Speculating on future news using social media (webcast)

There’s a flurry of activity in development of technologies, tools and platforms to help investors predict future events using social media.  Recorded Future hosted a webcast yesterday demonstrating its platform. This fertile ground will continue to be the subject of more research and investment (heck, I wrote an entire book on it).

I interviewed Recorded Future on my podcast, Recording the Future Using Social Media.  While the user interface isn’t yet going to win very many individual investors over, the company is making a lot of headway in working with institutional investors on more customized solutions.

How publicly traded companies communicate in the age of Twitter (podcast)

tradestream radio, discussing investing and technology

In this week’s podcast, we  talk to a true expert in corporate communications. Dominic Jones has been analyzing the intersection of social media with how publicly traded companies communicate since the 1990s. On IRWebReport.com, he’s a sharp critic of how typical companies interface with their shareholders and is full of ideas on how to improve this channel.

We discuss

  • how companies are changing (or not) how they are communicating with their investor communities
  • using technology to make more vibrant and democratic capital markets
  • how public companies are influenced in how they communicate by Investor Relations (IR) vendors and associations
  • the recent foray of Netflix ($NFLX) CEO into blogging to support his company and his stock against short sellers
  • and a lot more

Listen to the whole show by clicking below (if you don’t see the player, click here):

Learn more

Meat of the Tweet: Using big data solutions to pick stocks (video)

Last week, Opera Solutions hosted a seminar entitled The Meat of the Tweet: Applying Big Data Analytics to Social Media Data.

For investors, the presentation of Dr. Riza Berkan about his firm Hakia and its investing application, SENSEnews (around 4:30) shouldn’t be missed.

the social media brain appears to be something greater than all the individuals participating in it and we’re just beginning to understand how we can ask questions of it

Watch live streaming video from smw_newyork_google at livestream.com

I’m going to be interviewing SENSEnews for an upcoming show of Tradestreaming Radio.  Keep tuned to listen — should be interesting.

Winning trade of the week: front running the hedgies

From the great-idea-but-really-hard-to-implement:

comes a strategy to find profits by uncovering lesser known stocks before the big institutional investors come and plunk their money down on ’em — essentially front-running hedge funds.

By looking at stocks varying investor recognition, Sloan and Lehavy found 4 ways that recognition and stock prices are related

  1. security value is increasing in investor recognition
  2. expected return is decreasing in investor recognition
  3. the above two relations are increasing in a security’s idiosyncratic risk
  4. financing and investing activities are increasing in investor recognition


The researchers find that those stocks in the decile of  stocks with the highest change in institutional ownership generate size-adjusted returns of 14.4% whereas the lowest decile generates returns of –11.0%.


Well, this is all nice and dandy but actually applying this strategy is quite difficult. In fact, according to Empirical Finance (h/t for bubbling this paper up)

As amazing as these results are, they are of little use to the investor because the returns and the change in institutional ownership are occur during the same quarter.  That is, the investor won’t know which stocks have the highest change until after the 14.4% return has already been generated.

Nevertheless, it appears as if the gains in the owned stocks point to an underpricing in the market.  In addition to the issue of returns and ownership occurring in the same quarter, we still don’t know a whole lot about what constitutes investor recognition — how investors encounter stocks and continue to drink from a particular issue’s tradestream.

How investors discover new opportunities

  1. David Jackson, founder of Seeking Alpha, always believed that investors would encounter smaller companies by way of researching their bigger competitors. In fact, we launched an advert product that enabled smaller companies and their IR firms to target investors researching larger ones.
  2. Companies like StockTwits provide an opportunity for investors to discover lesser-known stocks residing in the long tail.
  3. Peter Lynch, the scion of buy-what-you-know investing, encouraged investors to buy the stocks of companies they’re familiar with.  As tragically hip companies like Skullcandy and Pandora ready to IPO, investors are given opportunities to invest in firms that make products they use daily.
  4. creating backtested strategies that piggyback guru investors a la AlphaClone is something I’ve spoken about a lot on this site (and in my book) — though this helps less if you’re trying to find firms not widely owned on the Street

Regardless, with social media, the dissemination of good ideas in lesser know companies will be something studied, analyzed, and made profitable.  Good times.

More resources

The future of financial content, social media and investing (transcript)

tradestream radio, discussing investing and technology

This transcript is of a conversation I had with Mick Weinstein (listen to the podcast), previously the Editor in Chief of Seeking Alpha and presently the head of content at Covestor.

Miller:   Hi! I’m Zack Miller, author of the recent book TradeStream Your Way to Profits: Building a Killer Portfolio in the Age of Social Media, and you’re listening to Tradestreaming Radio, our home in the internet radio space. This is our place to discuss how technology is helping investors to become better, smarter, and more accurate at what they do.

You can find this podcast on iTunes. You can also find lots of other material relating to this podcast, as well as archives of our programs at my website www.tradestreaming.com There’s lots of other great content there as well, and I recommend you check it out.

Today’s podcast includes a conversation with Mick Weinstein, I worked with Mick when I was at Seeking Alpha. Mick headed up their content initiative. He was the editor in chief, and managed the entire editorial staff. Mick recently joined Covestor, another company I write about in my book, TradeStream Your Way to Profits.

Covestor is an eBay of investment services of sorts. Investors can go there, open an account there, transfer money over, and then with the click of a button, allocate those funds to new and old aspiring investment advisors. So, it’s a transparent platform, investors can see exactly what they own at any given time, fees are transparent. Just like you would go to Schwab or to Fidelity to find a mutual fund, Covestor provides that level of service for the investment advisory industry.

We’ll just jump into the podcast, and we’ll take it from there.

I’m here with Mick Weinstein. Mick Weinstein is currently the head of content as Covestor, which I will let him tell you about. I’ve known Mick for years, Mick and I have worked together at Seeking Alpha, where Mick ran content as well, and managed the entire editorial process and team. I’d like Mick to introduce himself, and we’ll take it from there.

Weinstein: Thanks Zack, thanks for having me on the podcast. Before joining up at Seeking Alpha, in the early days of Seeking Alpha, I was working in online content. Sort of became active online as broadband was exploding, and things were getting really exciting for online content and access to it. The advent of the blog and the democratization of content creation, and broad distribution was already happening. I worked in both the business sphere and the non-profit sphere with online content.

And then I ran into my old friend David Jackson in, I think it was the summer of 2005. David was starting up this new company called Seeking Alpha, and he had a terrific vision of where it could go, and new possibilities in financial publishing. Built primarily around this new voice that was emerging of the individual, knowledgeable blogger about the market. And, it was very exciting opportunity, and David asked me to join up at that stage, and build up an editorial team.

Was it an issue that you didn’t have a traditional sort of investment/finance background?

Weinstein: I was always passionate about the market in sort of a individual investor sort of way. At that point, the way we saw it, it was more important to have editorial skills, strong communication skills, a strong vision of where things could go with this particular product, it was more important than knowledge of institutional investing and the like. There was a bit of a ramp up in knowledge that was required of me at that point.

It actually could have been and advantage, coming sort of with a different point of view.

Weinstein: Perhaps, yeah. It was, for me, a fascinating period of learning a new field, the institutional investor, the hedge funds crowd. I enjoyed that very much, and this was even before things got really interesting in 2007-2008.

Can you talk about the editorial process that Seeking Alpha used? How you built the content base, how you helped promote outside content? I think that’s kind of interesting.

Weinstein: Sure. Essentially at the beginning we were reaching out to some of the best financial bloggers out there, and inviting them to join up on the platform. David already had some relationships, and I built some relationships at that point with some of the early financial bloggers. I am thinking Roger Nusbaum was on board at that point, and some of the others who remain in the financial blogosphere remain active, and remain very popular.

