In case you thought the joke of Facebook’s public offering couldn’t get any worse, we have some bad news (or good news, if you have a morbid fascination with these kinds of things). There’s a stock index out there now that is made up of the companies sporting the largest numbers of Facebook “Likes.” Via Via Yahoo! Finance:
“So the index is an attempt to look at if there is a correlation between popularity on Facebook and how your stock performs in the market,” says Michael Copeland, senior editor at Wired magazine. He says the six-month old project is essentially an effort to determine if “Facebook is a platform that can boost your company in sales and ultimately in the stock market.”
The index consists of only the top 9 most “liked” companies on Facebook, which include Coca Cola (KO), Walt Disney (DIS), Viacom (VIA), Nike (NKE), Starbucks (SBUX), McDonald’s (MCD), Limited (LTD), Monster Beverage (MNST), and Wal-Mart (WMT). While Copeland says they are ”starting to see some correlation between Facebook popularity and market performance”, a longer dated back test over the past 12 months, showed the 9-stock index up about 12% and performing almost in-line with the broader market.
Granted, it’s not like they’re taking anyone’s money at this point… but still. Investing based on Facebook likes? Seriously? A few problems with this idea come to mind.
1. There’s a huge susceptibility to spurious correlation. Facebook likes are going to be centered around big consumer brands – this method won’t produce much of a dynamic investment strategy. It’s really just a roundabout way of getting particular sector exposure.
2. Facebook likes may hold value for some companies, but they’re irrelevant for many. There’s not much cause for a company like Lockheed Martin to have a Facebook fan base… but that is no indication of the company’s future prospects.
3. Fake “Likes” – and even though Facebook has been making noise about cracking down on this, it’s still a metric that is very easily manipulated.
Even if the folks over at Wired “discover” something based on this experiment, we’re far from convinced that investors will start consulting Facebook stats alongside P/E ratios. Big data may be trendy on the heels of Nate Silver’s rise, but when it comes to using Facebook to gauge company prospects, this looks like a case of “garbage in, garbage out.”