Hedge Funds look at all sorts of data to gain an edge over the market. The ideal market insight tool you might imagine would be some sort of micro-blogging platform, where millions of people would express how they are feeling at any point in time. ie. - Twitter.

It seems Derwent Capital have done just that. Using a paper that came out of University of Manchester and Indiana University, which found a correlation between mood and Twitter.

The number of emotional words on Twitter could be used to predict daily moves in the Dow Jones Industrial Average. A change in emotions expressed online would be followed between two and six days later by a move in the index, the researchers said, and this information let them predict its movements with 87.6 percent accuracy

The Derwent Capital algorithm specifically looks at the level of calmness on Twitter.

Their results showed that rises and falls in the number of instances of words related to a calm mood could be used to predict the same moves in the Dow’s closing price between two and six days later, with a fall in these “calm” words being followed by a fall in the index. The other moods did not have the same predictive quality, the paper said.” Specifically, it looks for words like “alert,” “happy,” and “vital,” adds Financial News’ Michelle Price. “Derwent Capital scans a selected 10% of available tweets at random and will then categorise these messages into one of a range of mood states.

It is only in its first month, but the fund has already considerably beaten the market average. If some sort of feedback loop could be added (which can lead to dangerous spirals), or as various tweaks are added, this could rise considerably. Stay tuned - we’ll let you know.

Poverty has many causes, not all of it under our self control. But the latest research on willpower has some surprising and useful insights for anyone wishing to change their financial situation.

In a nutshell, the poorer you are, the more stressful every purchasing decision necessarily is. “Shall I buy lunch today, or make my own?” requires some trade-offs, but “shall I buy a new car, or get private Health Insurance?” has much more. The rich have the luxury of making similar decisions based on fashion, taste, or competing benefits.

Recent research shows that such decision-making can be not only emotionally taxing, it can be intellectually taxing, too. The more of these types of decisions you are forced to make, the worse your later decision making becomes. Subjects in psychological tests were shown to do worse in IQ type exams after being asked to make a simple financial decision - such as whether or not to buy some soap that was on offer.

The effect was greater the lower the subjects’ income levels were. “Poverty may reduce free will, making it even harder for the poor to escape their circumstances.” says one researcher. Poverty is, then, a particularly difficult Catch-22 to escape from.

So, what can we do about it? Here are some tips to using this knowledge to your benefit:

1. Lock yourself into savings plans and long term deals, that not only save you money - they remove such decision making in your week, month, or year. This will increase the amount of willpower you have in other areas of your life, and hence the intelligence you apply to other financial decisions.
2. If you find it difficult to avoid distractions such as the internet, TV, or eating, find a workplace where these things are not on offer. You will have to exercise self control less, and your intelligence, willpower and bank balance will increase, as a result.
3. Have a routine. If you know exactly what you will be doing on a saturday morning, monday night, or sunday afternoon each week - it will go a great distance in lessening stresses on how you spend your time. The same is doubly true for your work week.
4. Opt to pay bills automatically, if your bank and service provider offers it. This will allow you to focus on other, more important financial decisions.
5. Make a list of things that will save you time. Where you spend your minutes is another taxing act of willpower, and any benefits here will be felt elsewhere. For instance - cook large meals for freezing on the weekend, or buy things like socks, underwear or shirts in bulk.
6. If someone offers you charity (a friend or family member, for instance), don’t balk at having conditions placed on it - such as limits on what it can be spent on, or what you must do in return. If the conditions match your long term goals, these constraints on your own free will can actually benefit you in the long run. They removing desires you would otherwise have to continually reign in.
7. Make use of electronic reminders and calendar alerts. You will sleep better knowing that you don’t always need to be on edge about when a bill is due, or a job application is about to expire.
8. Whilst ’shopping around’ may be a good savings tip, it underestimates the amount of time you are spending worrying about money. Research the cheapest place to buy your groceries, entertainment, books and other expenses and then stick with it - it will make for a much less stressful week. You will be able to think much more about your larger financial situation.
9. Increase your short term willpower regularly by taking a walk, or doing something that makes you laugh - like watching a good film. Researchers have found that these can have important part to play in resetting your will.
10. Divide up spending decisions with a significant other - be it a roommate, partner, or friend. Give them agency over one half of your expenditure (what food to buy, for instance, or where to go out to eat), whilst you take responsibility for the other half. In this way you can halve your strains on your willpower, rather than both suffering. Make sure you choose someone whose decision making you trust!

