Google helps investors achieve better investment returns

“In the relatively short space of its existence, Google has become an inextricable part of our lives and often serves as the primary means by which we access information,” says Marcus Rautenbach, Head of Investment Consulting at Simeka Consultants & Actua

In April 2013 Scientific Reports carried an article that shows how Google can be used to beat the market. The premise of the article, by Tobias Preis, Helen Susannah Moat and H. Eugene Stanley, is that the information publically available in Google Trends reveals a great deal about investor behaviour.

The authors propose that human interaction with the internet could perhaps provide fresh insights in the behaviour of investors during periods of significant market movements. “It has been previously established that data from Google Trends is linked to economic variables such as motor vehicle sales, unemployment, travel destinations and even consumer confidence,” says Rautenbach. The authors now suggest that Google query volumes for search terms related to finance are used as early warning signs of market moves and that it could even be used as a predictive mechanism.

“Gathering information is at the core of investment decisions. Monitoring information-gathering trends provides astute observers with insight into investor behaviour and investment decisions that are likely to follow,” he adds.

Between August 2004 and April 2011, the period covered by the research, the generic search term ‘debt’ produced the most significant results. “Supposing a holding period of one week for a notional long/short investment in the Dow Jones Industrial Average and without factoring in trading costs, the Google Trends ‘debt’ strategy produced a cumulative return of 326% as opposed to a buy-and-hold strategy that produced a cumulative 16%,” explains Rautenbach. “More to the point, a long only Google strategy produced a cumulative return of 128% over the period.”

The mechanics of the Google strategy is to assume:

• A long position if the occurrence of the search term ‘debt’ decreases beyond a certain level relative to the overall number of Google searches in a particular week.

• A short position if the occurrence of the search term ‘debt’ increases beyond a certain level relative to the overall number of Google searches in a particular week.

It can be argued that the period covered by the research includes some of the sharpest movements in financial markets in recent memory and that the search term ‘debt’ bears limited causality to the performance of financial markets. Doubters of the Google strategy should bear in mind that 97 other search terms were tested and that the top ten search terms include:

Says Rautenbach: “Investment strategies based on any of the top ten search terms, both long only strategies and long/short strategies would have outperformed a buy-and-hold strategy significantly.”

“It does appear that the Google strategy presents a novel approach as to the successful use of behavioural finance techniques in our everyday lives,” concludes Rautenbach.

Google Trends is a publically available application which can be used by anyone that has internet access and it provides Google Trends South African data as well.