Creating a research community

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This is the seventh article in a series about Post Modern Security Analysis.

Creating a research community

The essential element in Post Modern Security Analysis is emphasis on the gathering and selection of open source investment information and on the preparation of factual, encyclopedia-style articles based on this research.

Finding a collaborative research group ...

Because of the time required to develop factual research of this quality and because the utility of such research is enhanced by research on comparable securities and input from researchers with special expertise, the solitary analyst must now look to joining a research community to receive collaborative assistance from other researchers.

Post Modern Security Analysis dates from the Crash of 2008 and the decline of acceptance of the Efficient Market Hypothesis, along with criticism regarding the quality of work produced by traditional profit-based publishers of investment statistics.

So, in this new field of endeavor the question is, “How does a researcher create a Collaborative Investment Research Community?” and “Do any such communities already exist?”

Collaborative investment research

When the goal of collaborative investment research is to produce a factual, encyclopedia-style “article” about a certain topic, the following conditions must exist:

The worldwide web ... cheap and efficient.

1. Purpose and content: The purpose and content of the “article” must be defined and agreed upon by the collaborators.
2. Consensus: The collaborators must have reached a consensus regarding the standards to which the article must be held.
3. System and Rules: There must be a system by which collaborators at different locations may work on the same article in harmony, with rules for resolving inevitable differences of opinion regarding content or fact.
4. Enforcement: There must be a way for enforcing the rules and systems of collaborative research, protecting the work against disruptive elements.

The Internet offers the least expensive communication system to bring together collaborative researchers throughout the world. It is not free, but costs are small relative to benefits.

The rise of the Internet and personal computer systems has spawned many collaborative software systems. Of all these systems, the “wiki” concept is the most appropriate for collaborative investment research.

A wiki is a website that uses wiki software, allowing the easy creation and editing of any number of interlinked Web pages, using a simplified markup language or a WYSIWYG text editor, within the browser.

Wikipedia

Most wiki software is free (open-source) and MediaWiki, the software used in the most successful wiki (Wikipedia), can be easily setup by anyone with access to a server and basic computing skills.

Why not Wikipedia?

There are many collaborative communities organized around the wiki concept, but Wikipedia is, by far, the most successful.

Truth ... or Neutral Point of View

Because Wikipedia’s success is well-documented and its system freely available online, it serves as an ideal laboratory to study the operation of collaborative communities.

However, Wikipedia has certain fundamental policies that disqualify it as a base for collaborative investment research of open-source investment information:

1. Neutral Point of View: A non-negotiable policy states that articles should present “all significant views that have been published by reliable sources”. In other words, Wikipedia articles do not seek to present the truth, but rather “all significant views”. This, of course, is acceptable in a general encyclopedia on all conceivable subjects (like Area 51, Black helicopters, the Illuminati, or the Bilderberg Group), but is problematic when attempting to gather facts and ascertain the truth relative to capital markets and investments. To maintain quality output, opinions are to be avoided in the fact-gathering phase of research, which is the purpose of the collaborative research communities.
2. No original research: “The threshold for inclusion in Wikipedia is verifiability, not truth.” “If no reliable third-party sources can be found on an article topic, Wikipedia should not have an article about it.” Wikipedia considers that “the most reliable sources are peer-reviewed journals and books published in university presses; university-level textbooks; magazines, journals, and books published by respected publishing houses; and mainstream newspapers.” In other words, most open-source research is not acceptable.


For Wikipedia, Madoff was 'noteworthy' too late ...

3. Notability: “A topic needs to have had sufficient coverage in reliable sources to meet the general notability guideline.” In other words, factual information relative to Bernard Madoff’s operations, prior to the revealing of his Ponzi scheme in the newspapers, could not be published in Wikipedia (and, in fact, was not). Much information in US SEC files does not meet Wikipedia’s standards of “notability”.

However, Wikipedia is a rich laboratory from which to draw valuable lessons regarding the operation of collaborative research communities.

The basic need: a semantic wiki

What should be the most important organizational specification for a wiki that is to be used for collaborative investment research?

The answer is that a “semantic wiki” is necessary.

A semantic wiki has articles that conform a specific “taxonomy” or knowledge model. Special software can use this taxonomy to locate articles based on concepts, rather than ordinary word searches. With articles structured in this way, researchers work with concepts and the principle of “every fact in its place”, making it easier to locate the work of collaborators, avoiding redundancy.

Taxonomy is the science of classification. There are many different taxonomies, in many different fields.

Open source Semantic MediaWiki is available ...

To create a “semantic wiki” suitable for capital market collaborative research, three actions are necessary:

• Create a “capital market taxonomy”: This should consist of documented formal descriptions of the semantic relations and categories that are to govern research articles. This formal taxonomy may be purchased from specialists in semantics and ontology, created by volunteer collaborative researchers, or acquired by adopting a free, open source taxonomy available on the Internet.
  

  See: Capital Market Taxonomy.

• Create a semantic software system to support capital market taxonomy: In a wiki context, such a system must be capable of locating and classifying research articles on the basis of the formal capital market taxonomy. Such a system is available, without cost, with the open source Semantic MediaWiki software being funded by the Institut AIFB of Universität Karlsruhe, Germany.
• Create suggested content outlines based on taxonomy: To guide researchers as to the content of articles and strengthen the concept of “every fact in its place”, content guides should exist for each type of article. In other words, what would be the content of an article about a “securities exchange”, as opposed to an article about “preferred shares”? This greatly speeds up the research process, while helping to avoid redundancy and the need to restructure articles.
  

  See: Article outlines based on taxonomy.

The essential elements for creating a semantic wiki are all available from open sources on the Internet.

