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The Value of Market Blogs Print E-mail
Tutorials | Articles | Written by Brett N. Steenbarger |

Note: A version of this article appeared on the Trading Markets site, 9/15/2006.

Recently, we've seen several attempt to identify the best blogs for traders and investors. Kiplinger's came out with their list recently, and the 24/7 Wall St. site offered a very complete roster. My own effort in this regard was reported here. A look at the Alexa ratings of many financial blogs suggests that readers are finding value in them. What, exactly, is that value?

In a previous post to my blog, I made the distinction between descriptive and inferential statistics. When we describe a sample of the world around us, we take the first steps toward formulating hypotheses about that world. When we employ inferential statistics, we report tests of those hypotheses. Generating hypotheses, testing them, refining them based on tests: this is much of what science is all about.

But there is one crucial, missing ingredient: theories.

Theories are our explanations of the world we see. When we observe and describe our sample of the world, we build a model based on our perceptions and say to ourselves, 'This is what I think the world is like.' That model--our theory--provides us with the hypotheses that we test. When we check out and revise our hypotheses based on those tests, we're really refining our internal models of the world: our theories.

So where do market blogs come in?

It is rare indeed to find market blogs reporting statistical significance tests. Blogs are online journals: they describe; they do not infer. The really good blogs show you how an experienced investor/trader thinks. They not only provide valuable observations, but show readers how the writer moves from description to explanation: from data to model of the world.

Barry Ritholtz recently mentioned that he has three objectives in market analysis: 1) determining objective reality; 2) determining consensus on market issues; and 3) identifying where consensus varies from reality. In other words, he builds the most accurate model of the world that he can and then tries to find where market prices are not factoring in that model. This is the essence of opportunity: points at which the majority of market participants have not adequately updated their own models of the financial landscape to account for new realities.

The financial blog attempts such updating--hence the popularity of links--but also illustrates how the blogger uses this information to generate his or her own map of the world. Specific trade ideas generated from this theory can be thought of as partial tests of the blogger's map; over time, it is objective reality itself that provides the tests of the trader's ideas. In that context, every trade is a hypothesis: the trader's P/L over time reflects the degree to which the trader is skilled at generating and updating models of the world that are superior to the models of the consensus.

How does one learn to become a scientist? In graduate school, you join a research lab and apprentice yourself to an experienced investigator and the senior students of that investigator. Such an apprenticeship teaches skills, but also produces a modeling of the scientific process. For many traders, reading the ideas of experienced market participants in the blogosphere is as close to an apprenticeship as they're going to get.

That is the value of the best blogs. They don't just produce thoughts about markets; they model how to think about markets. If you're new to the blogosphere, those 'best of' lists linked above are an excellent place to start.

Brett N. Steenbarger, Ph.D.