We reached out and said what is happening, essentially, right now is that there is a lot of terrific writing from extremely knowledgeable people with real domain expertise that far exceeds, in many cases, what we can find on even the Wall Street Journal and Bloomberg reporters, because of the nature of their beat. But the problem is that no one knows about you, and you know that.

Financial bloggers’ perspective, in many cases, was very frustrating, they were doing terrific write ups on whatever the topic of the day was. They were writing because they wanted to write. They were writing because they were passionate about it, not because they had to file today. The content was coming from a really compelling viewpoint.

And they were putting their money behind some of these ideas, right?

Weinstein: In many cases, in many cases. Every aspect of it was compelling from a reader’s perspective. But the distribution just wasn’t there, and part of the problem with the distribution was that the filtering wasn’t there. No one would want to distribute it before strong filtering was in place to ensure quality and to ensure the ability to sort of follow up with the writer if an issue were to occur; quality in terms of the core production and quality in terms of the copy editing, tagging, headlines, the whole package.

We would reach out to the best bloggers at that point, and sort of hand pick them, and invite them to join up. Essentially, it formed a partnership around distribution of their content, and it worked remarkably well, with very rare exception, everyone was excited to join up with this new project that costs them nothing in terms of new work, but was all upside in terms of distribution.

In many cases, we were talking about a fund manager, let’s say, who was writing primarily either because they found it very interesting just to get their ideas out there and to get feedback from the community in comments and the like, or to market their business, and to get their name out there, to get their firm out there, to get their asset management services out there. Increased distribution was what they were interested in, exposure, and not so much to be compensated directly for their writing. It was a good arrangement all around.

You had hired and managed an internal, human team of editors to help sort of- this is the next stage of the process, you’ve identified that manager, that blogger, can you talk about what would happen at that point, once he’s written an article?

Weinstein: Sure. At the beginning it was just me taking these articles that were coming in, and there weren’t that many at the beginning, so it was something that I could handle on my own. But to scale things, and when things started really to flow, and when we started to get incoming requests to be on the platform, as opposed to our outgoing requests, we needed to scale editorially. So I began hiring editors with backgrounds more or less like my own, which is not financial expertise, but rather strong editorial abilities, web native types who had been blogging, were comfortable with content management systems, strong communication abilities, and could learn finance.

I always preferred hiring someone who was a lover of language, and enjoyed working in an editorial capacity who could learn finance and investing. I much preferred that approach to someone who had worked in finance/investing, but wasn’t strong editorially. I think you can teach finance and investing to a strong editor, but I don’t want to be teaching strong writing skills and editorial skills to someone who’s been working in finance and doesn’t have them already by the time they’re in their late 20’s or early 30’s. let’s say.

I think that helped, at least from my perspective, and part of what made Seeking Alpha so fresh was that the content was different than what else was out there. It was not dry, it wasn’t sort of onerous in the sense of just being written in a very sort of academic tone. It was very accessible.

Weinstein: Yeah right, like I said before, what was exciting about working with this content was, and continues to be I think you see on Seeking Alpha, people write because they want to, they write because they know about the field. If they have two things to say today, they write two blog posts, if they have nothing they write nothing. Everything, therefore, tends to lean towards quality. It’s a voice that you want to hear if you are active in the market yourself.

So, was a fresh voice, and that was broadly recognized, I think, from the mainstream media outlets also, that were lacking that at that point. And in many cases, still struggle with that. The voice from nowhere of the objective reporter is only so interesting when you talk about stocks and investing. At very least, to compliment that, the voice of the investor, talking from an informed, skin in the game perspective goes a long way.

You just got me thinking, so last podcast, I spoke with Nikesh Desai, whom I think you know. He used to run business development at TheStreet.com . Obviously, TheStreet.com has been taking outside content, third party content for years, certainly before Seeking Alpha was. But Seeking Alpha somehow sort of perfected that model and sort of ran away with the third party aggregated content model. Any reason why you think Seeking Alpha had a leg up in that race against TheStreet?

Weinstein: Not necessarily, I think TheStreet and MarketWatch, which were both pioneers in the late ‘90s in bringing financial content online, just didn’t get what it meant with the explosion of terrific content from individual bloggers and other types of content that became available outside of traditional journalistic frameworks. They were just late to respond to that.

And there is no reason why I think they could not have done it also. But I think David just saw sort of saw it earlier because he was in it, he was a blogger himself, and took the initiative and ran with it. I think what you find is that traditional media outlets, whether it’s an internet company, a net native company like the TheStreet or MarketWatch, or a company that has its roots in traditional print like the Wall Street Journal, Reuters, etc., companies get entrenched in their own way of doing things.

They have teams on board that they’ve built out that work within particular frameworks. They think of creating new content, they don’t think of changing that basic framework. And you still see it, the difficulties that traditional mainstream media outlets, even though the want, even though the are in principle committed to working in an online environment, it takes a long time and a culture change to think about content coming from someone who was previously a source, actually that being the source of the content that you publish and not just as a one off, but as a fundamental change to the business model, doesn’t happen so quickly, and I think they kind of  missed it on that.

So it’s natural, but I think that’s the nature of start ups. A start up can come up with a whole fresh approach, that any people onboard…

Sort of freed from the organizational constraints?

Weinstein: Exactly. That’s what occurred here, and as there’s greater recognition of the value of the blogger content, it’s interesting to see how the traditional mainstream media outlets are dealing with that. Whether it’s curating links from strong voices out there on the web, or in some cases hiring some of those bloggers to come on board and become part of their large organization, which is an exciting avenue for a financial blogger, for example who wants as a career move to become a writer, as opposed to sort of augment their money management business, or other profile like that.

Can you talk about volume? How many posts you were posting per day by the time you left?

Weinstein: Yeah. By the time I left last spring, we were north of 200 posts per day. I just looked yesterday that Seeking Alpha and Business Insider are both- Business Insider now is close to what Seeking Alpha’s output is. I thought that was interesting. They’ve really ramped up their volume there. That’s the nature of the business if you’re in that. The free content, ad-supported model, so for better or for worse, you need to have few things, and one of them is high volume.

We knew that early on at Seeking Alpha, that we needed to ramp up the contributor base. We were over 3,000 contributors over the lifetime of Seeking Alpha at the time I left, in terms of active contributors also, hundreds of active contributors; a large editorial team handling that, 15-17 editors. It was a big operation, and it had to for it to be a scalable web business in that model.

It’s funny that you say it had to be a large operation to be scalable, but that’s true. People have been writing about that. The great internet companies that are coming out that are actually pre-public at this point, they are investing a lot in infrastructure. It’s not that they are just a team of five guys being able to generate lots of money, it actually requires an increasing amount of investment, right?

Weinstein: Absolutely. I mean on the one hand, there’s misunderstanding about that, that it doesn’t cost as much to build an internet business as it once did, that’s true. But it’s still substantial, and we’re not talking about four or five people. To build a content business that reaches a certain scale, you need the sort of numbers at least that we had at Seeking Alpha.

On the other hand, when you compare it to the larger publishers, and with the traditional newspaper, and the mainstream publications, their overhead, there’s nothing to compare. If you build out the company carefully, a blogging model like the Seeking Alpha model or the Business Insider model, you still have a relatively small team, but you’re talking, editorially, still in the 15-20 people. If you want to reach the sort of numbers that turn into an interesting business.

So before we leave Seeking Alpha, and start talking about what you’re working on now, you touched on this before, can you talk a little bit more about why financial bloggers are blogging? And how they are using Seeking Alpha personally and professionally?

