I’ve been thinking a lot about collaborative research techniques, strategy, structure, etc. over the past couple of weeks. I’ve written about Wikinvest’s wiki structure previously and generally like what they’re up to.
But look a little further, and there’s been little written, discussed, analyzed about the future of collaborative research when so much has been written about crowdsourcing, in general. In a Wikipedia world, it’s amazing to think that the bull market we’re experiencing in investment research via blogs, expert communities, Screening 2.0, and crowdsourcing technologies hasn’t spurred more towards open-source collaboration as it relates to investment research. I’ve mentioned Piqqem as a tool to plumb the wisdom of the crowds for investors but outside of some tools, there ain’t a whole lot going on.
Through the course of my probing a bit deeper, I stumbled upon John Schroy, a financial professional who’s become both an industry analyst and entrepreneur in the collaborative research space. Below are the takeaways of some of my conversations with him.
First, I’d love to know a little about you, your background and what’s brought you this field.
John Schroy: I’m a retired banker and financial consultant. I’ve spent 33 years working in developing emerging capital markets — Brazil in the 1960s and 1970s, and Indonesia in the 1990s. I retired in 2000 and continued working on research that I had started earlier with respect to Capital Flow Analysis. This led to the opening of capital-flow-analysis.com in October 2004. (see: http://www.capital-flow-analysis.com/about/this_site.html). This is an educational, non-profit site.
By November 2007 I had become interested in the fact that the major financial statistical publishers (Moody’s, Standard & Poor’s, Fitch, Bloomberg, etc.) had fallen far behind in the job of gathering, summarizing, and publishing fundamental data on the millions of security issues now traded in global markets. Furthermore, some of these publishers had become focused primarily on purveying opinions (e.g. bond, stock, and fund ratings), rather than serving as impartial sources of basic investment intelligence.
In the 1960s, I had founded and managed what was, at that time, the largest publisher of financial statistics in Latin America. I know the constraints of this business model. See: Serviço Nacional de Investimentos Ltda. ( http://www.capital-flow-analysis.com/investment-tutorial/case_1t.html ). It seemed to me that a non-profit, wiki encyclopedia format (as in Wikipedia) might be an economical way to supply the need for more extensive factual, in-depth coverage of world capital markets.
With the Internet and Google, there is now far more undigested, raw, open-source information (OSINT) freely available than can be easily gathered and comprehended by the average investor. Even professional security analysts do not have the time to thoroughly research all the securities that they might wish to include in a diverse portfolio. With securities in foreign markets, the deficiency is severe. The challenge is how to transform this sea of raw information into reliable, actionable intelligence. The Crash of 2008 has provided a justification to return to hard research-based fundamental analytical methods.
I worked for two years creating the motivational and operational structure for Capital Market Wiki. The wiki was opened to the public in March 2009 without fanfare. My intention now is to approach professors of finance, business and economics at universities throughout the world, suggesting that they use Capital Market Wiki as a tool for teaching open source investment research techniques, while providing students with exposure that will help in placement on graduation. Professors would also have a platform for marketing their consulting services.
But first it is necessary to engage in publicity of the basic idea via articles in Capital Flow Watch — which is where I am at now. Capital Market Wiki is in the early proof of concept phase — a phase which I intend to keep open for at least five years. Wikis are notoriously difficult to get started and I expect going to be slow for an extended period. So far CMW does not have the academic and institutional patrons that it will need.
Capital Market Wiki (and most of the educational material on the Capital Flow Analysis website) is available under the creative commons license (i.e, its free to use as you see fit, if you cite the source).
You mention that there is a lack of motivation to conduct more collaborative research. How do you see that and why do you think that is?
JS: This is a complex issue that requires an historical explanation, but I’ll try to be brief.
First, since SEC Rule 10b-18 of 1982 granted save harbor to corporations to buy back their own stock and the corporate governance movement provided cover for hired executives to be remunerated by stock options, equity buybacks have dominated the US equity market, forcing prices up for over a generation. (See: The Great Misleading at http://www.capital-flow-analysis.com/investment-essays/buyback_fallacies.html). Prices exceeded earlier levels of rational value, but investors still appeared to be making money simply by investing in equity index funds, with no need for research.
