TRUE talks to David Jackson, the founder and CEO of the controversial investment research site Seeking Alpha, about why he thinks his crowdsourced approach to stock picking can produce better results.
TRUE: With all the investment advice, analysis and data emanating from Wall Street regularly and from the business press, why did you think a service like Seeking Alpha was needed?
Jackson: The idea for Seeking Alpha came out of my experience as a research analyst during the tech bubble. I realized that my clients who were running hedge funds and mutual funds had deeper insights into stocks than I did as a sell-side analyst. So I came up with the idea of starting a platform for crowdsourced equity research, where the contributors were real investors rather than Wall Street analysts.
Wall Street firms were also doing a poor job of covering small cap companies. A recent study reported that 55 percent of small cap companies have zero or no meaningful analyst coverage. But all these stocks have investors who have insight into them.
So I started dreaming. What if there was a platform where you could see what investors thought about stocks? What if you could see their reasons for buying and selling stocks? That was the idea for Seeking Alpha, which in essence means “trying to beat the market.”
Many people mistakenly think that helping people to become better investors means telling them what stocks to pick. That’s wrong. Investment professionals and self-directed individual investors want to make their own choices and are looking for information that will help them make better decisions.
So our goal is that investors can come to Seeking Alpha and find great articles and discussions with information that will help them make smarter decisions. We’re trying to surface the information and key issues, via crowdsourcing and open debate, so you can make up your own mind.
TRUE: Crowdsourcing is not widely used or accepted by the investment community as a method for gathering information and research. Why did you decide to build a service around it?
Jackson: It was obvious to me that the world was moving to crowdsourcing after the Web made it possible. It happened, because it was better. We saw it with Wikipedia, TripAdvisor, Yelp, book reviews, restaurant reviews, product reviews, movie reviews, and forums about almost every topic. It’s inevitable that the same would happen in investment research.
But the transition to crowdsourcing is often tough. Before crowdsourcing, when information is provided by a small group of experts, there’s an aura of quality and consistency, whether it’s Michelin Guide reviews, movie reviews written by journalists, or research reports from investment banks. Crowdsourced content looks scrappier, less consistent and less polished. But the value of the information in aggregate is far higher.
The investment community may be conservative, but it’s good at discerning value. With more than 100,000 users registered on Seeking Alpha with “buy side” in their profiles, adoption of Seeking Alpha by professional investors has been rapid. The Erdos and Morgan 2011-12 survey found that 47 percent of buy-side investment professionals visited Seeking Alpha monthly.
TRUE: What’s Seeking Alpha’s business model?
Jackson: We make money from subscriptions and advertising. Our subscription product is called Seeking Alpha PRO. It enables investors to improve their performance by getting an early look at many of the articles we publish and access to articles and comments on more than 4,000 stocks that aren’t available to people who don’t pay. That gives them a head start on investment ideas and enables them to reduce the risk of their current positions. Seeking Alpha PRO has coverage of 80 percent of the Russell 2000 and S&P Smallcap 600. If you’re considering taking a position in a stock, those articles and comments are valuable because they help you identify key issues that Wall Street analysts don’t even sometimes raise.
On the advertising side, Seeking Alpha has an audience of 8 million monthly unique visitors that spans financial advisors, money managers, C-level execs, business owners and retirees. It’s a more affluent and influential audience than that of any other business or finance website we’re aware of.
TRUE: How do you decide who can post articles and information on Seeking Alpha?
Jackson: More than 9,000 people have contributed articles to Seeking Alpha. They include hedge fund and mutual fund managers and analysts, individual investors, and industry experts. We are by far the largest platform for crowdsourced equity research.
We decide who can post on Seeking Alpha based on an evaluation of the quality of their submissions. If we think you’ve got something valuable to say about a stock, we’ll publish your article.
TRUE: Many of your contributors write under pseudonyms. Do they maintain total anonymity?
Jackson: No. None of our contributors are anonymous. We ascertain the real name of every contributor, even if they choose to use a pseudonym on their articles. This helps prevent people from lying and attempting to use the site to manipulate stocks. If the SEC forces us to hand over the name of a contributor in a fraud investigation, we’ll do it. The practice keeps our contributors honest.
TRUE: But don’t pseudonyms undermine the value of the articles?
Jackson: People care about real names because they think they want advice from unbiased experts. But that whole notion of advice from unbiased experts is a relic of legacy companies like newspapers and investment banks, which operated as oligopolies and protected their privileged position by claiming that they were unbiased. But newspaper owners have political agendas, and individual journalists bring their own biases to what they write about. Investment banks are getting paid by the companies they sell research on, and that leads to conflicts of interest.
More important, the investment banks and financial media have an abysmal track record. They failed to uncover the truth about fraudulent companies like Enron and WorldCom or provide warnings about the tech and real estate bubbles.
A much better model is to embrace debate between people who you assume are biased, and make up your own mind about who has the stronger case. This is what we do where the truth matters most – in the legal system when someone’s life or freedom is on the line. The jurors listen to the prosecution and the defense, both of whom are paid to achieve an outcome in their favor, and then make up their own minds about which has presented the most convincing case.
If some people want to use their real name because it adds credibility to what they’re saying, that’s fine. But real names should be optional. If you insist on real names, you lose many of the most valuable voices. Disqus did a research study on this, and found that pseudonyms lead to higher quality comments.
TRUE: Why do so many companies and Wall Street types have a bone to pick with Seeking Alpha?
Jackson: Many companies want to control the conversation. They don’t realize that you can’t control the conversation anymore, not on the Web.
In general, companies are incredibly sensitive about anything negative said about them or if someone makes public information before the company is ready. We have an article dispute process, and remove articles if they contain material factual errors. But companies often want more. They want us to remove negative opinions. We won’t do that.
The irony: Many don’t realize that what matters most for their stock isn’t whether people are always saying positive things, but that their stock is part of an active investment conversation. Silence is the killer, as it signals a lack of interest and leads to lack of liquidity in a stock.
TRUE: Do you believe that regular investors are ever on a level playing field with the major institutional investors and hedge funds?
Jackson: If you’re a long-term investor, the playing field is pretty level. In fact, we see lots of individual investors on Seeking Alpha who have outstanding track records, in many cases beating professional money managers. Reg. FD, which stopped companies from giving professional investors information before the rest of the market, helped a lot in this respect.
But if you’re a short-term trader, you’re at a disadvantage. The large funds and market makers have information and systems that you don’t have and they’re almost always going to come out on top there.
I think Seeking Alpha has led to a meaningful increase in transparency, and as we continue to grow, so too will transparency.