Weinstein: Sure, there are a few different profiles of the financial blogger, I think. In the Seeking Alpha universe, I’d say the largest profile is the money manager or financial professional in some capacity, could be a portfolio manager, could be an RIA, who is writing because they are looking for distribution of their ideas and their name, and ultimately for new client leads. That’s one profile.

Another big profile at Seeking Alpha is just the passionate individual investor who enjoys the process of writing up their ideas around the stocks they own, or it could also be macro ideas. Someone who is smart, writes well, and just enjoys that process, and is in it more for the community aspect. That is, for the thrill of writing something that you invest in, and then to get feedback from people.

It is a real thrill, and it can be addictive. I’ve experienced it myself. It’s a lot of fun to get feedback from people after you’ve put a lot of thought and effort into a piece. And getting that feedback, knowing that you have many people reading it, responding to it, who can follow up on, smart people who improve your thinking through their feedback, and the community around that. So that’s the second profile right there.

Are those types of people looking to make money? Do they have a day job, are they doing something different with their lives? Is it more of a hobby?

Weinstein: Yeah, for the most. I think they are looking to make money, but also just enjoy the process, and enjoy the discussion that happens, just like talking stocks, like sharing ideas around it. Like expressing themselves and hearing what others think about that.

And you started to say there was a third type?

Weinstein: Yeah, there are other profiles. There’s the professional, mainstream media or otherwise, the professional writer, who we were also taking on at Seeking Alpha. Who writes for, whether it’s a CNET, or someone like Felix Salmon, who was at Portfolio, and moved over to Reuters. And we had other deals in place with professional writers, we would carry tech crunch content.

These are people with domain expertise, who are writing as their profession. In that case, it made sense as a biz dev relationship for both sides, for their distribution and for us to have rich content like that. But didn’t really fall into either of those two profiles, so I just grabbed a…

I’ve seen recently that Seeking Alpha, from a monetization point of view, has moved into this sort of online app store, which I was writing about a year ago, and I mentioned in my book. I know it’s early days, and they’re doing some interesting things there. I have certainly heard from app developers that they are banking a lot on the success of this type of platform. StockTwits also launched a story recently.

Do you see that as an extension of sort of content, or is that just way for these companies to monetizes their content? Or is it just another vehicle for content just delivered via an app?

Weinstein: I think it’s really interesting. I think what’s happening is content start ups hit a certain ceiling, in terms of where the scaling becomes difficult to continue. That is, at a certain point in terms of your own team, and in terms of the content you’re bringing in, and in terms of the distribution you’re getting, and the visitors and the page views, things start to kind of maximum let’s say.

Like is it based on page view models?

Weinstein: It’s all about page views and selling those page views for the best rate you can on a CPM basis. So, you can have a terrific sales team in place, but at a certain point there’s only so much you can do in terms of your own output, without getting really annoying to the user with the more and more sort of hypey headlines.

Or splitting up pages and multiple-

Weinstein: Splitting up pages, and at a certain point, there are diminishing returns on that too. The users just get upset and leave. You can keep trying it, and you can do the, what’s it called at the Business Insider all the time? The slideshows. Like, “Ten ways to do…” this and that. You can try to branch out into the birds dying in the sky and falling and saying well, that’s still somehow business news.

But there’s still only so much you can do to grow your page views, without hitting the user in a way that undermines that growth. What do you do then, as a business? You can only drive the CPM so high, where does your growth come from at that point? You can launch new verticals, you can do conferences, sort of the tech crunch model, take the brand to the real world.


Weinstein: You can do jobs, there’s not a whole lot of money there. Another approach is to try to sell products on the site, essentially, and to create a platform. I think it’s really interesting. I think any effort to create a second revenue stream for a content, ad-based revenue model for a content business is interesting. Everyone is struggling to find one that works, and that really can produce real growth, that is interesting from the companies’ perspective and from a venture capitalist perspective.

The Seeking Alpha app store is a really interesting development, and I don’t know how it’s working out for them, but StockTwits also is taking that approach. Platform also has it’s attractive upside, you could say it’s a natural extension of the basic content model also, which is platform based.

But does it work to sell content on your closed platform, in the Facebook model?

The Apple model, yeah.

Weinstein: Yeah, in the Apple model, if you’re not Facebook or Apple? If you don’t have that massive user base that just loves being on your site or with your products, is it going to work to sell content on your platform? I think that’s the big question for Seeking Alpha, and maybe also for StockTwits, I don’t know.

That’s a great point, and I think that’s also a great segue into talking about what you are doing now. I know years ago there was talk that some of these next generation investment platforms, like a Covestor, or a KaChing, which is now called Wealthfront, would sort of be that revenue model for the financial blogger, right? If these models allow any content producer, theoretically, to put up a portfolio, put some real money behind it and have people invest along side this person, with audited results and basically to create a new model for punditry basically. No longer is a writer just a writer, you actually have performance metrics attached to it, and people can invest along side this person.

I don’t think it ever panned out that way, I don’t think that Covestor necessarily turned into the revenue model for the financial blogger. I think it’s a stand alone business that’s interesting in and of itself. Can you talk about Covestor, and what you are working on now, and where Covestor is headed?

Weinstein: Sure. I was really thrilled to join up with the Covestor team, it’s obviously a bit of a jump for me from a publisher to an investment management company. But I remember when Covestor launched, the excitement around it. The idea of using the internet as a means to empower individuals to both express themselves and to attract customers in however that’s defined, in new and novel business channels is what Covestor is doing. What’s happening in many other spheres in terms of people being able to express themselves, whether it’s just through the writing, or through their products, and to find access to customers around the world, who they wouldn’t otherwise have access to. And, thereby pushing aside some of the large initial players in the field. That’s very exciting to me, generally, online.

And that’s what Covestor is doing in investment management. The ability to share your own portfolio in a verified manner. I know that the person really holds those stocks, and show the track record in a verified manner. My ability, if I am interested in active investing, that is I am interested in not just following an index or following the general market, but either for a portion of my portfolio or my entire portfolio, active management, to have access to a whole marketplace of managers who are competing for my business, rather than just some un-named, faceless mutual fund or other vehicle, is compelling, I think. That’s what Covestor offers.

At this point, what I’m doing is working with a team there, a terrific team out of London and New York to build not just from the existing product, which is solid and works well, but to develop content around the managers, and around the service that will both express better the managers’ unique portfolio, strategies, and the like, and their own backgrounds, and also create compelling content around their trading, around their portfolios, that some one who is just interested in that aspect of it can access the platform.

That’s a really interesting jump to go from, to truly have achieved sort of an expertise in financial content, to go from a publisher to actually the investment side. Can you talk about that transition, and about the nature of content changes if it’s used to deliver page views, or it’s actually used as the opening of a sales funnel?

Weinstein: Sure. As a publisher, when working the publishing framework, you always sort of have your mind on creating compelling content for an end user, but also on the business end of things for the company, which is about volume, page views, and providing inventory for the sales team. Quality inventory is sort of the bottom line.

The aspect, the first part of that, which is creating compelling content for the end user, is applicable anywhere. It’s very much what I am taking with me to Covestor. We must produce, regardless of the web framework you are working in, if you are working in online content, you have to produce something that has real tangible value to people on a regular basis, that really meets their needs. And there’s no room for mediocrity really, in that regard.

Any interesting business that you are going to build on top of that, whether it’s a publishing business that’s ad-supported, or an investment management business that’s using content as part of its overall strategy. There’s no sacrificing the quality around that content. You really need to understand who the end user is, and you really need to provide that daily, quality, and direct.

