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Chris Damas
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Chris Damas is principal of BCMI Research, an independent equity research and trading company based in Barrie, Ontario. He has a biochemistry degree from McGill University followed by three years of industrial research at the M.Sc. level. At the age of 23, Damas had co-authored journal articles... More
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  • 10 Clues To Evaluating Seeking Alpha Articles 10 comments
    Mar 13, 2012 4:03 PM

    Here are some clues to allow readers to identify articles that will most likely waste their time and lose them money if acted upon.

    I have gathered this list after writing, reading, commenting on and often refuting a variety of articles on Seeking Alpha for over three and a half years:

    1) The author has no investment research credentials or chooses to remain anonymous. As they say, what you don't know can kill you.

    2) The author has performed little industry research. Authors with great technology backgrounds write about commodity stocks and vice versa - why do they do this?

    3) A computer-generated stock screen provides a list of candidates but no verification of the data inputs to the ratios is then performed. Garbage in, garbage out.

    4) Simplistic ideas such as "more population growth means more food consumption means this fertilizer stock will be a winner" are used to recommend complex companies in complex industries.

    5) Home-made technical analytics and overly-complex charts are applied to small-cap stocks which are illiquid and therefore violate trading volume requirements upon which technical analysis works.
    Read Joe Granville.

    6) Investment ideas are supported by quoting company executives and investment banking analysts. Now whose interest are they looking out for?

    7) The valuation ratios used are not appropriate because the industry demands idiosyncratic ratios for the sector being discussed. More simply, growth stock metrics are different than cyclical stock metrics.

    8) The author makes a strong case for a stock and then says they have no position and no intent to initiate one. What does that say about their level of conviction?

    9) Authors churn out short pithy articles on a daily basis without any in-depth arguments as to how they came to their conclusions.

    10)Articles are titled in an overly-provocative way designed to attract eyeballs: "Stocks That Will Do Well if A Catastrophic Meteor Hits The Earth". Avoid these articles like the plague (except of course, this one).

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Comments (10)
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  • winger2007
    , contributor
    Comments (16) | Send Message
     
    Chris, thanks. There *is* a lot of garbage to sort through.... I read almost everything you produce with great interest. I was actually involved privately in one of the fertlizer companies you referenced in your earlier articles, and can tell you without hesitation that your breakdown and analysis was the best I have seen. The management team actually used your framework in thinking about the competion and pricing in internall discussions! It is articles like yours that make this site worth it - even with the sorting. Best Regards
    13 Mar 2012, 10:08 PM Reply Like
  • northhills24
    , contributor
    Comments (1552) | Send Message
     
    This is fabulous... . I just started following you today and you here have highlighted what every SA should read.. thank you.
    17 Apr 2013, 02:28 PM Reply Like
  • smurf
    , contributor
    Comments (3655) | Send Message
     
    Chris,

     

    Very timely observations because another reader and I were recently discussing the explosion of useless articles on SA lately. It was as though you were reading our minds.

     

    You've earned a new follower in me.

     

    Thanks,
    18 Apr 2013, 12:40 AM Reply Like
  • northhills24
    , contributor
    Comments (1552) | Send Message
     
    I have
    #11- You have more followers than the author!
    18 Apr 2013, 08:48 AM Reply Like
  • richjoy403
    , contributor
    Comments (8521) | Send Message
     
    Chris -- Though I appreciate your attempt, and agree with some of your points, I will nonetheless continue to disagree with your notion an author must be long the stocks they recommend (and therefore, short those they do not recommend). That's a well-known Wall Street BIAS known as "talking their book"--because those who own (or short) the subject stock have an obvious financial interest in pushing their view of the stock.

     

    I am far more interested in the quality of an author's argument, than I am in his portfolio. Furthermore, I can think of no reason anyone should own (or short) every stock they research. All else equal, I tend to have more confidence in the opinions of the author who does not own (or short) the stock than that of the author having a financial interest...just as we tend to vote our financial interest, we also tend to speak our interest.

     

    My wife didn't insist her oncologist be a cancer survivor, I don't insist my mechanic own a BMW, nor do we insist the politicians we help elect toe the line on every position we hold.

     

    If you have strong research evidence supporting your advice, now is the time to share it. It appears instead, your only measure of the quality of one's analysis is being long or short the subject stock.
    20 Apr 2013, 06:59 AM Reply Like
  • Chris Damas
    , contributor
    Comments (1157) | Send Message
     
    Author’s reply » It's a good point. It's the old "do you eat your own cooking" argument - for and against. Should an investment manager or analyst have skin in the game, etc.

     

    At least two potential conflicts appear it seems to me.

     

    First the recommendation may or will actually move the market in the way the author intends. This usually happens if the analyst is institutional (eg Dahlman Rose's call on fert stocks recently). Or its a small cap or other illiquid stock. I do not have institutional sway nor do I write about small cap or illiquid stocks. Actually, I write about Canadian stocks mainly and most SA readers don't seem to care much about them.

