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Summary

  • Some people claim that “talking your book” about a stock which you own or are short is wrong. It isn’t.
  • Talking your book isn’t the same as front running or manipulation. Front running is the abuse of privileged information for personal gain. Manipulation is the intentional dissemination of false information.
  • Investors have greater incentives to get stocks right than journalists or sell-side analysts, so their research is more valuable.
  • Investors’ best research is typically about the stocks they know most about - the stocks they have positions in.

In a comment on Short Sellers and Seeking Alpha, Mark Gerstein wrote this:

Back when i was at Value Line, we had very strict rules about owning stocks on which we wrote that were designed to get the article published first. We had to give readers an initial chance to act. Only after they had a substantial opportunity to do so could we trade. (And by the way, we didn't self report; all of our trading info was sent directly from the brokerage firms to VL compliance.) Other organizations permit no stock ownership at all by writers. The latter is a bit extreme; I like the idea of analysis done by people who are real investors. But front running - trading first and then writing an article designer to push the stock in a direction of your trade, even though it can nowadays be made legal by disclaimers, will always be perceived in the court of public opinion as sleazy.

This is a crucial issue which goes to the heart of Seeking Alpha. I have tremendous respect for Marc (follow him here), but in this case I think he's wrong.

Trading first and then writing an article designed to push the stock in the direction of your trade is not front running. Front running, according to Wikipedia, is

"the illegal practice of a stockbroker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers."

Front running is the abuse of privileged information for personal gain, the abrogation of a broker's fiduciary responsibility to its clients. Clients trust brokers to act in their best interests. But when a broker front runs its clients, it uses information about its own clients' trades to make money at their expense. For that reason, front running is illegal and unethical.

Investors who publish articles about stocks they have positions in are not front running. They are "talking their book." Talking your book is not stock manipulation. Investors who talk their book have conviction in the truth of what they write, whereas stock manipulators disseminate false information with the aim of profiting from their dishonesty. Note the reference in each of these Wikipedia definitions to falsity (the italics are mine):

Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of securities laws.

Market manipulation is a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a security.

Pump and dump is a form of microcap stock fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price.

(An aside: Seeking Alpha combats the dissemination of false information in a number of ways. Among them: (1) While we allow article authors to publish under a pseudonym, we require them to provide us with their real identity, because people who knowingly disseminate false information do not want to reveal their true identity, knowing that we will pass it to the SEC or other legal authorities when appropriate. (2) We contractually require all authors to disclose positions in stocks they write about, and we disallow hyperbolic language, the bread and butter of stock manipulators. (3) Our community challenges weak arguments, and calls out contributors. (4) We encourage companies and readers to dispute articles which contain material factual errors; when we find one, we pull the article. It's surprising, though, that many companies and readers who dispute an article fail to show that it contains a material factual error, as opposed to an interpretation of the facts which they dislike.)

"Talking your book" is legal and widespread. Even before Seeking Alpha, many fund managers - including the most prominent and widely respected - talked their book in interviews on CNBC and other TV shows, pitched their ideas to Barron's and other publications in the hope they'd be published, and publicized their research about their highest conviction positions in conference presentations (think HLF) or by email.

Investors may want to talk their book for a number of legitimate reasons. If you publish convincing articles about the stocks you know best (usually those you have a position in), you can enhance your reputation and attract clients. Emerging hedge fund managers have told us they attract more LPs on Seeking Alpha than any other platform.

By publishing research about your stocks on Seeking Alpha, you can "stress test" your investment thesis. Many Seeking Alpha contributors say that the comments and feedback from the SA community have changed their minds about a stock and made them smarter investors.

What about investors who talk their book to move the price of a stock which they honestly believe is mispriced? Some people think that's sleazy. I don't, with one caveat: that their subsequent trading in the immediate aftermath of the article's publication is consistent with what they wrote in the article. (Which perhaps is the same as saying that their article was honest.)

The desire for profit is the core driver of a free economy. Capitalism works because the pursuit of profit by individuals, when legal and ethical, leads to the greater good of society. If we want people to invest time, effort and expense in equity research, and share that research, they have to make money from doing so. The people who make the most money from getting stocks right will be the people who invest the most in equity research. They are the investors in those stocks.

That's why we built Seeking Alpha to be the platform for research for investors by investors - because research by investors is the most rigorous research.

Marc wrote, "I like the idea of analysis done by people who are real investors," but then argues that they shouldn't write about stocks they own. But research by "real investors" means research by people who write about stocks because they are investors, not because they are paid to write research by a research firm like ValueLine (where Marc worked) or an investment bank like Morgan Stanley (where I worked as a sell-side analyst). Real investors have no financial incentive to publish their research before benefiting from it themselves.

Personally, I take Seeking Alpha articles by authors with positions in the stocks they write about far more seriously than articles by authors without positions in the stocks they write about. They have more on the line; they care more; they've probably dug deeper.

So, is it wrong to take a position in a stock and then write about it on Seeking Alpha? Absolutely not. Just because someone has a financial interest in the stock they are writing about doesn't mean they are a front runner, and doesn't mean they are a manipulator. In fact, articles about stocks by real investors are more rigorous and have greater credibility.

If you're an investor with valuable insight into stocks, we and our readers want to hear what you have to say. Give us your real name, sign our compliance agreement, and start submitting articles to our editors. Start here.