That challenge is present here at Covestor, just as it was at Seeking Alpha. That said, obviously I am part of an investment management firm here, which has regulatory considerations. I am still learning all of the aspects of that. Things that you can say-

You wouldn’t wish that on your enemies, right?

Weinstein: A lot of it makes sense, and is out to protect people for all the right reasons. Other parts I am trying to understand exactly how to work within the framework in a way that both meets compliance, and is genuinely interesting and informative really, to a end user without getting too cumbersome.

The quality, the focus on quality content is very much still there. It’s just a question of what you are expressing. We have a lot of outstanding money managers on the platform at Covestor. They’re writing terrific stuff in many cases, and their activity is very interesting. This is what we’re trying to amplify through our content on the platform. And in that regard, it’s not that different from what I was doing at Seeking Alpha, in working with a relatively large body of content producers to express better, and more broadly, how they see the market, and how that effects their own investing.

The main difference is, being the platform itself, you are able to track the conversion rate and the lead generation in a way that you are handing that off to a third party manager, who is writing for Seeking Alpha, right? Now you actually have soup to nuts right? The whole process, from a track-ability or an analytics point of view, you have the whole exchange, which I think is kind of interesting.

Weinstein: Yeah, that is.

Do you think that the rise of Covestor, and the success of Covestor- obviously it’s still early days- that we are seeing a new form of financial startup, meaning moving away from the MarketWatches and the Seeking Alphas, which were purely content exchanges in some way, and moving more into a transactional type of platforms? I can think of Betterment, I can think of AlphaClone, sites that use content, but actually have some type of mechanism to either actually manage money, or there’s some transaction going on at the end point. Do you think we’ve reached that stage now, that maturity in the start up field?

Weinstein: I think they’ll coexist. I think content consumers will continue to want different things in their daily reading. They will want sources that are purely exchange of ideas based, whether it’s a blogger who is independent, or a Wall Street Journal, or Seeking Alpha that is a publisher. It’s understood that it’s a place where you come to hear ideas, and exchange ideas, but there is no incentive on the part of the publisher other than attracting your eyeballs, and selling that to advertisers. There’s no financial incentive, there’s no interest in presenting product to you in terms of investment.

Then there will be investment advisors and platforms like Covestor, which are quite clearly with a different product at the end that is right for some consumers. And the content that you consume may or may not draw you to purchase the product or to become a client of the service, but the content itself may still be compelling to you, and your awareness of that service grows as a result.

I think the two will co-exist. I don’t think the investment management content producers will have the resources, or will be interested in all the business aspects of creating the idea exchange that you find on the publishing end. I don’t think that the publishers can produce the investment management products and deal with all of the regulatory aspects of that, and the product and operation aspects of that which are necessary for operation. I think that will coexist.

That leads to my last question, I always though of the holy grail as the merger between those two. If you could find somebody who was really good at creating objectified, agenda-less, or agenda-free content and combining that with an actual transactional platform, that somehow that would be the best of both worlds.

And there have been some attempts, some of the newer start up brokerages tried to use content and provide a pathway through the content to actually transact off of it. None of which has really resulted in moving the needle much. Maybe what you are saying is that those two things actually have to be separate.

Weinstein: Yeah, I am not convinced,-I think it would be interesting to see such a combination. In some ways, I am skeptical that it is the future for financial content. We once had the Chinese wall between editorial and sales, in that you  see publishers online. I can tell you all inline financial editors are influenced by aspects of sales and advertising; some more than others.

That may have therefore- not fallen- but it’s a good wall to have in place. It’s important for the integrity of the publisher. I wonder if a financial publisher who was answering not just to an ad sales team, but to an asset management team could move ahead in the way editorially you need to make things interesting for an end user with that intention. If the tend user would be interested ultimately in that tension built into the model. I’m not convinced.

Mick, this has been really, really great. It’s been great talking shop with you, and I appreciate your time and wish you the best of luck at Covestor.

Weinstein: Thanks a lot, Zack.

So that was Mick Weinstein talking about financial content, both in a publishing model and in a purely financial model, using content actually to create lead generation for financial advisory services. I hope that was interesting.

Again, you can check out this podcast on my blog at www.tradestreaming.com , we are also at iTunes, look for us again soon, thanks for joining us.

More Resources

Learn more about Covestor and Mick Weinstein

Best practices for equity research analysts (new podcast)

james valentine and analyst training

In this week’s episode of Tradestreaming Radio, we interview James Valentine, author of the new book, Best Practices for Equity Research Analysts: Essentials for Buy-Side and Sell-Side Analysts.

Jim brings a ton of information and experience into the only book I know of that addresses the business of being an equity researcher, whether on the sell side or buy side.  But beyond that, this book is about the art and science of professional investing.

We discuss:

  • the need for stock researchers to sharpen organizational skills
  • killer apps to monitor stocks
  • “food chain analysis”
  • how analysts communicate in the age of social media, and a lot more

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I really enjoyed this book because it fills a gap in the literature, not only in terms of how to research stocks professionally, but also how to manage the practice of being a professional researcher.

Jim has a lot of his history and on the job experience built into this book. It’s as much a book about investing as it is the business of investing. I think it was a fantastic read. I recommend it. And, I hope that you’ll find this interview very engaging.  Check out the transcript to dig in.

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Best practices for equity research analysts (transcript)

This transcript is of a conversation I had with James Valentine, author of Best Practices for Equity Research Analysts: Essentials for Buy-side and Sell-side Analysts.

Miller: Hi! I’m Zack Miller, author of the recent book TradeStream Your Way to Profits: Building a Killer Portfolio in the Age of Social Media, and you’re listening to Tradestreaming Radio, our home in the internet radio space. This is our place to discuss how technology is helping investors to become better, smarter, and more accurate at what they do.

You can find this podcast on iTunes. You can also find lots of other material relating to this podcast, as well as archives of our programs at my website www.tradestreaming.com There’s lots of other great content there as well, and I recommend you check it out.

We’ve got a great interview set up today. Joining us will be James Valentine, CFA, who’s the author of the recent Best Practices for Equity Research Analysts: Essentials for Buy-side and Sell-side Analysts. He’s the founder of Analysts Solutions: providing best practices, training and career advancement services for equity research analysts. He’s held a number of roles at four of Wall Street’s largest firms, including most recently Morgan Stanley, where he was Associate Director of North American Research, as well as the director of training for the firm’s global research department.

He was also an established research analyst where for ten consecutive years he was ranked by the major Wall Street institutional investor polls as one of the top three analysts in his sector.

I really enjoyed this book because it fills a gap in the literature, not only in terms of how to research stocks professionally, but also how to manage the practice of being a professional researcher.

Jim has a lot of his history and on the job experience built into this book. It’s as much a book about investing as it is the business of investing. I think it was a fantastic read. I recommend it. And, I hope that you’ll find this interview very engaging.

First up I asked Jim to tell us a little bit about his background.

Valentine: I started in the industry in the early ‘90s on the sell side. I started at Paine Webber and did that for about a year and a half as brand new out of grad school. I had a Master’s in finance.

After doing that I got an offer to go over to Smith Barney and be the senior analyst. So, I went and did that. I did that for about a year and a half. I had a lot of fun and learned a lot. Because I was a senior analyst I really didn’t have a mentor.

Then Salomon Brothers called at the time. I went over there. I was there for about three years. There is where I really started get my sea legs and kind of understand how to do the job, and work with clients, and do higher quality research.

Then Morgan Stanley called- this was in 1998, early ‘98. I went over there. I was there as an analyst for about eight years. Then I was getting burned out. I had been an analyst for fourteen years at that point. I said, “I want to do something else.” I moved into the global management team, where I did a number of things, but among those was worked on training development for the research department, which got about 1,000 employees globally.