Can you think of other ways to take the strain out of worrying where to spend your money, or time?

In this TED talk, designer Stefan Sagmeister reveals how he applied one key idea to get more happiness: “do less of the things that make you unhappy, and more of the things that make you happy.” A compulsive list maker, he came up with these seven principles, which guide the work he accepts.

Point number three is “using a wide range of tools and techniques”, and is really a trick to get away from the computer. And point seven involves forcing himself to accept work that half allows the use of skills he is already good at, and half requiring skills which are new. What’s nice is that work here is seen as the heart of happiness, not its antithesis, and that once the job is set up correctly, happiness necessarily follows.

This post originally appeared on Personal Shoplifter.

Watchmen comic book author Alan Moore on why you should stick with your passions, and particularly your unique identity and experiences - to succeed in life. And there is a nice little touch where he suggests why you would be giving your children something much more important than mere financial security.

There is a great article over at Inc.com by Jason Fried of 37signals. Comparing making money to learning to play the drums well, he emphasizes the importance of practice.

I have a degree in finance, but I don’t remember taking any classes that even remotely taught me how to make money. I’ve read plenty of business books. Same thing—lots of talk about money, but not much about how to actually make the stuff. One thing I do know is that making money is not the same as starting a business. For entrepreneurs, this is an important thing to understand. It took me a long time to figure out how to make money. Here’s how the lessons unfolded….

He then goes on to break down all the lessons he had to learn to be good at making money (and he does, actually, make a lot of it these days). Some of my favorite points were

Don’t try to impress customers with acronyms, terminology, or jargon.

This has a negative effect. “When you describe things in terms people don’t understand, they tend not to trust you as much. Trust is important. You can bluff your way into money, but for only so long.”

Understand what the customer really wants.

This needn’t be an impossible, Freudian level analysis. Perhaps think about what are the top three things a customer thinks is important, in making a purchasing choice:

Once I stopped slinging the technical terms, I realized that when customers shop for shoes, they do three things. They consider the look and style. They try them on to see if they’re comfortable. And they consider the price. Endorsements by famous athletes help a lot, too. But the technology, the features, the special-testing labs—I can’t remember a single customer who cared. I sold a boatload of shoes and tennis rackets that summer.”Understanding what people really want to know—and how that differs from what you want to tell them—is a fundamental tenet of sales. And you can’t get good at making money unless you get good at selling.

Sell only things you’d want to buy for yourself.

You can understand a buyer best, and most naturally, when you honestly would like to buy your own product. And if you can offer people things that you want - for less than they can get anywhere else - you have a winning combination.

His advice about practicing by buying and selling things repeatedly on eBay is a good one.

Here’s a great way to practice making money: Buy and sell the same thing over and over on Craigslist or eBay. Seriously.

Go buy something on Craigslist or eBay. Find something that’s a bit of a commodity, so you know there’s always plenty of supply and demand. An iPod is a good test. Buy it, and then immediately resell it. Then buy it again. Each time, try selling it for more than you paid for it. See how far you can push it. See how much profit you can make off 10 transactions.

Start tweaking the headline. Then start fiddling with the product description. Vary the photographs. Take some pictures of the thing for sale; use other photos with other items, or people, in them. Shoot really high-quality shots, and also post crappy ones from your cell-phone camera. Try every variation you can think of.

Other tips include:

People are happy to pay for things that work well. Never be afraid to put a price on something. If you pour your heart into something and make it great, sell it. For real money. Even if there are free options, even if the market is flooded with free. People will pay for things they love.

Charging for something makes you want to make it better. There is a type of intimacy involved with selling (and buying) a product. Living up to expectations makes you perform.

Don’t just charge. Try as many different pricing models as you can. Jason’s description from his own business is persuasive here:

Before I launched 37signals, I worked as a freelance Web designer. I charged clients by the hour. I work quickly. But I soon realized that charging hourly penalizes efficiency. If I can finish something in an hour that might take someone else three or four hours, why should I be penalized? So when we launched 37signals in 1999, we charged clients by the project.

It worked great. But as the projects started getting bigger and costing a lot more, I noticed that clients became more reticent about signing on. Big numbers and long time frames make people nervous. More money and more time mean more risk, and risk is something all companies would prefer to avoid.

