This is a guest article by Zack Miller, New Rules of Investing
AT New Rules of Investing, we analyze a new generation of investment sites changing the landscape of how investors consume financial content. As investors encounter information from these new sources, it is affecting how they ultimately make investment decisions.
Combining social media, the proliferation of financial content written by professional bloggers, and the leveling of the playing field that Reg FD brought, IR professionals must concern themselves with understanding these new models and devise a strategy to address them as more and more investors turn away from consuming traditional investment media and turn to these new methods.
Before describing in detail the changes taking place in online finance, it’s important to look at what’s driving these changes and how they have affected traditional channels of financial content:
- Costs of web publishing now equal zero given free blog hosting technologies and this has spawned millions of smart people writing about stocks via blogs. Gartner forecasts that at the end of 2007, the number of writers who maintain a personal Web site reached 100 million. Others think that if you add in the huge growth in popularity of social networks, their own form of blogging, the numbers get much bigger.
- Mainstay sites like Yahoo Finance and Marketwatch have taken notice and are expanding into these spaces with 2nd generation message boards, collective intelligence (crowd sourcing), aggregation of blogs, and advanced stock screening technologies.
Expert investment communities
What is it: Expert investment communities are affinity groups of successful investors creating and sharing their analysis of the markets and stocks within a social networking framework.
What’s new: What distinguishes these sites from the activity found on message boards is that the sites actually plug into its members own investment accounts to monitor the success of their investing. Comprised of professional investors and arm-chair analysts alike, sites like Covestor and Vestopia continuously raise the bar on participation in these communities because they layer performance on top of all opinions generated in their sites.
How investors are using these sites: The trend is for these sites to register to become licensed investment advisors and investors using these systems can choose to either pay to follow specific members’ moves or the investor can open an account with these sites and turn their portfolios over to the portfolio managers participating on these sites. Covestor has recently signed a deal with TheStreet.com to syndicate some of the content created on Covestor onto TheStreet.com’s website. Investors are ranked brutally by their performance and risk rankings. One such site, Cake Financial, has tracked over 1 million transactions on its platform.
What it means for IR: If investors continue to move towards basing decisions off the moves of experts, expert opinion gains more and more credibility. As consumer products marketers have learned to tap into influential online communities, IR professionals need to expand roadshows (both virtual and real) to include getting exposure to these experts. These are the new influencers. Targeting these communities for influencers may be a more powerful way in the future for getting the work out.
Piggybacking the pros
What is it: Certain web businesses like StockPickr are constantly monitoring SEC filings and publish 13D/13F findings to their own websites, creating guru portfolios around hedge funds and mutual funds for investors to piggyback on for investment ideas.
What’s new: While the SEC has published financial filings for public consumption for years via its EDGAR system, the interface is designed for data mining, not for idea generation or stock discovery. The piggybacking systems have done the hard work for investors by data mining and arranged the content around the moves of guru investors like Warren Buffet and Carl Icahn.
How investors are using these sites: Investors can literally drill-down into SAC Capital’s Eddie Lambert’s portfolio, monitor his moves in and out of particular companies and use this information as an input into stock purchase decisions. Investors are compiling “all-star” portfolios by picking top picks from a multiple of guru portfolios.
What it means for IR: IR professionals need to gain awareness that investors are creating portfolios based on piggybacking professional portfolios. People in IR should spend the time understanding who owns their firm’s stock publicly and use that information to gain credibility for retail investors. Hedge fund managers are notorious piggybackers as well.
Investment screening 2.0
What is it: Combining technology and computer algorithms, investors can utilize new stock screening systems to approximate the same strategies employed by guru investors when sizing up prospective investments.
What’s new: Many professional investors have written and spoken about the criteria they use in making investment decisions. These criteria are beginning to be computerized and made available to individual investors looking to employ these same strategies.