I moved to London and I really enjoyed it, because when I was an analyst I was kind of known within the department for helping younger talent develop and I tried to do mentoring and those types of things to help these people succeed. So, I did this on a global basis. I enjoyed it. I did that for about two years.

Somewhere in the middle of that I came back to New York, and became the number two guy in the equity research department, in terms of management. I enjoyed that, although we started going through a lot downsizing in 2008. It became really just kind of frustrating watching the budget get cut, which was happening across all of Wall Street.

After a few rounds of that I just got frustrated with dismantling a department that I was trying to build, and decided I was going to retire. After that, after about I’d say four or five months I decided that I wanted to write a book, and kind of help the next generation of analysts to take all this stuff that I had collected throughout my career and put it in a place where the next generation of analysts could learn from it.

Obviously a lot of the information within the book was on the job stuff that you picked up. Did you write this book more for incoming analysts? Somebody that aspires to be an analyst? Or somebody on the job who hasn’t necessarily been mentored, or learned the things that you did along the way?

Valentine: It’s kind of both in the sense that… the primary target was to somebody who’s right out of grad school, or college, or maybe a year into the job. If they were to read the book hopefully they would get something out of almost every section of it. But there’s also parts of it for more senior analysts who want to brush up, or improve on things.

One thing I learned as an analyst, and then also when I was managing a department of analysts, is that you never have every element of being an analyst perfect. There’s going to be some element of your job that you could do better. So, the book has some of the more advanced sections, which kind of start probably a third to halfway into the book, that could be valuable to even someone who’s been doing the job for let’s say ten years, because it just kind of gives you- it tries to give you a framework to think about how to approach all the different facets of the job.

One of the things that I picked up when reading through the book, again, I don’t have experience on the sell side. I was more on the buy side. But it was every bit as much about investing as it is about the business of being an analyst. Was that sort of what you sort of envisioned?

Valentine: It is. I wasn’t trying to create an every man’s investment book, but obviously being you’re a research analyst a big part of the job is successfully investing. I delved into that. I tried to approach it from a different perspective then what you might see out there in some other books, namely. There’s a lot written on evaluation. I think if you Google it, or go to Amazon you’ll see there’s like over 10,000 books on evaluation. Obviously there’s tens of thousands of books on investing.

What I was trying to do was approach it from a real practical perspective, namely, what do analysts really do day to day? Like I said, I got a Master’s in finance and I thought when I got to Wall Street that I’d conquer all of my competitors because I had all this academic knowledge.

What I realized is that a lot of it wasn’t really applied day to day in the job. So, when writing the book I said I’m only going to talk about things that people can really apply day to day. Like, there’s a lot of focus on how to use the P/E ratio and some of the downsides of the P/E ratio, whereas in academia they focus so much on discounted cash flows.

So, yeah. I try to make it as- I try to focus some element of discussion on investments, but really focusing on keeping it practical.

So, let’s talk about practicality. Obviously the title of the book is Best Practices for Equity Research Analysts, can you give us a couple?

Valentine: Sure. Well, I think starting off, and it’s a real simple one, but it’s understanding time management. And you might say, “Well, what does that have to do with investing?” But when you think about the research job- I like to say it’s similar to saying you went to the library and you read all the books. I mean it’s just- there’s no physical way you can do it. So, you have to prioritize.

Time management is really all about prioritizing your time, trying to figure out what’s really important, and then focusing your day on that.

When I look across analysts that I trained, analysts that I worked with, that I managed, if I had to say what’s the single biggest problem with the success, it’s not intelligence. It’s not drive. It’s the inability to manage their day, all the distractions, interruptions that they’ve had.

One of the best practices, candidly, is to take a one day time management class. There’s two firms out there that do this; Getting Things Done is one, and the other is the Franklin Covey Focus. And, by the way I’m not getting any reimbursement. I have no financial connection to these firms. But, I’ve always recommended- in fact I’ve made my new people who have worked for my team, I always make them go and take one of  these one day courses, and it helped so much on their time management skills. So, that’s one thing.

I think another thing that may be getting more into the investment arena, in terms of best practice, is to identify the two to four critical factors that impact every one of your stocks. This kind of goes back into the time management thing. What I find is that there are a lot of really smart analysts who know a lot about other companies, but they don’t have a differentiated view from consensus on any particular issues that are going to drive the stock. Ultimately they become a company analyst, rather than a stock analyst.

So the best practice, in effect, is to do some research, figure out what are those two to four critical factors, and then focus all your time on those for your companies, as opposed to all the other factors out there that are, in effect, noise.

Why do you think so many investors get that, what you call materiality, wrong? Obviously the media does, because the media doesn’t necessarily know how to size those up correctly, at least as a stock analyst, not as a company analyst. Why is that so hard for investors?

Valentine: I think, at least the way I saw a lot of analysts, both sell side and buy side, approach their job was kind of a CYA mindset, that they had to make sure that any piece of news that came out on their stock, whether it be the newswires, or it be a sell side piece of work, they felt like they had to at least take a look at it. If you’re trying to do that all day long- let’s say you’re following twenty stocks on the sell side, or fifty stocks on the buy side, if you’re trying to pay attention to every piece of material that comes out during the day, that’s all you’re going to be doing is basically reacting to news.

The constant of being a really good stock picker is to figure out, proactively, how you differentiate from consensus, and find a place where you differentiate from consensus. Well, you can’t proactively go and do proprietary research if you’re spending- which by the way, I think if you’re doing this proactive work- I call that doing research offensively- that you can’t do the offensively type research if you’re spending all day doing defense and be trying to read the news tape and trying read every consumer thing out there.

Nobody wants to be caught off guard. Nobody wants their boss to come in and say, “Hey, piece of news just got announced on this company, why don’t you have a view on it?” Or, “What is your view on it?” And then you’ve got to scrabble to figure it out. But the reality is that I’d say at least eight out of ten, even nine out ten of those pieces of information have no impact on moving a stock. So, the analyst shouldn’t spend much time focused on that, or any time for that matter. They need to focus on those two to four critical factors.

It’s tough to shift your mindset because you are going to be in a situation in where on the buy side your portfolio manager is going to ask you a question, and you won’t have the answer, because it’s something that’s trivial, and you haven’t focused on it. On the sell side you’re going to have a client that’s going to ask you something, and you’re going to say, “I don’t know the answer,” because it’s in effect trivial. But the good news is you will have the answers on the key things that are really important, that are going to move the stocks.

So, in terms of gauging what’s critically important, in the book you described Google News Alerts as killer apps for analysts. Can you explain why?

Valentine: Sure, well, specifically about the killer apps, it’s fine tuning your news alerts and also to some extent any other kind of email alerts that you have, anything that you’ve got that alerts you to what’s going on. As analyst the killer app here is creating filters, because as you know, there’s hundreds, if not thousands, if not millions of pieces of information coming out everyday, and you want to filter it down to make sure that you’re not getting distracted by noise, but that you are picking up the information that is going to potentially help you on those two to four critical factors for everyone of your stocks.

What I try to go into on the killer app is that as an analyst you have to always be fine tuning these news filter, or the Google filters, or Google news alerts, whatever it is, you’ve always got to be going in there fine tuning these, because you’re going to find that if you go too far you’re going to wind up with too much noise. You’re going to be getting three hundred pieces of information. You’ve got to read it. That’s too much.

On the other hand if you go too restrictive you’re going to miss key pieces of information about your industry. But if you do it right you’re going to be getting it might be ten, it might be twenty, it might be fifty alerts a day on key things that you want to be looking at that are ultimately going to help you have a differentiated view from consensus, without having information overload.

