This is the seventh article in a series about Post Modern Security Analysis.

Creating a Research Community

The essential element in Post Modern Security Analysis is emphasis on the gathering and selection of open source investment information and on the preparation of factual, encyclopedia-style articles based on this research.

Because of the time required to develop factual research of this quality and because the utility of such research is enhanced by research on comparable securities and input from researchers with special expertise, the solitary analyst must now look to joining a research community to receive collaborative assistance from other researchers.

Post Modern Security Analysis dates from the Crash of 2008 and the decline of acceptance of the Efficient Market Hypothesis, along with criticism regarding the quality of work produced by traditional profit-based publishers of investment statistics.

So, in this new field of endeavor the question is, “How does a researcher create a Collaborative Investment Research Community?” and “Do any such communities already exist?”

Essential elements of collaborative investment research

When the goal of collaborative investment research is to produce a factual, encyclopedia-style “article” about a certain topic, the following conditions must exist:

1. Purpose and content: The purpose and content of the “article” must be defined and agreed upon by the collaborators.
2. Consensus: The collaborators must have reached a consensus regarding the standards to which the article must be held.
3. System and Rules: There must be a system by which collaborators at different locations may work on the same article in harmony, with rules for resolving inevitable differences of opinion regarding content or fact.
4. Enforcement: There must be a way for enforcing the rules and systems of collaborative research, protecting the work against disruptive elements.

The Internet offers the least expensive communication system to bring together collaborative researchers throughout the world. It is not free, but costs are small relative to benefits.

The rise of the Internet and personal computer systems has spawned many collaborative software systems. Of all these systems, the “wiki” concept is the most appropriate for collaborative investment research.

A wiki is a website that uses wiki software, allowing the easy creation and editing of any number of interlinked Web pages, using a simplified markup language or a WYSIWYG text editor, within the browser.

Wikipedia

Most wiki software is free (open-source) and MediaWiki, the software used in the most successful wiki (Wikipedia), can be easily setup by anyone with access to a server and basic computing skills.

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This is the sixth article in a series about Post Modern Security Analysis.

Researching comparables

Capital markets are made up of many securities. Most investment decisions, at some point, involve comparing the characteristics of one security with those of other securities.

One purpose of security analysis is to determine intrinsic value, but this generally involves making comparisons with a number of securities.

Intuitively, we feel more confident in a decision if we can say that security “A” has a greater or lesser intrinsic value than security “B”, than if we were to try to fix the intrinsic value of security “A” without knowing anything about other securities in the market.

For example, if we were to invest in Company ABC, a stock in the Russian Federation, we would usually like to know the dividend payout ratio of other stocks in that market.

However, in order to make value comparisons, we need to have research available about many comparable securities — often more than we can possibly research alone. Therefore, we come to depend upon not only our own research, but on research done by many others.

The need to reduce the cost of researching comparables is the reason for collaborative research.

Parallel sources

When researching comparables, useful facts are often uncovered relative to the primary target of a research project.

For example, if we are studying the common stock of “ABC”, a health-care REIT, a parellel study of other health-care REITs will probably reveal useful information about the health-care REIT business, not found in a direct study of sources about “ABC”.

If we follow the research techniques suggest in Part Five of this series — posting our findings to separate “folders”, by topic — from parallel research, we will develop a fact-rich folder on the topic of the health-care REIT line of business that will greatly facilitate our analysis of target “ABC”.

The type of useful information revealed by such “parallel research” might include:

• Operational procedures
• Relevant laws and regulations
• Business risks
• Competitive advantages
• Economic constraints
• Market size and growth

However, to get at this valuable “parallel information” requires much more time and effort than an individual analyst would normally be able to expend.

The help of other researchers is necessary.

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An examination of a typical Standard & Poor’s investment report reveals that it is, in large part, composed not of facts, but of opinion, often from third parties.

Sites like EarningsWhispers.com and WhisperNumber.com engage in the crowdsourcing of investment opinion, for a fee.

An article in the UK Moneyterms blog recently expressed doubts about “crowdsourcing investing” , as follows:

As for investment research, good research requires opinionated non-conformists. The requirement is to spot what the crowd has missed. This is exactly what crowdsourcing cannot deliver. The work itself does not easily lend itself to loose collaboration: analysing a company cannot be divided up into discrete tasks that can be carried out with little communication — a close knit team can work, but that approach cannot easily be crowdsourced.

I would agree with this in that effective collaborative investment research is something not easily achieved.

However, just because something has not yet been done, doesn’t mean that it is impossible.

Invention and progress always must conquer doubt and the status quo.

In the case of collaborative investment research, the tsunami of unanalyzed information that overwhelmed the market in Q4 2008, leaving so-called “experts” uninformed, is the stimulus that calls for new methods.

New tools, new times, new perspectives

Two things have hampered the development of collaborative investment research:

1. A lack of tools: Collaborative editing software (i.e., a “wiki”) has only proven to be an outstanding success with Wikipedia in the last four or five years. Wikis are easy to set up but hard to grow. So far, no wiki dedicated to investment research has proven successful. Capital Market Wiki, the first semantic wiki designed for this purpose, is only in the fourth month of its “proof of concept” phase which is scheduled to last five years.
2. A lack of motivation: Until the Crash of 2008, the US stock market has been driven upwards by the relentless pressure of the share buyback movement. The Efficient Market Hypothesis dominated investment thinking. Fundamental analysis, in the mold of Graham & Dodd, gave way to Modern Portfolio Theory. One should remember that Benjamin Graham’s advice on investment research only began to become popular after the Great Depression, when tape reading went out of fashion.

A new field with new challenges

Collaborative investment research is indeed a new field, yet to be proven. Like any new technique, it goes against the status quo and conventional wisdom. The doubters may prove to be correct. We shall see.

The main challenge is not to devise a system that allows researchers who do not know each other to work effectively together to produce a useful product. Wikipedia has shown that this can be done in the area of general knowledge. Capital Market Wiki has tweaked the Wikipedia system, added a semantic structure and built-in incentives, and has created a tool to do specialized investment research.

The challenge is to attract editors and researchers to an empty wiki in the proof of concept phase. Most people do not want to be be first in anything. Today, Wikipedia attracts a thousand times more editors per month than it did six or seven years ago.

At this stage of development, collaborative investment research is an area for pioneers, especially those who want to help build a better capital market.

For more on this, see:

See: Crowdsourcing investment research: opportunities in OSINT and Free information and the Efficient Market Hypothesis and Crowdsourcing investment research: Capital Market Taxonomy and Innovation in investment research; dealing with free information and Modern technology for institutional investment research