trades in New Jersey, has built a big fan base on Twitter under the alias "Upsidetrader." He started blogging last January just to keep a personal journal and made the transition to tweeting after learning that random visitors to his site appreciated his insights and wanted even more, and faster. He then began to post an idea like "I'm buying 1,000 shares of IBM" and soon thereafter started a lively, running commentary on about a quarter of the 50 trades he makes a day, punctuated by enthusiastic comments such as "Spartans, prepare for victory!"

It would be annoying if it weren't so genuine and leavened with self-deprecating humor and acknowledgements of mistakes. Donohue, who did well last year with a bearish approach and plans to be short most of this year, said he's found many former colleagues who have left the hedge fund community in its year of sorrow -- sell-side analysts, buy-side traders, macro strategists and day-trading pragmatists -- have joined him on Twitter to enjoy the camaraderie and share ideas.

"Everyone just wants to help; it's human nature," he said.

This is truly a peek into the soul of the new paradigm for information gathering in a post-newspaper world -- a curated content experience in which raw data, half-baked ideas and real insights are filtered by trusted sources who build their reputations with you a post at a time. It's a world where consumers become creators and creators become friction-free distributors.

Now about Taiwan: I posted my idea that night on Twitter, and within a few minutes it was re-tweeted by one follower in Taipei and another in Beijing, showing me that well-informed people considered it important news that had not yet been discounted by the market. That gave me the confidence to short the iShares Taiwan ETF in the morning, and it promptly fell 8% in two days, providing a handsome profit and proving that community is the new capitalism.

Fine print

I was honored to be named 2008 business-news pundit of the year by Hubdub, a news prediction Web site based in Scotland. Here's the press release. Check out their Web site here. . . . For some how-to help on Twitter, check out these sites: Dosh Dosh, ProBlogger, Cnet and Lost Art of Blogging. . . . To follow me on Twitter, go here and sign up for free. Others discussed here are Howard Lindzon, Paul Kedrosky, Upsidetrader and Fred Wilson. Some others to get you started are BusinessWeek.com Editor-in-Chief John A. Byrne, venture capitalist Jim Robinson and, for an interesting twist on the data, click here. . . . My favorite desktop client is TweetDeck -- it's a must.

At the time of publication, Jon Markman did not own or control shares of any fund or company mentioned in this column.