Pat Wachleser of Fleishman Hillart interviewed me about Seeking Alpha. Here's the edited version of the interview in Fleishman Hillard's TRUE Magazine. And here's the longer, unpublished version with my unedited answers:
With all the investment advice, analysis and data emanating from Wall Street regularly and from the business press, why did you think a service like Seeking Alpha was needed?
The idea for Seeking Alpha came out of my experience as a research analyst during the tech bubble. I covered communications equipment stocks for Morgan Stanley. It was a crazy and exhilarating time. I remember when I upgraded or downgraded a stock, thinking that everyone would care, they'd all be listening to my investment advice.
But I quickly realized that my clients were better investors than I was. That's why they were running hedge funds and mutual funds, and I was a sell-side analyst. Investors had the best information and insight about stocks, because they were the ones who got paid for being right. In contrast, sell-side analysts and journalists don't get paid for being right. Analysts get paid for helping their clients, and business journalists get paid for providing infotainment.
So I started dreaming. What if there was a platform where you could see what investors thought about stocks? What if you could see their reasons for buying and selling stocks? What if someone could make the world's investment insight accessible? That was the idea for Seeking Alpha.
Crowdsourcing is certainly not widely used or accepted by the investment community. Why did you decide to build a service around it?
It was obvious to me that the world was moving to crowdsourcing. The Web was making crowdsourcing possible. And wherever crowdsourcing became possible, it happened, because it was better. We saw it with Wikipedia, TripAdvisor, Yelp, book reviews, movie reviews, and forums about almost every topic. It's inevitable that the same will happen in investment research.
The transition to crowdsourcing is often tough, though. Before crowdsourcing, when information is provided by a small group of experts, there's an aura of quality and consistency, whether it's Michelin Guide reviews, movie reviews written by journalists, or research reports from investment banks. Crowdsourced content looks scrappier, less consistent and less polished. But the value of the information in aggregate is far higher.
The investment community is conservative. But it's also good at discerning value. Over 100,000 users have registered on Seeking Alpha with "buyside" in their profiles, and that understates the real total, as many prefer to stay anonymous. So adoption of Seeking Alpha by professional investors has been rapid. The Erdos and Morgan 2011/2012 survey found that 47% of buyside investment professionals visited Seeking Alpha monthly.
What's the main goal you're trying to achieve? Why did you call the site "Seeking Alpha"?
"Seeking Alpha" essentially means "trying to beat the market". Every investor wants to beat the market. I chose the name "Seeking Alpha" because I wanted to create something that would help people be better investors.
Many people mistakenly think that helping people to become better investors means giving them advice, telling them what stocks to pick. But investment professionals and self-directed individual investors don't want to be told what to do. They want to make their own decisions. They're looking for information as part of their own research process, which will help them make better decisions.
So our goal is that you, an investor, can come to Seeking Alpha and find great articles and discussion that will help you make smarter decisions. For any stock, you should be able to find articles by people who are long the stock and people who are short the stock. You'll find comment discussions that challenge the articles and fill in missing information and perspectives. Then you can make up your own mind.
At the beginning, people used to find this confusing. They weren't used to it. We'd get emails from people saying "This is crazy! Yesterday you told me to buy this stock, and today you're telling me not to!".
They didn't understand that we aren't providing advice, we're not telling you to do anything. We're trying to surface the information and key issues, via crowdsourcing and open debate, so you can make up your own mind.
Why does conventional Wall Street investment advice fail in your opinion to produce alpha-seeking revelations or sufficient coverage of companies for investors?
Wall Street analysts don't produce money-making stock ideas because they don't have the resources to do real research. And that's because their firms don't get paid for being right about stocks. They get paid, via trading commissions and investment banking fees, for a number of things which don't require them to provide genuine insight into stocks. For example, money managers pay Wall Street analysts for inviting them to meetings with company managements. So it's not surprising that if you don't get paid for genuine insights, you're not going to invest in the resources to provide them.
The investment banks' business model also explains why Wall Street is failing to provide research coverage of so many companies. A recent study reported that 29% of publicly-traded companies have zero or no meaningful analyst coverage. Among small-caps, an astonishing 55% have zero or no meaningful analyst coverage.
The reason is that trading commissions have plummeted, and investment banking fees from small-cap companies aren't sufficient to justify the cost of analyst coverage.
The people who do deep research into stocks are the people who make money from getting stocks right -- the people who actually invest in stocks. In other words, it all comes down to business models.
So what's Seeking Alpha's business model?
We make money from subscriptions and advertising.
Our subscription product is called Seeking Alpha PRO. It enables investors to improve their performance. They get an early look at many of the articles we publish, which gives them a head start on investment ideas and enables them to reduce the risk of their current positions. And it provides them with access to articles and comments on over 4,000 stocks which aren't available to people who don't pay. Seeking Alpha PRO has coverage of over 75% of the Russell 2000 and 80% of the S&P Smallcap 600. If you're considering taking a position in a stock, those articles and comments are valuable, because they help you identify key issues that Wall Street analysts often don't raise.
On the advertising side, Seeking Alpha has an audience of 8-12 million monthly uniques which spans financial advisors, money managers, C-level execs, business owners and retirees. It's a more affluent and influential audience than that of any other business or finance website we're aware of.
Who writes for Seeking Alpha? How do you decide who can post on Seeking Alpha?
Over 9,000 people have contributed articles to Seeking Alpha. They include hedge fund and mutual fund managers and analysts, individual investors, and industry experts. We are by far the largest platform for crowdsourced equity research.
We decide who can post on Seeking Alpha based on our evaluation of the quality of their submissions. If we think you've got something valuable to say about a stock, we'll publish your article.