How investors are using these sites: Validea is a pioneer in this field and publishes premium content to its website and via a newsletter and provides portfolio management services as well. Validea has created computer algorithms to approximate strategies employed by investor heavyweights like Ken Fisher and Peter Lynch and then scans through thousands of stocks to find those companies that would satisfy these pros’ investment criteria.
What it means for IR: Screening technologies are employed by professional investors and are now being filtered down to the retail level. While certain investors are driven by models, the most important part for those in IR is to get their firms into the traditional funnel that begins the stock screen. Once in the running, make yourself available via a wide variety of media to flesh out the story to investors.
Long tail investment opinion
What is it: As publishing costs have been pushed to zero, amateurs and professionals alike are using blogs to help promote themselves and their businesses. Employing a traditional editorial filter, aggregators like SeekingAlpha have emerged and collect thousands of the various financial blog postings into a standardized platform.
What’s new: Just a few years ago, investors had just a handful of traditional media sites to check for financial news and commentary. Employing professional journalists, the focus was on publishing accurate news. Given the cost of publication, sites like Yahoo and Marketwatch focused on just a few hundred of the largest stocks. The emergence of financial blogging has encouraged bloggers to specialize in analyzing specific fields that don’t exist as such in traditional equity research teams (homeland security, consumer electronics), specific companies (eBay, Apple), and specific geographies. We’ve essentially moved from the fat head to the long tail of financial content.
How investors are using these sites: SeekingAlpha came out of nowhere and has become one of the largest financial websites online. With over one hundred daily articles and thousands of smart analysts, SeekingAlpha and its like are convincing investors to turn to these sites to find opinionated commentary (not news). SeekingAlpha has further democratized financial content by freely diseminating quarterly earnings call transcripts to its community. See the ranking graph to the right to see how SeekingAlpha is gaining on sites like TheStreet.com and Forbes.com.
What it means for IR: Like expert investment opinion, a whole new class of influencers has emerged with vast reach over a pretty sticky subscriber base. As IR professionals have traditionally pitched editors of influential subscription research products, bloggers are usurping the power of these longstanding products. In fact, many of the top Forbes newsletter publishers are turning to SeekingAlpha as a marketing channel. Blog aggregators like SeekingAlpha don’t go away as they become even more important as more blogs are published. Leading IR pros are already turning to the aggregators as this content is showing up on Yahoo Finance, Marketwatch, E*trade, and Reuters. There will be tremendous opportunities for next generation IR to gain exposure via thoughtful products like sponsored interviews and surgically-targeted advertising.
What is it: While expert communities are designed to create a hierarchy in performance to bubble up true investment experts, crowd sourcing technologies are based on research that says that the aggregate opinion of the crowd has statistical significance for investors.
What’s new: The Internet has enabled the creation of affinity investment communities with requisite new tools to extract and monitor sentiment change within the community.
How investors are using these sites: Still early in their maturation process, investors are going to sites like piqqem and Marketwatch’s Community site to see what the top and lowest rated stocks are as well as searching for the opinion on specific stocks they are interested in. So far, crowdsourcing should be seen as just another input into investment decisions.
What it means for IR: As the opinion of the crowd carries more sway in overall investment decision making, IR pros will need to focus their attention on influencing the view of the crowd. This stands in stark contrast to many IR activities today that focus on garnering the attention of just a limited few investors.
Takeaways for the IR field
I’ve tried to briefly explain a few underpinnings of the recent changes in the investment research process. New Internet technologies, combined with the current environment of consolidation within the equity research community, are empowering investors to consume a lot more information about stocks, albeit via different channels than what we’ve used traditionally. IR professionals must recognize that the early adopters of these technologies and platforms will be followed by critical mass. The after-effects of this evolutionary process entails a shift of power to new influential individuals and online communities. Bloggers and other experts have the ability to hold sway literally over millions of readers. Professionals who understand the new rules of investing and structure their work accordingly have the ability to harness the vast power of these new technologies and platforms.