In this article, I continue discussing new directions in investment research.

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

Investment bankers, fund managers, and institutional investors of all types depend upon investment research to achieve their purposes. Those institutions that combine the most complete and accurate information intelligence with the best interpretative skills can best serve clients and gain competitive advantage.

	New Technology

Investment research has a cost and there is a limit as to how much an institution can spend on this item.

When investment research is performed with respect to a portfolio, the limits on investment research are determined by the size of the portfolio, plausible returns, and practical ceilings to management fees that might be charged.

Competitive advantage in investment research depends upon getting the most accurate and complete information and then making decisions based on the highest interpretive skills, at the least possible cost, within economic limits set by the nature of the business and by realities of the market.

As mentioned in previous articles (see above), there is more information freely available today, than most investment institutions can afford to gather and process.

However, new technologies are available that can reduce information costs substantially, while giving practitioners a competitive advantage — at least for a number of years until these technologies become common practice.

Note: This is a rather long article, describing strategies and technologies for gaining competitive advantage in institutional investment research.

Investment strategy when mining free information

In today’s information rich environment, it costs far, far more to gather, organize, filter, summarize, and present factual investment intelligence than it costs to make a rational, informed decision based on this data.

	Gold buried in the archives

Although this information is free and usually available to anyone that has access to the Internet, often in official sources such as SEC archives, the quantity of information is so vast and the presentation so disorganized and confounded with irrelevant, repetitious, and obvious self-serving statements, that the time-cost of digging out this data is far greater than most people can expend.

In other words, the information is there for all to see, but few have the time to find it.

The Crash of 2008, in large part an informational crisis, has opened the door to new opportunities for institutions that are able to think outside the box.

A plausible strategy that takes advantage of the current informational environment has three elements:

1. Find a way to process and turn raw investment information into actionable intelligence at far less cost than one’s competitors.
2. Take action on this intelligence (buy or sell securities, make recommendations to clients, etc.) before competitors can do so.
3. Having taken action on the intelligence, make sure that the whole world has the same information as quickly as possible. The market will only react to what it knows. If you are the only one that knows the facts about stock ABC, the price will probably not be influenced by these facts.

No intent to deceive, no investment advice

Now this may sound like blatant market manipulation, but it is not.

Here is how the US SEC defines market manipulation:

Manipulation is intentional conduct designed to deceive investors by controlling or artificially affecting the market for a security. Manipulation can involve a number of techniques to affect the supply of, or demand for, a stock. They include: spreading false or misleading information about a company; improperly limiting the number of publicly-available shares; or rigging quotes, prices or trades to create a false or deceptive picture of the demand for a security. Those who engage in manipulation are subject to various civil and criminal sanctions.

Stock manipulation (other than that permitted by the SEC under Rule 10b-18) was common in the information-poor markets of the early 20th century — a different world than today.

	An information-poor market ...

Republishing facts (probably taken initially from SEC public files) with no intent to deceive — without recommendations, opinions, or advice — can hardly be considered market manipulation, otherwise, every Moody’s report would be considered market manipulation.

Furthermore, if this information is published with footnotes linked to each source and is limited to strictly factual information, with no buy, sell, or hold recommendations, without puffery that might be considered touting a particular security, it is hard to see how this could be considered market manipulation.

Note: Information published on Capital Market Wiki — the technology described in this article — is strictly limited to true, factual information, stripped of any element of opinion. Information is presented in “recommended formats” in response to standard “implied questions” intended to reduce chances for bias. All assertions should be true and footnoted, with links to sources. Finally, every article is subject to collaborative editing and correction by anyone, so that no single institution of editor can control the output. The information is free, not sold. Every article has a legal disclaimer and warning. All edits are documented as to editor and timestamped. Editors may disclose potential conflicts of interest, if they so desire, on their individual pages, linked to each article in which they have participated. The wiki will cooperate fully with authorities in providing information regard source of postings.

Drastically reducing the costs of factual information

The key to the above-described strategy is knowing how to extract valuable facts from the sea of free, largely unexploited investment information, at far less cost than competitors.

Part of the solution lies in applying new technology, such as crowdsourcing, semantic databases, and Capital Market Taxonomy, as described in Capital Market Wiki and the references in the blue box at the top of this article.

	High-salaries, overtime, and high-rent

However, the real secret to cost-cutting lies in contracting methods and sourcing arrangements, and the separation of the fact-gathering function from the intelligence analysis and decision-making function.

The nut to crack is the cost of a credentialed, experienced security analyst sitting at a desk in a high-rent office of one of the world’s major financial centers, as a full-time employee with a year-end bonus, pension scheme, and with expenses paid for luncheons and taxis, and with the overhead of the inevitable organizational meetings (sensitivity training and such), as well as proportional costs of staff support (human resources, building maintenance, expense account reviews, etc.).

Since, in the aggregate, the highest costs are with fact-gathering, the trick is knowing how to organize and enlist many low-cost, skilled fact gatherers, managed by a senior decision-maker, thereby permitting careful control of the higher-cost elements of the process while maximizing coverage and accuracy.

New tools for organizational technology

There are tens of thousands of people, maybe more, with the necessary skills and who are willing and able to work in investment research at a fraction of the cost of those doing the same job in financial centers like New York City, London, or Singapore.

For example, let’s imagine a stay-at-home mom in Boise, Idaho, with a degree in finance, two young kids, and a home office.