Jim just brings a huge repertoire to the whole professional investing process. And part of the book really looks at how professional investors should size up companies and industries. So, in the next part of the interview I asked Jim about some of the techniques that he describes in the book.


So one of the things that I found, as a new buy side analyst, I really cut my teeth on the job, was just something that you talked about, and you call ‘food chain analysis’, where you’re trying to understand the entire sort of value chain within an industry. Particularly for new industry it takes time to sort of drilldown and figure out how that works. Why is food chain analysis so important in being able to have an opinion on the stock?

Valentine: I think that we get caught up in our sectors based on what’s assigned to us, based on very often it’s the GICS sectors, or S&P sectors, and these create these silos, these artificial silos, that make it tough to really see a difference in terms of having a different view about something relative to consensus.

I’ll give an example. If you’re following the airline industry you’re likely not responsible for Boeing ($BA), which is an aircraft manufacturer, and you’re not going to be responsible for a leasing company that leases aircraft, that’s more of a financial services company. So, you’re not going to know those two other companies, unless you go out of your way to do this food chain analysis where you understand the upstream and downstream effects.

And, those analysts who take that extra time, they are more likely to discover some critical factors that are going to move the stock that the Street is not going to pick up on.

In this day and age of post Reg FD, we’re seeing now a crack down on some of the primary expert networks, it seems that it’s getting harder and harder necessarily to find that critical information. In the book you talked about triangulating, or mosaic theory, and what analysts need to do to be able to sort of piece the investment puzzle together.

Are you finding that it’s becoming harder within the industry to get this type of information? How do you consult with analysts to be able to sort of overcome some of the new obstacles?

Valentine: It’s definitely harder than pre- Reg FD, but candidly, I as an analyst liked when Reg FD came in place, because I had been doing a lot of really in-depth fundamental research on proprietary surveys. I had my own proprietary contacts. And, so it was frustrating when I knew that one of my competitors could just make a phone call to a CEO, or CFO, or control of a company and get kind of an understanding of what the quarter was going to be. Meanwhile I had spent all this time, and he got the same piece of information.

So, I guess what I’m trying to get at is for analysts to do the hard work, the deep work, the research, having more and more of these regulations and requirements is a good thing, because presumably this extra research is going to actually give them an edge and help them generate some alpha.

But conversely because middle managers are less likely to talk about things, and it is harder to get information, you have to follow fewer stocks. Studies have shown that analysts over the last ten-fifteen years are following fewer and fewer stocks.

I don’t know what that magic number is, but I talked a little about it in the book, it feels like having about seven stocks per team member on the sell side is about the right coverage, and having somewhere between thirty and fifty stocks on the buy side is about the right number. Those numbers are lower than they would have been ten or fifteen years ago, partly because of the restriction on how much information you can get from people.

That’s so interesting. One thing that I found when I was reading through the book is that- you focus very much on sort of the persona of a professional analyst, what it takes to become an analyst, to be a successful analyst. Some of the things that sort of hit me when I was reading through the chapters was that behavioral finance continues to sort of bubble up sort of the short comings of mankind, particularly in the investment field. And, certainly professionals are subject to those same sort of short comings. They’re sort of embedded within human nature.

So, how can some professionals, or aspiring professional investors sort of avoid the same pitfalls that afflict the rest of us?

Valentine: I guess there’s a few thoughts. One is, and you may have seen there’s a chapter in there, how to avoid the psychological pitfalls, those are more inherent, and those are going to be inherent for anybody regardless of their personality.

The other is that I guess being more self-aware, and self-awareness is a skill that you have to work on. There has been work done in the past, academic work done in the past to try to identify investment styles. They show that if you’re- there’s two scales. One to do with whether you’re very careful, or you’re very impetuous. And the other scale is whether you’re very confident, or you’re very anxious.

What they’ve shown and discussed makes a lot of sense from a practitioner’s perspective, that if you’re too careful, and if you’re too anxious at those ends of the spectrums that you’re never going to pull the trigger and make a decision, because even the best analysts and portfolio managers know that you’ll never have 100% of the information to make the call on stock.

On the other hand if you’re too confident and you’re too impetuous when you’re making stock calls you’re going to wind up out there making too many stock calls that aren’t well-based, fact-based. They’re not bound by the research from real good work.

As an analyst you have to kind of find that sweet spot, that you’re willing to take a little bit of risk, maybe even more than a little bit of risk if you’re at a shop where they want you to take more risk, but not willing to take so much risk that you have stocks that are huge blow-ups, and hopefully if they do blow up it’s not because of sloppy research. It’s because of something that just couldn’t have been foreseen.

My first boss when I was at the hedge fund, as I was an incoming analyst, sort of gave me a library of books and other types of information I needed to read through just to kind of get up to speed. I remember one book he gave me, which sort of surprised me, besides the Jim Cramer book that he gave me, was a book on technical analysis.

You devoted a section in the book to technical analysis. So, I’m just curious sort of- it was my experience that people either fell in either camp. Either you’re a fundamental analyst, or a technical one. And you sort of see the intersection of those two. Can you talk about how you use that in your stock picking, and how you recommend analysts to use technical analysis?

Valentine: Sure. Very early on in my career, I’d say it was within a few months of taking the job, I actually started talking a little bit about technical analysis to my boss. He said something along the lines of- he said, “Do you know what we’re going to do? We’re going to cut open the chicken’s liver and we’ll see which way the blood flows to decide whether we’re going to go war.” I think that dates back to either the Romans or the Greek in terms of, you know, I guess some superstitious ways of going to battle.

And there are people out there that believe that typical analysis is a bit of witchcraft or superstition. What I hope- what I’m trying to do with fundamental analysts is to say there’s definitely some benefit. It helps you to understand the psychology of the stock. It gives you another dimension. And it’s not that overly complicated, meaning it doesn’t takes months and months to learn this stuff. And, I think it’s helpful.

So, what I did is I partnered up with Barry Sign [assumed spelling], he’s a well regarded professional who’s a technical analyst, and he has some experience as a fundamental analyst as well, and we tried to write it from a practitioner’s prospective.

When I was analyst, and specifically when I was at Morgan Stanley, we had a technician who would help us. So, first we had to get the fundamental call right. And by the way I heard this over and over again, I interviewed 75 people for the book and a number of them said the they always would require the fundamental analysis to be done first, and then you can look at the technical analysis.

Basically if you say, “Look, I’m about ready to upgrade the stock, because of these fundamentals. I think consensus is too low,” you can then go to the technical numbers and charts, and say, “What is it telling me? Is it telling me that this thing is ready to break out? Is it telling me that the stock has been oversold, or maybe it’s been overbought?” So, what we’re were trying to do is say, “Look, this is one more tool to your toolbox. It shouldn’t be this single method you used to try to pick stocks. It can give you a competitive advantage.”

We always used it sort of exactly the way you described. Like, “Go do the work on the stocks, speak to as many people as you can. Make sure you get the numbers right,” and then look at the chart for really timing on the call, right? To try to, like, at least put it into context with the stock price movement as opposed to just making outright call off of a chart.

Valentine: Exactly. And one thing Barry really taught me, and I guess I learned somewhat on the job, is that technical analysis will never spot the infliction point before it happens, whereas in fundamental work we’d like to think that we can figure something out before the rest of the Street and get in while the stock is cheap, and then it ultimately starts to move and we look like heroes.

In the technical world the stock has to start to move. Things have to start to go in a certain trend before you can say, “OK, the trend is starting here, now we can get on it.” And, I think that’s a little bit of a mind shift for a fundamental analyst to say, “Hey, wait. The trend is already starting, and now I’m getting on,” but very often the trend will continue, as we discussed in the book.