What percentage of your contributors writes anonymously?
None of our contributors are anonymous. We ascertain the real name of every contributor. But we allow them to use a pseudonym on their articles so readers don't know who they are.
Why do you allow your contributors to use pseudonyms? Doesn't that undermine the value of their views?
People care about real names because they think they want advice from unbiased experts. But that whole notion of advice from unbiased experts is a relic of legacy companies like newspapers and investment banks, which operated as oligopolies and had to protect their privileged position by claiming that they were unbiased.
Well, that model didn't turn out so well. First of all, the newspapers and the investment banks weren't really objective. Newspaper owners have political agendas, and individual journalists bring their own biases to what they write about. Investment banks get paid by companies, and that leads to conflicts of interest.
More important, the system didn't produce good results. The investment banks and the financial media have an abysmal track record. They failed to uncover the truth about fraudulent companies like Enron and Worldcom, and were happy to keep selling newspapers and collecting trading commissions during the tech bubble and real estate bubble.
A much better model is to embrace debate between people who you assume are biased, and make up your own mind about who has the stronger case. This is what we do where the truth matters most -- in the legal system when someone's life or freedom is on the line. The jurors listen to the prosecution and the defense, both of which are biased to the point that they're paid to achieve an outcome in their favor, and then make up their own minds.
Once you embrace that approach, you're not worried that people are biased. You evaluate what they have to say on its own terms.
If some people want to use their real name because it adds credibility to what they're saying, that's fine. But real names should be optional, because there are many legitimate reasons why people may not want to reveal their name publicly.
Such as?
A fund manager might want to publish her thoughts on a stock to get feedback from other smart investors, without wanting to tip her hand that her fund is considering taking a position in that stock. A customer of a company might have insight into the company's stock, and not want their relationship with their supplier to be impacted by their opinion of the stock. A short seller might not want the company to know they are short the stock, as they might lose access to analyst days or other information.
If you insist on real names, you lose many of the most valuable voices. Disqus did a research study on this, and found that pseudonyms lead to higher quality comments.
So why do you require your contributors to give you their real names, while you allow them to use a pseudonym on their published articles?
Because there's a specific problem in finance. You can manipulate stocks if you lie. It's illegal, so we have a simple way of preventing it. We insist that our contributors give us their real names, and if the SEC forces us to hand over name of a contributor in a fraud investigation, we'll do it. Knowing that keeps our contributors honest.
David Einhorn from Greenlight Capital sued to find out the name of the blogger that made public his hedge fund's stake in Micron, but you refused to and he withdrew the suit. Do you think the blogger in question violated the law or any kind of fiduciary duty?
We'll protect our contributors' pseudonymity until someone legitimately forces us to disclose their real names. The burden of proof is on the person trying to force disclosure to make a compelling case. David Einhorn withdrew his suit either because he felt it was unnecessary, or because he realized that he didn't have a compelling case.
Do you think Einhorn would have acted differently if a member of the traditional media published the same information and refused to divulge the source? Would the courts have treated the case differently?
David Einhorn is an extraordinarily smart and talented person. You should ask him that question.
Do you believe investors in general are provided enough information to make intelligent investments? Do you believe that regular investors are ever on a level playing field with the major institutional investors and hedge funds?
If you're a long term investor, the playing field is pretty level. In fact, we see lots of individual investors on Seeking Alpha who have outstanding track records, in many cases beating professional money managers. Reg. FD helped a lot in this respect. Reg. FD stops companies giving professional investors information that they're not giving to individual investors.
But if you're a short term trader, you're at a big disadvantage. The large funds and market makers have information and systems that you don't have.
Even with all the sources of information on Wall Street, are we close to real transparency about companies or how Wall Street operates?
Probably not, particularly for small cap stocks.
The best sources of information are the companies themselves. But it's often not in their interest to be transparent, and the cost of managing transparency is high, partly due to the compliance requirements of Reg. FD.
The next best source of transparency into companies is investors sharing their research. I think Seeking Alpha has led to a meaningful increase in transparency, and as we continue to grow, that will increase.
Why do some companies and Wall Street players seem out to get Seeking Alpha? Is all the criticism unfair? Have you made any changes based on it?
Companies are incredibly sensitive about anything negative which is said about them. We have an article dispute process, and remove articles if they contain material factual errors. But companies often want more. They want us to remove negative opinions. We won't do that.
Many companies want to control the conversation. They don't realize that you can't control the conversation on the Web. You can influence the conversation by participating in it, but you can't control it. Many companies don't realize that what matters most for their stock isn't that people are saying positive things, but that there's an active conversation about it, an exchange of information and opinons. Silence is the killer, as it signals lack of interest and leads to lack of liquidity in the stock.
We faced a different type of criticism from Wall Street. Some traditional investors and analysts claimed that Seeking Alpha was low quality and was dominated by stock manipulators. Some of the criticism was helpful -- we tightened up our processes to verify contributors' real names, and we raised the quality bar on articles. So listening to the criticism was valuable.
Is the assertion that we're low quality fair? I think perceived quality is always an issue when an industry gets disrupted by crowdsourcing. You have to address the criticisms by looking at data and usage. On the data side, a study by a group of academics found that Seeking Alpha articles are meaningfully more predictive of stock prices than sell side research or financial newswires. And on the usage side, Seeking Alpha has become almost universally adopted among serious investors.
What are your hopes for the future of Seeking Alpha? How and where should it grow or change?
We only need to do one thing really well to bring enormous disruptive value to the equity research market, and to become enormously valuable as a company. And that's to be the dominant platform for crowdsourced stock market analysis.
We're already the leader by a long way, but we've barely scratched the surface of the number of people who could be Seeking Alpha contributors and commenters.