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#304: Wisdom of the Smart Crowd

#304: Wisdom of the Smart Crowd

Michael Berman, Ph.D.
May 30, 2025

2,530 active subscribers.

S2N Spotlight

A number of years ago I launched a short-lived trading strategy called Omega, which was built on the back of my thesis of the Wisdom of the Smart Crowd. The well-known idea of the wisdom of the crowd is based on the statistical evidence that taking the collective view of average people is more likely to give you an accurate answer than a single expert. My view was and still is that if (not an easy task) you can assemble a significant cohort of smart people and aggregate their views, then you have likely discovered a form of alchemy.

I read an article in today’s Wall Street Journal with interest about 2 guys who, over the last 30 years, have built one of the largest hedge funds in the world, with $70 billion under management, that invests based on the tips and recommendations of a cohort of sell-side analysts. Marshall Wace outperformed the biggest names in the industry last year with a 22% return. Essentially, ~1000 external people/firms submit trade ideas to them, and they have an algorithm that processes over 30 petabytes of data each day, equivalent to 400 billion emails, to come up with the best trading ideas. They track each person’s ideas and provide tracking of the profit and loss associated with the idea. They pay hundreds of millions of dollars as commission to the Smart Crowd. Poor performers get cut to ensure the group stays smart.

The takeaway is to make sure you are hanging with a smart crowd when researching and seeking advice, and make sure it’s a crowd. A single genius is unlikely to match the performance of a smart crowd.

S2N Observations

Check out this interesting portfolio. This is a 2-ETF portfolio that introduces a market beta hedge. We rebalance to the weightings listed below annually.

50% BTAL—long position. Market neutral, short beta exposure.
50% TQQQ—long position, 3x exposure to Nasdaq.

From 2012 until now, this portfolio has produced a 1600% cumulative return versus 400% for the S&P 500. Its Sharpe Ratio is 0.71 versus 0.82. The biggest issue with this strategy is the drawdown of -77%. The data doesn’t go back before 2011. I am pretty sure this strategy would have blown up through the global financial crisis in 2008/9.

Be very careful when people present a portfolio like this to you.

I really need to be a bit more charitable with James Wynn, but he was asking for it. He just got liquidated from his Bitcoin position, losing more than $100 million.

$BTC.X ( ▲ 1.09% ) volatility remains on the low side of its nascent history.

I wrote on the 8th of May that Musk wasn’t even close to his $2 trillion target that he made up on the spot.

The data reveals that Musk has delivered 0.25% of the promised federal spending cuts. This week he was having a farewell party, as he claims the bulk of his work is done and he is heading back to Tesla HQ to try and hang on to his job.

Today the facts are official. Musk reduced his target from $2 trillion to $1 trillion and then finally reduced it to $175 billion. Serial bullshitters like Musk and Trump have no shame failing to keep promises; they carry on like nothing happened. It’s a superpower, but not one you want to be known for.