First of all, her living costs are far less than if she lived in New York City. Second, she is available only part time, on her own schedule (taking the kids to school, buying groceries, ballet lessons, and all that). Third, she would be willing to work for a flat fee per job, with no pension or fringes. She doesn’t have to pay the triple taxes of residents of New York City and she wants to be able to take a vacation whenever she feels like it, not when the boss says she can. Working from a home office, she can deduct part of her living costs (depreciation, electrical bills, Internet service, etc) and she can even set up her own pension plan — also tax deductible.

	Home office, teddy bears, diplomas, computer, Internet ... ready to work

The costs of doing home-based factual research on a fixed-fee basis, without strict delivery deadlines, can represent a savings of as much as 80% compared to the same service provided by a full-time employee of a financial institution in New York City ($96,000). That amounts to about $50 per hour (before bonuses, over-head, and down-time). The true cost is probably double that.

This suggests that a 75 man-hour research project performed by a salaried security analyst in New York City, taking into consideration overhead and downtime, might cost $7,500, where the same job done by a stay-at-home mom, with equal professional qualifications in Boise, Idaho, on a fixed-fee basis, without a deadline, might cost $1,500 — or less, with payment only on delivery. Furthermore, after taxes and the cost-of-living differential, the stay-at-home mom in Boise, Idaho may end up with more money in her pocket than her colleague in New York City.

So, if home-sourcing factual research can save money, the question becomes how to manage such work?

Capital Market Wiki assignment templates

The Capital Market Wiki Project comes with programmable research assignment templates, tied into Capital Market Taxonomy and a system of recommended formats, that simplifies the task of managing remote researchers.

	Easily programmable research assignment templates

The system, designed initially for professors assigning open source research projects to students, works just as well in a business environment in managing a distant team of fact-gathering researchers.

These templates are easily programmable, as are the templates for the recommended format system for specific types of research.

The combination of research assignment templates, Capital Market Taxonomy, and the recommended format templates provides a simple way to organize a group of out-sourced researchers at minimum cost.

The Capital Market Wiki Project, is a non-profit organization and access and use is free. The project has extensive help files and requires the same computer skills that millions of editors of Wikipedia possess.

Capital Market Wiki technology is ready-to-go, out-of-the-box, and free. Furthermore, the system is easily adaptable to the needs of any particular organization.

Multiple strategies for out-sourcing factual research

So far, we have only explored the possibility of home-sourcing factual research assignments. This works for people like a stay-at-home mom, a retired banker, or someone who has been down-sized from a major institution after the Crash of 2008.

	Organization by function and cost-basis

However, there are a variety of sourcing strategies that all work off of the same system:

• Student-sourcing.
• Offshore-sourcing.
• Prize-based-sourcing.
• Home-sourcing.
• Collaborative project sourcing.

Student-souring involves working together with a professor at a university who is interested in teaching open source investment research techniques.

	Students earn while learning

Capital Market Wiki comes complete with a system that allows professors to assign and monitor financial research projects to students. An institution may make an arrangement with a professor whereby both students and teachers may receive compensation for directing such projects to an area of research that is of interest to the financial institution. The students learn how to do research and improves chances for employment on graduation, both students and the professor earn some money, and the institution gets basic research done at far less cost.

The same system used for home-sourcing research describe above, can work just as well with researchers in a foreign country. In this case, the advantage is not just cost, but also gaining access to data that is difficult to obtain in the home country. For example, a finance professional in India may provide factual research on stocks traded on Indian markets, with access to data not easily obtained in the United States or Europe.

	Prizes recruit and expand coverage

Capital Market Wiki also allows financial institutions to act as patrons, offering prizes to free-lance editors for the best research in whatever area interests the institution. This system can be useful in finding talent for home-sourcing or offshore-sourcing arrangements, or for broadening coverage of certain market areas.

Finally, there is also the possibility of working together in a collaborative project with another financial institution. The research assignment template system allows for multi-institutional research assignment management.

For example, Fund Manager A and Fund Manager B are both interested in investment in REITs. By working together in managing out-sourced factual research, using Capital Market Wiki templates, they can reduce costs even further. Fund A might handle health service REITs, while Fund B handles office/industrial REITs. They both share the factual output, but each keeps the decision-making, interpretive function in house.

“Going public” with the data

The Capital Market Wiki system allows editors to prepare data in private sandboxes, not connected to the semantic database. This allows complete control over the research, although postings are done on a public wiki.

Once the research assignment is done, a copy can be printed, filed, and the article transferred to the public encyclopedia, with full links to the semantic database and indexing by Internet search engines. This “going public” phase provides additional advantages to the research project.

	Information on a semantic wiki, become visible worldwide

1. Information is open to editing by all. Errors may be found. Important information that had been over-looked may be added.
2. The institution that has an interest in this data can set the wiki to send an email advising of any changes made by third parties to the article. This essentially enlists the whole world in the research project, an no additional cost.
3. The facts, although probably already available in SEC files or Internet articles, are now organized in a succinct manner, stripped of fluff and superfluous text. The information is also better linked into the major search engines and therefore more visible to readers worldwide. This serves the purpose of providing the market with the same quality of information available to the institution — increasing the chances that market prices will reflect intrinsic value.

Learn by doing

The most effective way to understand the potential of Capital Market Wiki is to actually register, read the help files, and start to create a research article on a topic that interests you.

You may register using a randomly-generated pseudonym (actually, this is the recommended procedure).

It is not difficult to edit articles — the system is very similar to Wikipedia. However, to learn the intricacies of Capital Market Taxonomy, recommended formats, and templates takes a little time.

You can register here.

This entry was posted on Thursday, May 7th, 2009 at 3:20 pm and is filed under Technology. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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