Have you ever heard of CrowdInvest and do you regularly use its Apple iOS app? If you’re an investor, and you answer “No” to either question, as it seems many would, that raises troubling questions regarding the credibility of the index its pushing and of the CrowdInvest Wisdom ETF (WIZE) which was recently launched based on it.

The Idea

The index and the ETF track own respectively a portfolio of popular stocks, the 35 stocks that received the most net bullish votes (bullish votes minus bearish votes) from among U.S. listed firms that meet a basic liquidity requirement (average dollar volume traded over the last 20 days averaging $15 million or more).

Complaining about active mutual find manager performance and about the size biases of plain-vanilla index funds, CrowdInvest says it has a better idea. Inspired by James Surowiecki’s book The Wisdom of Crowds, it decided that portfolio’s selections be based on votes by the crowd, with position weightings determined by the relative strength of the bullishness of the vote.

On paper . . .

On paper, this idea sounds . . . this is where I’m supposed to say “good” or “OK.” But I won’t. On paper, this idea struck me as being bad. My inclination is to lean, for investment wisdom, to authorities such as Peter Lynch, who in his classic One Up on Wall Street, penned what has become one of my favorite passages:

“If I could avoid a single stock, it would be the hottest stock in the hottest industry, the one that gets the most favorable publicity, the one that every investor hears about in the car pool or on the commuter train— and succumbing to the social pressure, often buys.” (Kindle Location 2366 – sorry folks, I don’t do page numbers any more.)

I agree with CrowdInvest that active management isn’t so hot and that market cap weighted index funds aren’t ideal, and have so written Forbes. But null ; i.e. I work with rules-based models built using data to identify stocks worthy of consideration, not because the crowd says so, but because, objectively speaking, they really and demonstrably are worth owning. I expect anybody who has ever had any success in equity investing knows that the ideal is to get in before crowd figures out the stock is good, and preferably, even before the crowd figures out that it exists. And no, I’m not talking about penny stocks. The crowd can be remarkably narrow, and often focuses only on stocks media outlets think can garner enough eyeballs, (ad viewers) to justify exposure. There are many good-size companies with very liquid stocks about which the crowd knows zilch or which isn’t top of mind at the “right” time.

Live and Learn?

That said, maybe things are different now. It’s been a while since Peter Lynch managed Fidelity Magellan. I’m sure I need not recite the laundry list of the numerous, bold and obvious changes that now give information and tools once accessible only to sophisticated pros to everyone at the speed of modern broadband. Heck, my stock ranking and screening activities are one example of this. So maybe the crowd is not as dumb as it used to be back when one eagerly ran to the mailbox once a month to retrieve the S&P Stock Guide or back when I begged companies to mail me 10-Ks more quickly than via third-class mail. Maybe the crowd is getting smarter.

I’m absolutely positively open to that. Unlike many who are as geeky as I am when it comes to fundamentals, I’m fine with technical analysis, momentum indicators and sentiment gauges. In fact, I even created and discussed here a Smart Alpha Equity Income model, which made substantial use of Mr. Market’s assessment of dividend security.

So maybe, just maybe, I should rethink my initial revulsion regarding WIZE. Lynch is a smart guy. But so, too, is Surowiecki. Maybe we can, and perhaps should, use contemporary technology to harness the wisdom of the investment crowd, to give the iconic “Mr. Market” a real and valuable persona.

The Devil is in the Details

Once I found common ground between the way I approach things and the way WIZE says it does, I moved on to the details. How, exactly, is crowd sentiment measured here?

It works through the Crowd-Invest Apple iOS app. I downloaded it and created my free account. And immediately I was confronted with a ticker and a request that I vote “Bull,” vote “Bear” or “Pass.” I voted Bull to see what would happen. (I had no idea what the stock was – I just wanted to see how the app worked. Anybody notice a problem here?) I got to see a chart that showed me how others voted on that stock.

Then, the app took me to another stock. I did likewise. Then another. I stopped voting. It’s not that I cared about how many stock scores were being distorted by my random votes. This wasn’t like my job the articles I write. When it comes to voting in the app, I have zero accountability. (Anybody see another problem here?) I just got impatient and I wanted to figure out how to pick my own stock, a stock in which I wanted to vote. Finally, I nailed it.

So now I understand what WIZE is doing, As a result, I really do hate this Index and ETF. I don’t think this is bona fide crowd sourcing. It strikes me as quick-fix make believe crowd sourcing that could, I think, better be described as iOS-fan-boy sourcing. The only people whose votes are counted are those who have heard of CrowdInvest a narrow group to start with (they have only 1,640 Twitter followers at this writing, now including me, and Apple, a very high profile stock, got only 16,067 votes over the last 60 days including an erroneous Short vote from me because I moved my finger the wrong way as I was trying to figure out how to see the vote count), people who take the trouble to download its iOS app, and people who take it seriously and keep voting once the novelty wears off. By the way, it seems the app is iOS only. That means Droid and Windows users, a very substantial portion of the relevant crowd, are excluded.

It’s been a while since I read Surowiecki’s book but if I’m recalling correctly, I suspect he’d have a huge problem with this, possibly the single worst sampling in the history of surveying. (Maybe that’s an exaggeration. After Indiana, Hillary Clinton might have some relevant thoughts on the topic. And of course there was the survey I created way back for my undergrad Research Methods in Sociology class, etc.) If I’m wrong, if it turns out there’s something in the book that would deem this acceptable, I’ll have to double check and assuming it’s so, go to Amazon and give the book a one-star review.

Quo Vadis Fintech

Last month, I criticized Wealthfront 3.0 for its emphasis on APIs that seem cool from the vantage point of PowerPoint jockeys and its inattention to what’s good for the portfolios of its clients, an example of Fintech gone wild. And now we have WIZE.

Folks, I believe in and am deeply committed to the idea of bringing technology to bear in order to serve investors better than they have ever been served before. That’s why I work the way I do with my rules based approach, which would not have been feasible a generation ago.

But applying technology just for the heck of it, fintech without the fin: No, that’s not a good thing. And here, it’s especially perplexing. Based on the bio of CrowdInvest CEO and founder Martin Mikus, I’d have expected him to hit the bull’s eye with this.

Sensible crowd sourced investment wisdom may be constructive. But to implement that, we need to measure the crowd, the real crowd and not a ridiculously narrow and likely unrepresentative sliver of it. (Mr. Surowiecki, are you there? Help!) I also assume a worthy solution would either find a way to measure the sincerity of what the crowd says (I should think the app would need to fid ways to detect and delete B.S. votes like the ones I cast this morning and I’m not sure how that would be done) or possibly even better, measure what the crowd does, how it actually casts its dollar votes. (That was good enough for Adam Smith.) Ah, but the latter is not really new. Technical analysis has been doing it for decades. And I’m already doing it with my Equity Income model. I don’t know that I have all the answers. But I wish the investment community could have been spared from the launching of indexes or ETFs when its so obvious major questions haven’t even been addressed.

Anyway following the Wealthfront 3.0 announcement, this is the second really bad fintech idea I came across in the last month. (#NotHappy) Anyway, before you buy into any fintech ideas, make sure you read the fine print. Make sure that the fin portion of it is really there, and that it makes sense.