Where to invest – just Google it?

As of July 2017, 86.83 per cent of all web searches were carried out through Google. With such dominance of the search engine market, could that data be used to power better investment decisions?

A 2013 study by economists looked at Google Trends data for the search term “debt” between 2004 and 2011. The researchers hypothesised that a decrease in searches for “debt” would predict an increase in the price of the Dow Jones Industrial Average (DJIA), while an increase in searches for the same term would predict a price decrease. They designed an investment strategy based on that hypothesis and, using the relevant Google Trends data from that period alongside the actual performance of the DJIA, looked at how using such a strategy would have affected a hypothetical portfolio. They found that the Google Trends strategy would have increased its value by 326%1.

Of course, hindsight is an excellent predictor of the past. With the financial crisis behind us and its causes exhaustively analysed, it is surely much easier today than it would have been at the time to predict that people researching the word “debt” would foreshadow major shifts in the market.

Tete2_Articles.jpgWhat this study does show is that, in principle, Google Trends data can be a stunning predictor of future market movements – if you know what to look for. In reality, an active investment strategy based on Google Trends data might be a little more tricky to implement. Perhaps a more conservative approach would be to use Google Trends to help decide which investments to avoid. In other words, if there is a spike in searches for a certain stock, it might be worth putting your money elsewhere.

1 https://www.nature.com/articles/srep01684.pdf