ValueWiki

Since about October or so I have been contributing to an open source investment research site named ValueWiki. ValueWiki(VW) is trying to implement the "Wikipedia" model to the world of Investment Research. When I joined in October, the site was still in early beta, besides the founders, Jon and Zach, there were barely anyone contributing to the site. However, I got intrigued by their proposition and decided to join and help them grow the site by contributing and spreading the word.

The site has been growing steadily, recently it had its first 1 million pageviews. And it has been gaining traction significantly since the founders started marketing more aggressively January. Just check the Alexa data here. The site has been getting some Buzz in the blogosphere.

While the community is still at its infancy, I believe that an open source investment research platform like ValueWiki can have a dramatic impact on how investors share information and collaborate on research.

There are many reasons I believe in this model. First of all, until recently, sell-side and independent researchers affiliated with the big investment bank and brokerage houses has the biggest influence in disseminating information and form market opinion on stocks. While most of these are subscription based, the advent of internet and message boards have made their analysis and opinion widespread quickly. However, In my opinion, recent development have reduced the influence of these analysts. The bubble burst of early 2000's and fallout of all those conflict of interest cases certainly dented analysts' credibility. Star analysts like Blodgett, Meeker and Grubman fell from grace. Regulations that prevent analysts to get a share of investment banking pot have reduced the motivation of the sell side community. Many of the best analysts are moving to the buy side. Furthermore, regulations FD that was enacted after the bust, limited access of these analysts to "privileged early information" from management. Which means that these analyst has the same information access as other people (like me).

I think there would still be market for paid analysts research. Considering that the analyst community are made up of some of the smartest people around and experienced industry experts. So there would still be good market for their opinions.

On the other hand, I am impressed on how wikipedia with an army of volunteer editors has been able to build an encyclopedia that matches the quality of Britannica, an encyclopedia written by staffs that are experts in their fields. Well, there are debates whether wikipedia is as accurate as Britannica, but wikipedia is certainly more comprehensive. Jon and Zach mentioned in the ValueWiki about page that "Encyclopedia Britannica's paid staff could only write 118,000 articles in 240 years. Wikipedia has written 1.6 million articles in 5 years! So Wiki seems to create a good model for collaborative research." I think ValueWiki can do the same to the world of investment research as wikipedia to encyclopedia. I think the average sell-side analyst can only cover 5-15 stocks (less for complex large cap and more for small cap analysts).

Paid analysts have the incentive to cover more well known stocks that bring some trading business to their brokerage houses. I can imagine that once ValueWiki gets bigger, like wikipedia, it will have broader scope of coverage than the professional publishing analyst coverage universe. ValueWiki could certainly carry more information about small cap stocks and emerging market stocks that don't get much paid analyst coverage, increasing market efficiency and transparencies for those securities.

Well, right now we're starting to see trends that a lot of information are floating around blogs and investment message boards. However, these channels are ripe with problems. There are many popular finance blogs that have gained credibility from public and became quite influential. Here's a list of top 100 blogs ranked by alexa data compiled by Jon. However, information contained in these blogs are quite scattered. While there are some blog aggregators like seekingalpha that help organize these info, it is not purely democratic. SeekingAlpha has a gatekeeper that selectively chooses which blog to be included or not, therefore many worthy entries are not included.

Another place where people collaborate on an investment research is the message boards universe where anyone can say anything, but it is full of irrelevant and inaccurate information that goes unchecked. Consider this kind of interaction I notice at a biotech stock board:

Mr. Fool: This company's drug is in phase 3, but the stock is tanking, I am buying
Dr. X: I am a doctor, I think FDA won't approve the drug, Don't buy the stock
Mr. Fool: Are you really a doctor? you're so stupid, how come you don't know the drug is so hot!!!
Profanity laced interaction continues for the next 1000 posts

In my opinion the community moderated model that ValueWiki and Wikipedia uses can alleviate some of the problem of inaccuracy and incivility in the message boards.

Well, ValueWiki needs to reach a critical mass to work best and deliver all these promised benefits. There have been other investment wikis before like stockepedia and wikistock, however neither of those ever gained as much traction as ValueWiki. I think the founders, Jon and Zach's commitment to the site is the difference maker. I really hope that the site becomes really big and influential like Wikipedia. I can imagine that one day, posts in ValueWiki could trigger an SEC investigation that uncover Enron type schemes or option backdating scandal.