Social arbitrage investing
As a retiree or pensioner, or a long term or regular camper, you may look for something to keep your mind occupied, while at the same time generating an extra income or to build your wealth while you live the retired lifestyle.
You may also want to have a hobby that produces a result rather than reading fiction all day.
Many, if not most, people get the jitters if you talk about investing in, or trading shares on the stock exchange, but for anyone who wants to learn a new skill, the ability to buy fractional shares, provides an affordable way in which to learn.
Fractional shares are parts of a whole share. Most brokers require you to buy at least one full share, which makes it unaffordable if you must pay a fixed cost of around R100. But, recently, many platforms appeared which allows one to buy a part of a share.
How it works, is that the broker buys shares and then puts it in a pool in which a small investor can invest. Example: let’s say the broker buys 1 share. It can then sell parts of that share (let’s say 10%) and sell it to 10 investors to make up 1 share or 100%. They can not sell more than the number of shares available.
Because a fraction of a share cannot be registered in a person’s name, the brokers have found a legitimate way in which to allow the individual to get ownership of a fraction of a share. It is outside the scope of this article to go into how it is done, but you can read about it here.
The important point is that your investment is safe, cannot be stolen by the broker and is covered by the compulsory insurance which brokers must take out. If you want to check if a broker is allowed to provide the services it advertises, check with the Financial Services Board of SA.
I use Easy Equities for my trading because of its affordability. My bank just became too expensive and too rigid for how I trade and invest. If you want to try them (there is no cost to start and no fixed fee if you do not trade), send me a message and I will arrange an invitation for you. This will give you and I a R50 credit each on our accounts, the moment you do your first transaction. You can sign up with them directly (I don’t buy groceries with R50) here.
Most people do not want to spend hours poring over financial statements and annual reports – more so, retirees or pensioners.
Even before I developed an amateur interest in share trading and investing some 40 years ago, I suffered from a natural dislike of numbers.
I will spare you a recount of my woes in math classes and my constant struggle to find a path that does not involve being a number cruncher. I got by thanks to my ability to pick the essence of a topic and to squeeze every available drop of knowledge from a small bit of a larger part (and utilizing only that). That is probably why I never made a living from it.
Social arbitrage trading
The start of my new career as ‘n working retiree, occurred at the same time as the concept of social arbitrage or social arb investing caught the limelight.
“Arbitrage” is a business, investment or economic term meaning the simultaneous buying and selling of the same commodity.
We don’t need to know more for the purpose of this post, but if you want to do additional reading, click here. (It won’t take you away from this page, but will open in a new one)
The foundational information on which an investment or trade depends, is gathered from the difference in insight or interpretation of information available to all possible market participants. (An information edge).
Social arb trading has been practiced by many investors in the past under the adage of “10% of action on the stock market is based on fact and 90% based on psychology”
Chris Camillo of Dumb Money is the first person who specifically and actively promoted the philosophy using social media. He famously used social arbitrage to build $20 000 into $2 000 000 within three years. Most of the strategies, techniques and styles used in social arb trading today, have been defined and verbalized by Camillo.
Social arb trading is mainly based on:
Listening and observation – listen on social media, listen to people talking to identify new information, observe what happens around you. This information often presents itself as a unique trend or topic that generates “buzz” or discussion in the online community.
Identification – Identify which companies could be affected by what you learn.
A thesis – form a thesis of how the information you gathered, could affect the share price of a company.
Strategy:
Listen:
- Listen what online users talk about on social media.
- Listen what your grand children get excited about as the “newest craze”.
- Determine whether the information you have could affect the share price positively or negatively or not at all.
Once you identify a product that creates a “buzz” and determine that it may have a positive or negative effect on the share price, use your tools.
Tools to use:
- Google search – search for the buzz word and see what results you find and how many searches have been done. Also make sure the search results are recent. Click on the “News” tab to see the recent news about your buzz word/product.
- Google Trends – type the buzz word into Google Trends and look at the resulting chart, especially if there is a recent spike.
- Twitter – Use Twitter search to form an idea of what is being tweeted and at what intensity.
- Blogging platforms such as Stocktwits and Redditt.
