With social media being all the rage, the question is whether investors can use it to generate higher returns. I recently had the opportunity to sit down with Zack Miller, who literally wrote the book on the topic and is a leading expert on using social media to become a better investor. Here are some excerpts from our interview.

Can you tell us a bit about your background?

I have a very eclectic background, one that combines business and marketing roles for Internet companies with investing.

I’ve been an analyst for a multinational hedge fund as well as helped build some of the leading online finance companies today, like Seeking Alpha.

You have become an expert in investing and social media. Can you explain how investors can use social media to become better investors?

Yeah, I wrote a book about the subject in 2010. Tradestream your Way to Profits: Building a Killer Portfolio in the Age of Social Media is all about using freely available tools to make better, smarter investment decisions. Some really smart people are publishing their trading activities online. Step one is to just plug into the collective intelligence, what I call the tradestream.

Beyond that, much of what my research shows is that investors can do well by mimicking the smart people they’re following. You don’t have to find creative ways to beat the market; for many of us, that’s a sucker’s game. Smart strategies that ape the one percent of investors who can regularly perform well will also get us to the promised land of profits.

In my book, I talk about various ways and tools to do that, including cloning hedge-fund portfolios and tracking insider trading. There was a seminal research piece a few years ago that really formed my thinking on the subject. It showed that investors could come close to the returns Warren Buffett gets in his own portfolio merely by copying the Oracle of Omaha’s moves when he files with the SEC.

Can you tell us a bit about the piggybacking methods you have developed?

So, I’ve been running what I call the Tradestreaming Guru Piggyback Model for almost three years now with real money. It’s based upon work I developed in my book. Essentially, I created a portfolio that winnows through 2,500 different hedge funds with different styles to create a balanced portfolio that mimics the stock picks of some of the most profitable hedge-fund managers out there. It’s almost like having an all-star investment team pick stocks for you. It’s a collection of around 12 stocks that rebalances every quarter based upon what the hedge-fund managers are doing with their own money.

What’s important to note here is that I’m not just copying these managers’ moves willy-nilly. My Guru Piggyback Model identified specific managers where this strategy works well. High-frequency trading funds can’t be copied well. I look for funds that take longer-term, sizable bets in individual stocks. I also tried to pick funds that focus on different sectors so the portfolio will be better balanced. Lastly, some funds replicate well when you buy their newest holding, while others replicate better when you buy their largest.

Other picks are popular picks – stocks that are held in multiple funds. So, there’s a lot of moving parts here.

What tools are out there for individual investors to learn about investing like the pros?

Caution, shameless plug... There’s my aforementioned book, of course, that you can find on Amazon. I’m also writing about a lot of this on my blog, Tradestreaming.com. In addition, there are many sites like marketfolly.com and J3SG.com that track the picks of famous, successful investors. But again, don’t buy a stock just because Investor X bought it – that’s not a strategy. Piggyback investing works when there’s a strategy behind the buying and selling decisions.

If it’s so easy to invest like pros, why don’t individual investors have similar investment returns?

Perhaps one of the best-known investors I know is Joel Greenblatt, author of The Little Book that Beats the Market. He put up amazing returns for 20 years and shared his secrets in his book. Someone once asked him why he’s giving away the special sauce and whether his public revelation of his methods would scrap his technique. He said that he wasn’t afraid of everyone adopting his techniques because individual investors have an extremely hard time sticking to an investment strategy. They’d rather play investor cowboy than to implement a rigorous buy/sell methodology.

Same is true with piggybacking; it requires a strongly formulated strategy. There’s no stock picking that goes into my portfolio; I developed the algorithm, tested rigorously and then every quarter, buy and sell what the computer tells me.

It’s been extremely hard for me as an investor to take this quantitative approach – I want to believe I’m smarter than that. But it’s hard to beat returns of over 300% over the past five years. I’m a believer now.

aaron@lighthousecapital.co.il

Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.

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