Can you talk about one of those instances in your career, whether it was you directly or somebody you were managing where you got it right? Where you went in, you did the work, you sort of went against the Street and stuck your neck out on a call and got it right?

Valentine: Yeah, I’d say probably one of the highest profile calls I had was on- I guess the one we’re talking about is on Union Pacific ($UNP), and I guess it just helps illustrate the whole point of doing fundamental work.

At the time in this whole food chain analysis- Union Pacific is railroad, and they haul all kinds of chemicals. The chemical analyst at our firm was saying, “Hey, I’m hearing of some trouble.” This by the way was ten years ago, so it’s not a current issue with Union Pacific. He said, “I’m hearing of some trouble with chemical shippers in Union Pacific.”

I had heard there was going to be a shipper meeting down in Houston, so I got on a plane, flew down there. It was the Friday before Labor Day weekend, so it wasn’t necessarily the place I wanted to be. And there were like 300 shippers in this ballroom that were just hopping mad with the service. What it made me realize was that the company was really struggling with the acquisition they had done prior to that, six months earlier.

Ultimately they went negative on the stock. I think most people, including myself, had been fairly [inaudible; 0:25:03] at that point. The stock collapsed and had major problems for the following year.

I guess my point is it was due to getting out in the field and actually doing some fundamental research, as opposed to trying to just read the news tape and have a differentiated view.

There is a give and take there though, right? Between being too much in the field or too much in the office? Right? It seems to me like to be successful at what you do you’d have to- in either way you’re sort of influenced by your surroundings, right? So, how do you sort of balance that as a analyst?

Valentine: Yeah, I don’t know that I’ve ever met someone who felt like they were out of the office too much, or that they did a bad job. If anything I think that I would say over the years the people who I met who were the best at their job were the people that would be most willing to get on a plane and go somewhere.

To your point, you can’t spend 52 weeks of the year on the road, although with laptops nowadays, and mobile phones, smart phones, and everything else, there’s no reason from a technology perspective why you couldn’t. But you’re right, to the extent that you need to be working, communicating with your colleagues and making sure that your ideas are being put in the portfolio, or on the sell side that your clients are adopting your ideas.

But I guess on the whole point I would say the more an analyst, especially in the first five years of their career, the more an analyst is out on the road the greater the likelihood they’re going to do high quality work, assuming they’re using their time proactively. I mean going to some far remote place to meet one company for two hours and spending the whole day and that’s all they do is a problem, but if they can be working remotely on their laptop and keeping news flow and doing some research while they’re traveling, I think that actually helps analysts out a lot.

Let’s just reaffirm this a little bit, within the book, and obviously as an outsider looking into the industry, technology obviously is changing our inputs in terms of where we’re getting our information, and the speed of information.

What’s interesting for a sell side analyst is that’s only one side of the business. The other side of the business is obviously communicating your ideas.

How have you seen technology sort of transform how analysts are helping to disseminate their ideas?

Valentine: Well, I’ll maybe just punch out that the buy side I really haven’t seen much difference because almost in all instances it’s in-house. But on the sell side it’s clearly been-

Although that’s not exactly true. I don’t know if you saw like last month Whitney Tilson who was short Netflix ($NFLX) went very public with that short. The CEO of Netflix came onto Seeking Alpha. There was this back and forth between why- basic premises on sort of the thesis there. So, I’ve seen successful hedge fund guys now go to the media- I mean this is an age old issue, but it’s happening faster and I think more frequently that buy side guys are going out making their portfolio picks public.

Valentine: Yeah, that’s a really good point. There are some- I’m not sure how big of a population it is, but there’s definitely some I guess more activist type investors, specifically hedge funds, that are willing to go out and get their message out there.

So, you’re right. That absolutely happens.

But when I think about technology transforming the way- communication of stock messages- I tend to think more of the sell side in that there still is this regulatory concern, and rightfully so, that you have to disseminate all material information to all your clients at the same time.

We like to think that, “Well, great. Now you’ve got instant messaging, and you can use your smart phone to do all these things, communicate your ideas as an analyst,” but the reality is that as a sales analyst you’re going to go out and share an idea that is material you’ve got to get it out there to everybody, which means you’ve first got to write at least a short note, have it go through legal, your compliance, and then ultimately it gets sent out.

But the good news is that when it gets sent out now it can go out to smart phones, it can go out via the web. I remember fifteen or twenty years ago, starting off you had to have a dedicated first call machine, and you had to like walk over to it and use it for your whole department to pull up any new information that was coming up out of the sell side.

Now it’s ubiquitous. You can get this anywhere in the world, assuming you’re a [inaudible; 0:29:37] client of the sell side firm, you can get the research, and so yeah. It definitely had a big impact. Information is disseminated so quickly that as an analyst if you get something, a few pieces of information, you’ve got to move very quickly on that.

Ten or fifteen years ago you could say, “Let me spend another day, or two, or three, really double checking and making sure I’ve got all this understood.” But nowadays with so many eyes out there that have access to ultimately the media, they’re all going to self-publish what they discover, that you don’t have that luxury, as much of a luxury to wait.

I guess I’m colored obviously because of where I sit, and sort of the media side of things, but I sort of see analysts, both on the sell side and on the buy side, becoming more and more media type personalities, as time unfolds. Are they getting training internally or externally, in terms of how to manage messaging, like, when they’re on a live show, like on CNBC, or speaking to reporters?

Valentine: It really depends on the firm. Some firms have very strict policies and say only certain level- vice president or managing director and above- can talk to the media, and they need full blown training. Other firms are more flexible, and their attitude is, “You can talk to anybody you want.” That, by the way, is on the sell side. On the buy side my experience has been only the most senior people are allowed to have these discussions and they very often do get media training.

This is a weird questions, but I ask this of all the guests on my radio program- what do you do during your day? What sources of information do you find useful, as an analyst? What would you recommend to analysts of sources of information? Books to read, things like that. I just like to help bubble those up for our readership.

Valentine: Sure, now are you talking about to do day to day research on a particular stock, or are you saying to get smarter, to be a better analyst?


Valentine: Well, I think in day to day research I think that the- there’s two elements for your sectors, or your companies, and that is there’s obviously the newswires and the print media you’ve got to keep an eye on, and once again hopefully you’re only focusing on the things that are really likely to impact your stock.

Then there’s the more specific trade journals and things that are in your sector, and unfortunately, because it’s sector specific I can’t necessarily give you names, but every analyst out there better have at least one or two industry-specific trade journals that they find useful, that they’re scanning periodically, otherwise they’re going to miss on the trends. They’re going to have to wait until the general media picks up on them.

In terms of how to be a better analyst, obviously I wouldn’t have wrote the book if I didn’t think that there was a hole there. So, I do think that’s one of the ways, obviously.

But, there are some books on evaluation. Unfortunately a lot of them are fairly academic.

Professor Damodaran from NYU has got two or three books out there that I think are very good. He is looking at them from more of somewhat academic, but he has more of a practitioner’s vent than I’ve seen from a lot of other authors.

I think on the buy side, obviously priorities are different whether you’re on the buy side or sell side, but buy side is consuming every type of media you can possibly think of, right? They’re on Twitter, and they’re mining that to try to find any morsels that may move stocks, or that maybe pertinent to a particular thesis.

Are sell side guys also sort of attune to some of the changes in the consumption of media now? Or are they still sort of innoculated from that?

Valentine: It really depends on the person, and this kind of goes back to part of the reason I wrote the book, is that every analyst out there is allowed to kind of adopt whatever practice they want. I would say if you find- most analysts who are on the job that are 30, or maybe 35 is the right age, threshold and older, not convinced that they’re all out there mining Twitter, or any of the other social media to try to stay ahead, but I would say most analysts under the age of 30 are probably trying to do those things.