I thought about the problem and decided to try something new. Instead of doing long, expensive projects, we’d do short, affordable ones. Instead of billing $50,000 for a 15-page website redesign that would take three months, we’d charge $3,500 per page and offer to complete the page in a week. If you want another page, it’s another $3,500 and another week. We called it 37express.

It took off. It took the risk out. It let companies try us out before committing to something big. And it was a lot more fun for us—fewer meetings, less stress, fewer decisions to be made. Just a quick one-week project for a fixed price. If you want more, we’ll sell you another.

We no longer design websites, so we don’t offer 37express anymore. But it was a fantastic way to make money. Remove the fear, and people will be more willing to pay you. People don’t like uncertainty—especially when they have to pay for it. A week and a fixed price is certain.

We’ve continued to experiment with pricing models. It’s been a great way to get a 360-degree view of how customers think about their money and our products. Our apps, for example, are available as monthly subscriptions for $24 to $249 per month. We’ve sold our book Getting Real as an instant download for $19 and as a paperback for $25. We’ve sold tickets to our eight-hour workshops for up to $1,000. Listings on our job board are $400 for 30 days. We sell listings on Sortfolio, a service we built to help small businesses find Web designers, for $99 per month.

We’ve even sold promotional T-shirts, for $19, when just about everyone else in the business gives them away. People wear shirts they paid $19 for. People turn free T-shirts into rags. Rags don’t promote anyone.

Read the whole article here.

Warren Buffett said buying a home was the third-best investment he ever made. The first? Wedding rings he bought for his first wife (Susan Thompson) his second wife (Astrid Menks). Buffett wrote to shareholders of his Berkshire Hathaway

For the $31,500 I paid for our house, my family and I gained 52 years of terrific memories with more to come.

Not a bad return - and a reminder for us to keep what makes us truly happy the goal we should try to reach.

[Bloomberg]

Well, the book is more plain common sense than secrets, though it may just make you a fortune. See the article in the NYTimes for more info.

I liked his analogy of the advantages of finding niches (in nature as well as businesses) to find good economics. And a really good look at the advantages of scale - why it is such a non-brainer - but which can be beaten by the ‘niche’ technique. Also, some fields naturally destroy profit for everybody as they become more efficient - whereas others maintain profitability for everyone.

Charles Munger

The Wal-Mart story is good too - how old Sam Walton beat the big guys by learning their rules, and playing them better than his mentors. And how he couldn’t take on the big guys in the early days, so he beat (other) little guys dozens of times, getting stronger each time. Eventually, he became the strongest retailer in the nation, which is quite a Taoist model of success.

Other topics covered - Surfing and the Early Bird advantages, finding and developing your own circle of competence, only ‘playing’ (or working) when you have a substantial advantage. The ‘Geiger counter’ technique of picking such advantages.

The one thing that all those winning betters in the whole history of people who’ve beaten the pari-mutuel system have is quite simple. They bet very seldom.

It’s not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it—who look and sift the world for a mispriced be—that they can occasionally find one.

And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.

Berkshire Hathaway made the majority of its billions betting heavily on perhaps spotting just 10 sure-thing mispriced insights, and then consciously sitting on its hands for the other 90% of the time. It is the last thing that most people find too difficult to do, since it seems to go against our ego’s idea of ourselves as geniuses. But the market is almost a perfect system. And it probably applies as much to people in the service industries as picking stocks et cetera. Working more often, or harder, is not always the best way to go.

When Warren lectures at business schools, he says, “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.”

He says, “Under those rules, you’d really think carefully about what you did and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”

There is a great FedEx example Munger gives - when even the most difficult problems were solved merely by paying people to finish a job at the center of the problem, rather than by the hour (the importance of incentives). And when it comes to selling to people? His story is great about the guy who sold fishing tackle. I asked him, “My God, they’re purple and green. Do fish really take these lures?” And he said, “Mister, I don’t sell to fish.”

It is a long article, so I’ll leave it to Munger to explain about the joy of finding businesses where you can easily double the price, and not lose many customers. Or, keeping the macro view in buying shares:

Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.

You can read a transcript of the whole lecture here.

From my own experience, I’ve also found this to be true. Traveling in Europe - seeing the best sights in the world, eating in great restaurants, and traveling from country to country on a whim, I always marvel how I’m spending the same or less than just being at home working. The devil truly is in the details.

Have you read this article? What did you think, too good to be true?