Second, the popularity of the Efficient Market Hypothesis provided a theoretical basis for non-research based investing, such as through index funds. Modern Portfolio Theory adopts Nobel laureate Harry Markowitz’s measure of risk (past price volatility and betas) rather than fundamentals, with performance measured on relative rather than absolute terms. The negative effects of the Efficient Market Hypothesis could be seen in 2008 with the impact of mark-to-market rules on financial institutions. (See: Fallacies of the Nobel Gods at http://www.capital-flow-analysis.com/investment-essays/nobel_gods.html)
Third, the rise of proprietary trading at financial institutions further emphasized technical analysis, rather than old-fashioned Ben Graham fundamentals. Institutions offered higher remunerations to traders, salesmen, and account executives than to long-term security analysts.
The amount that can be spent on fundamental research is limited by return on investment and customary levels of fund management fees. There are competing uses for this money, not the least of which are the remuneration of portfolio managers, marketing expenses, and the profit margin of the fund management company. I estimate that only about 1/100 of one percent of total market value of US stocks and corporate and municipal bonds is spent each year by Wall Street institutions on salaries and bonuses of financial analysts, according the US government figures. (See: The economics of security analysis at http://capital-flow-analysis.com/capital-flow-watch/post-modern-security-analysis-part-three-the-economics-of-security-analysis.html).
The Crash of 2008 was, in my opinion, a world-changing event of such significance that there is a possibility that fundamental research will again regain importance. However, more efficient methods of research than the old-fashioned “Standard & Poor’s” model are needed, which is where wikis and crowd-sourcing comes in.
You say no wiki has sufficiently addressed the necessary issues facing the investment field until you developed capital market wiki. What about Wikinvest?
JS: As far as I know, Capital Market Wiki is the only vehicle designed for collaborative, fundamental research on world capital markets with strict encyclopedia standards.
What I seek to create is a factual encyclopedia of world capital markets that is free from opinion and that emphasizes truth and accuracy. The closest that any wiki comes to this model is Wikipedia, but this extremely successful wiki is not organized as a capital market encyclopedia.
When I first started to explore this idea, I thought that it might be possible to get something done through Wikipedia. However, I found that Wikpedia’s policies essentially made this impractical.
Wikipedia presents problems in dealing with raw financial research:
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It has an over-riding policy regarding “Neutral Point of View” that requires editors to allow all points of view (i.e., opinions), rather than to present only what is true, avoiding opinion.
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Policies regarding “reliable sources” and “no original research” essentially prohibit or restrict open source intelligence gathered from places such as SEC files.
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There is a lack of a semantic structure or framework suitable for capital market information.
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There is a policy of “notability” that excludes topics that are not yet “noteworthy”. This eliminates many small companies and even firms like that of Bernie Madoff (until after fraud is uncovered and the firm is notorious).
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There is a large contingent of editors (the majority) with no expertise or interest in capital markets but who will eliminate and restrict contributions about this field for no good reason.
Wikinvest is not a semantic wiki, nor does it have strict policies regarding content consistent with the creation of a reliable source of factual information about capital markets. It is loaded with opinion (even having “bulls” and “bears” tabs on articles), and seems to duplicate much of the information available on Yahoo Finance. It also is clearly a commercial venture with distracting advertisements that raise questions regarding impartiality.
Marketswiki is also not a semantic wiki and seems to be restricted to derivative markets.
Piqqem is not an encyclopedia wiki but rather a system for crowdsourcing investment opinion.
Valuewiki is also supported by advertisements, similar to Yahoo Finance, and lacking in substantive original research. It is not structured as a semantic wiki.
Note: It seems to me that the non-profit aspect of the wiki itself is important, as has been the case for Wikipedia. Editors might be willing to donate their time for their own benefit, but not for the profit of others.
Stay tuned for part II of my interview with John Schroy where we’ll dig deeper into crowdsourcing investment research to learn more of the Capital Markets Wiki and the work/thought John has put into it to make it the go-to resource for publishing opinion-free investment content. We’ll learn more about the taxonomy as well that Schroy has developed to make this work.
Additional Resources
- This is part 1 in a 2 part series. Part II is here.
- Capital Flow Analysis
- Capital Market Wiki
- Wisdom of the Investing Crowds sites: piqqem and wikinvest