The key thing though, and this goes back twenty years, at least, as far as I know in my career, there is always something that comes out that people think is going to be the panacea, that’s going to be, “Here’s the place to find the good information.” And the reality is that you have to filter it down to what’s really relevant to you. Then once you filter that down you’ve got to figure out, “Well, is this really going to impact my stock, and if so what’s the magnitude,” and then do the research.

It’s kind of going back to when we were talking about killer apps, this idea that using social media, and this is more your area than mine, but using social media is clearly important, but you’ve got to be able to harness it, so you’re not sitting there for eight hours a day scanning things defensively, and not really doing your job, namely, getting out there and proactively being on offensive and trying to figure out how you can have a differentiated view. Because if it’s already out there in social media it’s out there, and you’re not necessarily going to be able to make a big difference.

Just lastly, in terms of building that differentiated view that you talk so much about, you talk about this innerplay this communication between the buy side and the sell side. Obviously each one is looking for something different from each other, but when we were at the hedge fund we definitely found this sort of dream team of sell side analyst from different firms that we reach out to for different things that we felt had a really valuable perspective for us when we were building our thesis.

Can you talk a little bit about that, about how to use each other I guess to sort of harness the different perspectives in terms of finding out where stocks are going to go?

Valentine: Sure. Well, in terms of the buy side using sell side, one of the thing I think every analyst should do before they start calling around and figuring out who their favorite analyst is going to be is to look at the numbers. Starmine does a really good job of this. I believe Factset and Bloomberg also have methods to evaluate analysts on two dimensions, both their stock picking skills, as well as their earning accuracy.

There’s a number of studies that have shown that the analysts who are more accurate with their earnings estimates are also better with their stock picks. So, figure out who in your industry ranks on that scale, and use it as a foundation, and then start making the phone calls.

Look, the buy side might use a sell side analyst because he/she has a great relationship with the CEO, or because they’ve got a great historical perspective. So, I’m not saying only use people based on the statistics, but know when you’re going to call someone, if you begin to develop a relationship, that they are number 9th in the industry in terms of stock picking skills, because you only have so much time to invest in each relationship. You can’t be friends- not friends- but not necessarily have a good, strong working relationship with ten analysts in every sector. It’s probably going to come down to two or three.

Then on the sell side in terms of relationships you do on the buy side, part of this is getting clients to vote for you and say they like your work, because that ultimately results in commissions, which is ultimately how sell side analysts, their firms are paid.

But there’s also the factor of sell side analysts should make sure they’re staying close to the smartest buy side analysts, because it makes them smarter. It makes them better. It definitely helps them understand the psychology of the stock. There’s a number of places in the book where I talk about the only way you’re going to really know whether you differ from consensus is to understand consensus.

Consensus isn’t necessarily just the number that’s out there for the quarterly earnings, or the annual earnings. Very often consensus can be a whisper number. It could be the psychology behind whether a company is going to get a new patent, whether they’re going to get drug approval. And, the only way you know what that consensus is, is to get out there and talk to some of the smart investors. So, point being that I think the sell side always needs to make an effort to stay close to smart buy side clients.

Smart buy side clients, they don’t always wind up being in the biggest commission paying firms. So, sometimes you have relationships with these people that are in smaller firms, but they hopefully make you smart.

I also, just harkening back to something you said, I definitely feel that there was a void in the industry and that your book definitely fills this need that there isn’t this sort of overarching publication that tells people how to be better at their job. I know it’s sort of a sink or swim very competitive industry, where you sort of just learn on the job or you don’t. I just want to commend you on putting together a really sort of end to end book that I think addresses the entire business in a very practical way.

Reading the book, I appreciate your time today. This has been very intuitive for me.

Valentine: Well, thank you.

Miller: Good luck.

That was Jim Valentine, the author of a new book, Best Practices for Equity Research Analysts: Essentials for Buy-side and Sell-side Analysts. It’s put out by McGraw-Hill. You can find it on Amazon. I’ll link to it from my blog as well.

Check out my blog at www.tradestreaming.com You’ll find an archive of all of our previous podcasts, and conversations with new authors, discussions about using technology to become better, more accurate, more profitable investors. Thanks for joining us. I hope you’ll drop us a line, let us know what you think of the podcast. And I hope you’ll listen next week.

More Resources

Learn more about the book and Jim Valentine

The future of financial content, social media and investing (podcast)

tradestream radio, discussing investing and technology

In this week’s podcast, we interview Mick Weinstein, head of content at Covestor, a new investment platform that allows investors to shop for investment advisor like shopping for Pez on eBay. Mick was previously editor-in-chief at Seeking Alpha.

I’ve discussed Covestor and its do-it-yourself model at length both in my book, Tradestream, as well as on my blog.  Just as we’ve become accustomed to shop for mutual funds within a supermarket model, it’s been harder to do that within the investment advisory business.  Covestor and its competitor, Wealthfront, are changing all that.  And financial content will play a key role in the success of these types of firms.

Mick sits right at the edge of what’s happening in financial content and now brings his perspective to Covestor.  He’s working with the team there to build out its content platform beyond the transactional infrastructure the firm has invested in building.

We discuss:

  • how financial content is being used for lead generation in the finance field
  • Mick’s experience building and managing Seeking Alpha’s offering and content team
  • tips to building a successful financial content business
  • the compliance challenges for financial content when published by an investment firm
  • the future of investing

More resources

Learn more about Covestor and Mick Weinstein

Investing in the next mashup

Technology continues to run riot over a variety of industries.  Nowhere has that been felt as acutely as in the music industry.  Apple’s ($AAPL) iTunes may have changed the distribution model (selling over $1B in the last financial quarter alone), basically unbundling CDs and selling individual songs a la carte.

Music, it is a changin’

But the migration from analog to digital has been accompanied by a much more profound change — the revenue model of the music industry is undergoing a transformation.  Where the model was previously selling musical media (artists generally made lots of loot by selling records/tapes/CDs), the model is changing to charging for music experiences (see my recent piece on the business of Broadway and concerts).

Artists embracing this change have shifted their model to almost giving away music (or charging fans whatever they want to pay) in order to capture some funds at the next concert.

Fast Company has a very interesting rundown on Girl Talk, a biomedical-engineer-turned-DJ who makes music by mashing up others’ tunes.  Simply, he takes hundreds of samples of music and weaves them together, creating cool sounds but even more enjoyable live shows.  He’s putting butts in the seats because he’s providing great live value.

IPOs, Social Media and the Era of the Mashup

We’ve all read how Facebook, Twitter, and LinkedIn are gearing up to go public sometime soon.  While these services seem novel, in essence, they’re all just mashups of technologies and platforms that existed before Zuck entered his first frat party (not to sound snobby, but there aren’t frats at Harvard).

Startups and traditional companies are making lots of money just copying Groupon’s model of group discount buying.  Travelzoo , a decidedly Internet 1.0 company, has a Groupon-like clone that offers expiring travel deals to its email list of over 20m and that 4-month old business is rumored to be valued at $400M.  Abe’s Market, an Etsy-like green marketplace founded by my friend, Richard Demb, is experimenting with live selling online with its Abe’s Live, combining the breadth of vendor-driven supply and the entertainment value of a QVC.

The future of business is the mashup.  Those companies who can climb to the top of the value pyramid — by leveraging and riffing on the work done on by those along the way — will win and that’s where investors should be looking to place their bets, IPO or not.

More Resources

How Girl Talk Mashes Up the Music Biz (Fast Company)

Download Girl Talk music