     

    The other bias is more subtle. The author's thinking or analysis (or lack thereof) is potentially biased by his/her stock position as you point out. For example, I've seen so many bullish articles on PotashCorp over the past three years. Most of those authors have been long and seem desperate to prove others wrong.

     

    As someone who designed staff conflict of interest and personal trading regulations at a major financial institution in the 80's, and was chief compliance officer of an 80 person mutual fund organization in the 90's I am very aware of the issues of credibility, due diligence, fairness (everyone receives the call at the same time), full and ongoing disclosure and insider trading prohibitions.

     

    I don't think I have insisted that every author own every stock they write about. But when I see the author saying it is a screaming buy, look how obvious the value is, blah blah blah, I wonder why they don't own it, that's all.

     

    There is no easy answer to the question except the analyst disclosing his ownership both before, and after the article. Seeking Alpha to its credit, asks that the author disclose if they have, have not, or are planning to trade the stock in the next 72 hours. But that probably isn't enough.

     

    The other point is not all stock recommendations should be acted upon in the same way by all investors which will have different objectives from the author.

     

    For example, I earn a living primarily from my investment company performance. An investor may be more buy and hold because he/she has employment and the stock investment is in an IRA or RRSP for example.

     

    I usually don't have target prices, becuase I have no idea what the market is going to do, do you? But sometimes I do - my recent buy recommendation Canexus last fall when it was around $8 - my target was $9.17, when it got there I sold - I don;'t think disclosure was required. It went to $9.50 or so but was recently down to $8.30 or so in the downdraft. I wrote the CFO to ask if anything negative had been disclosed so I could update readers. He said no. I was going to write about it - stock already rallied by that time.

     

    I have made pains in the follow-on comments to my articles, to describe what I am doing with my position. When you write about stocks such as fertilizers, forest and energy, this becomes difficult because they are extremely volatile.

     

    There is no easy answer in my view to these potentially capital damaging conflict of interest situations. Some firms restrict analysts from owning any of the stocks they write about, as a matter of policy, yet they are doing investment banking deals at the same time.

     

    Unbelievably, journalists are exempted from securities advisor registration requirements in talking and writing about stocks in Canada. A well known business news station here has journalists casually talking about their stock positions as they are at the same time supposedly reporting objectively on the news on the company.

     

    I have thought for some time now that SA should have a full time compliance department, policies and chief compliance officer to regulate and investigate potential abuses of their business model.

     

    I have never written an article hoping that my article would push up or down a stock, so I could sell or buy it at a better price.

     

    As to my other nine points, please let me know if you have any other suggestions.

     

    Thanks for your comment.
    20 Apr 2013, 09:24 AM Reply Like
  • richjoy403
    , contributor
    Comments (8521) | Send Message
     
    Chris -- Thank you for the long response.

     

    It seems, if one eliminates all the tangential info, you will agree there is no credible research indicating those who are long the stocks they advocate (or are short the ones they trash) are providing more accurate advice than are those who have no position in the stock.

     

    I questioned that 'clue' because it struck me as without adequate foundation. I am not so concerned that those having a financial bias would insert a fabrication into an article (readers would quickly call that out), but rather the (even unintentional) subtle slanting of their article by the omission of relevant information, or give overemphasis to information already priced into the stock.

     

    I do have views on your remaining 9 clues...but as they closely parallel your own, it is pointless to elaborate.

     

    However, I do have a couple comments regarding your response...
    (a) I advocate for more firms had policies prohibiting analysts from writing about the stocks they own (and I find investment banking deals are not the same as advocating/trashing stocks in the media).

     

    (b) I endorse your view SA should have a full time compliance department, policies and chief compliance officer to regulate and investigate potential abuses of their business model. I suggest you make your views known to David Jackson (and also illicit the support of other authors).

     

    Thank you,
    Rich
    20 Apr 2013, 12:33 PM Reply Like
  • northhills24
    , contributor
    Comments (1552) | Send Message
     
    I respect Richjoy and he is a valued reader here on SA- I think writing about stocks you own does not determine the validity of the article. In fact one can say that the author is attempting to pump or dump because of his position long/short etc... This however is only 1 of 10 great ideas in determining an authors credibility. Recently reading a ridiculous article about gold going to $370- the author responded to my comment ; "I freely admit I don't know everything' and his author pick on the comments...
    Junior do some research and put your diapers on.The production cost of gold is more than double your price predication..
    Gold like any commodity can over shoot up or down but 370 that is a total joke.....When a commodity trades below production cost producers shut down and supply declines ... prices then stabilize and then advance...Common sense
    20 Apr 2013, 09:36 AM Reply Like
  • raykrv6a
    , contributor
    Comments (2319) | Send Message
     
    northhills. One of the people I read on SA is Petrarch. He has a good business background and his posts (he doesn't post that often) usually seem quite balanced to me.

     

    His post on this tread on gold is interesting.

     

    http://seekingalpha.co...
    20 Apr 2013, 02:36 PM Reply Like
  • northhills24
    , contributor
    Comments (1552) | Send Message
     
    thanks Ray...I do follow many here... and appreciate your rec.
    21 Apr 2013, 09:56 AM Reply Like
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