Once you have all the info you could find by listening and researching:
- Ask yourself (verify) if the information you have, are already known by the market. You verify it by reading who wrote about it on your google search (news), yahoo finance and any publicly available information such as company press releases and blogs. If the information is publicly available, you probably do not have an edge and you pass the opportunity.
- If you find little or no info about the buzz word, you may have an information edge (social arbitrage opportunity) and you should consider an investment.
- Do you foresee (not an expectation but a possibility) that information may become available or an action may occur that could make the share price move in an opposite direction from which you want to trade it?
If you want to read more or see some examples of opportunities seized by Camillo, go here.
A variation on “pure” social arb trading is to observe what society believes and what the underlying truth (facts) is and to exploit the difference
When something like Covid19 occurs, people’s immediate reaction will be to withdraw until such time as they feel they understand or are in control of the situation. That is what happened in 2020.
Covid, Barbie, Hot Wheels, Sportsmans and Outdoor Warehouse
During the Covid19 outbreak in March 2020, many share prices fell like a rock.
JSE All Share Index
Source: markets.ft.com
Top 500 shares in the USA
Source: Google
Mattel
Mattell is the maker of Barbie dolls and Hot Wheels toys. Mattell’s share price fell 43% from $14,28 to $8,01 on 15 March 2020.
Source: Google
Technical traders would have noticed that the price fell through a support level and may have been interested in buying the share. From a social arb point of view, another factor came into play.
What will the effect of Covid lockdown be on the sales of toys like Barbie and Hot Wheels?
The answer was that sales could increase because children would be staying at home under lockdown.
I could not buy immediately so, on 19 Nov 2020, I bought Mattel at $14,63 and on 25 Nov 2020 I bought more at $15,47. At the time of writing the price is $21,17. Growth: 38% after costs in just over 6 months.
Long4Life
In South Africa, I thought that outdoor companies would take a knock during lockdown, so I bought Long4Life, the holding company of Outdoor Warehouse and Sportsman’s Warehouse.
I bought on 15 June 2020 at R3,07. At the time of writing (9 June 2021) the price stands at R4,57. The growth after costs is around 47% in just under 12 months.
Source: Google
But …
But Covid19 does not happen every month.
One has to observe and take note of what you hear and see, so that you are able to utilize discrepancies in what people think and what the facts are as well as what the newest craze or “flavour of the month” is. It may show you where the growth in spending is.
This morning I had a discussion with a friend in the camping and adventure field who told me that they experienced a marked increase in black people doing hiking camps. At the same time his son, who is a mountain bike rider, reported that they often have to wait in a queue to be able to get on the route they want to ride.
Source: Google Trends
This information may be useful to the social arb trader.
Comment
Not every retired person is interested in risking money on something such as shares. But if you are prepared to “risk” R100 and learn a new skill, trading with a low cost platform may be a good idea. To me, there are three observations that direct my views on share trading:
- never risk more money than you can afford to lose;
- you don’t know what will happen in the next 10 minutes, so don’t think you know what will happen in the economy in the next year. What you think will happen is only an expectation that what already happened will continue;
- you don’t have to invest in shares. You can invest in a bank account or via an adviser, but keep in mind that the bank and the adviser take your money and invest it in shares (that include money markets)
There are two types of market participants:
- traders who buy and sell
- investors who buy and hold
Decide how intense your interest is and how active you want to be. That will indicate whether you must trade or invest. You can be both a trader and investor.
How do I find a broker?
If you do not have a broker that allows you to trade both international shares and fractional shares, the affordable South African choice is Easy Equities (EE).
Find someone who is an existing EE user and ask them to invite you. If you want me to arrange an invitation for you, send me a message here.
When you do your first trade through EE, you receive R50 which you can add to your first trade. This helps when trading fractionals. EE offers trading in a variety of international companies and transferring ZAR to USD is as easy as clicking a button.
General
Share trading and investing may not be something that interests you. You may prefer to write articles for magazines or dispense your camping knowledge to people on social media or your own blog. Or you may prefer a hobby such as collecting shells.
This post is not financial advice, so do your own research and due diligence.
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