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Product Reviews: The Newest Investor Tool?

10 June 2012 in Trading Ideas

Many investors are constantly searching for any new pieces of data – or ways to use them – that creates a better chance to find a winning trade or investment.

It’s ironic, then, that the latest darling of traders may be an idea that’s nearly as old as the history of buying and selling merchandise.

It’s product reviews – well, online product reviews, to be exact.

A recent Time.com article reported on an academic study in the journal Marketing Science that sifted through 350,000 consumer product reviews on three major sites – Amazon.com (AMZN), Epinions.com and Yahoo (YHOO) Shopping – from 2005 to 2010. The reviews were related to products made by 15 publicly traded companies, primarily in the areas of technology, toys and shoes.

The key takeaway from the report: the more negative the reviews after a new product comes out, the more likely that company’s stock price would head lower soon afterward.

But be warned: the flipside didn’t work. The effect of positive reviews is completely neutral. According to Time, the study’s authors offer a few reasons for this: the relative rarity of negative reviews, the heightened attention that people in general tend to give to risks over rewards, and the possibility that positive product information has already been priced into the stock, either through earlier advertising or anticipatory buzz.

Do you think online product reviews could be a useful investing tool?