In Part Five of this tutorial on Post Modern Security Analysis (Managing Complexity), we mentioned the need to break up a topic into “articles”. Taxonomy provides the guidelines for this division, making it easier for collaborators who don’t know each other, to all land on the same page and post facts about a subject.

Wikipedia, which is not a semantic wiki, constantly faces the problem of the need to merge, split, or rewrite articles because editors have no easy way of knowing what outline to follow for articles or whether a topic has already been posted elsewhere.

In September 2009, Wikipedia had 15,000 articles marked as candidates for merging, due to this problem.

Rules and guidelines

One reason for the success of Wikipedia is the extensive documentation of its rules and guidelines.

Because Wikipedia is not a semantic wiki, it is not easy to say exactly how many articles serve as help files, tutorials, policy guides, governance rules, and so forth, but the number appears to be in the hundreds — created by consensus among collaborating editors since the first guidelines were laid out by Jimmy Wales, the founder of the wiki.

Collaboration in time and space ...

Successful collaborative research in any area as vast as world capital markets requires a solid foundation of documentation explaining how the effort is expected to function and the roles and preferred behavior of collaborators.

There are many possible models for collaborative research:

• A collaborative effort may occur at one place at one time (like volunteer firefighters coming together to put out a fire) or may occur in different places at different times, like editors from around the world working on Wikipedia.
• Collaborators may join and leave an effort, without being invited or approved (as in Wikipedia), or may join only on invitation, after a formal process of selection (as in a closed, scientific project or internal institutional wiki).
• All collaborative groups have administrative costs, which may be covered by contributions of collaborators, or by a central source of funding, such as an institution or foundation, or by a variety of other methods, such as advertising or the sale of the research product.

Topics which require rules and guidelines include: the style and content of articles, behavior of editors and collaborators, dispute resolution, governance, documentation of sources, standards of excellence, and how to use editing and semantic tools.

Financing collaborative research

Wikis are generally inexpensive to run, compared to other forms of collaborative investment research.

Collaborative wikis cost little ...

However, there is a cost with servers and maintenance that increases with the number of readers, editors, and articles.

Wikipedia, the largest wiki, is financed entirely by donations and does not allow advertising. Total expenses for the Wikimedia Foundation for 2007/2008 were $3.5 million, covering encyclopedias in 250 languages with 10.7 million articles.

To put this in context, total remuneration (salaries and bonuses) of 48,000 financial analysts working for financial institutions and publishers in the United States in 2006 was $3.1 billion. In order words, the US capital market could reap the benefits of collaborative research, using a wiki the size of Wikipedia covering all US securities, for an incremental cost of about 1/10 of 1% of the cost of the time of financial analysts working directly in the market.

If the benefits of collaborative research saved the average analyst only thirty-seconds a day in avoiding duplicative work, or in obtaining new factual research on a topic, collaborative research would pay for itself.

See: The economics of security analysis

The economic benefits of collaborative research are even greater when one considers the potential of home-sourcing and out-sourcing work to analysts far from the financial centers where living costs are lower. Even greater savings could be achieved by using institutional-academic “collaboratories”.

CFA candidates await testing in 2006 ...

Institutional “collaboratories”

Financial institutions and universities can join in collaborative investment research to mutual benefit.

The primary barrier to the development of collaborative investment research as described in this series of articles is the shortage of financial analysts trained in open source investment research.

Business schools generally use the “case method” of teaching which focuses on decision-making based on a set of data (factual or not) prepared and presented by the teacher, rather on the development of the skills needed to present documented factual information based on open source research.

As of 2009, the curricula for candidates for the designation of “Certified Financial Analyst (CFA)” did not require work or assignments in open source research, or any understanding of OSINT methods. The designation is granted upon passing three exams, consisting of multiple choice and essay-type questions, after having four years work experience in the field of finance.

The few universities that do teach OSINT methods, focus on information gathering for military or political intelligence purposes.

See: Teaching open source investment research in Capital Market Wiki

Consumers of financial research

The primary consumers of open source financial research would be financial institutions of all types, seeking competitive advantage based on superior investment intelligence. These institutions already have financial analysts on their staffs, but generally rely on commercial secondary sources, such as Standard & Poor’s or Bloomberg for factual information on which to base investment decisions. In-house research that goes directly to primary sources, beyond SEC files and company disclosures, is usually restricted to special cases, such as mergers, acquisitions, corporate investment decisions requiring due diligence, or under-writings.

However, using wikis as a basis for collaborative research, institutions may make arrangements with universities to mutual benefit:

Capital Market Wiki offers templates for classroom research assignments that can be used to teach open source research techniques, while developing encyclopedia-style “articles” that are consistent with the first step in Post Modern Security Analysis — creating encyclopedia-style, factual, non-opinion articles about the research target.

The institution may make arrangements with a professor to develop articles in a certain field of interest (such as REIT common stock, or securities listed on the Jakarta Stock Exchange), offering prizes to students that produce the best articles, as well as priority consideration for internship programs or on hiring upon graduation.

Teachers benefit by having more motivated students, plus a body of researchers that can provide basic research for academic papers. Teachers may also use the skills and knowledge acquired to support work as consultants.

Such institutional-academic “collaboratories” might be expanded to develop a capital market that has a weak informational infrastructure. For example, an investment bank, a university, a development bank, and a stock exchange in a new market could team up to develop encyclopedia-style articles on securities issued in an emerging market, with information available worldwide on the Internet to attract investors.

Open or closed collaboration?

In designing a collaborative research project, a basic decision is about who shall be allowed to participate in the project?

Wikis such as Wikipedia demonstrate how an open encyclopedia that “anyone can edit” can develop effective protection against vandals and spammers that would destroy the system.

See: Patrolling edits in Capital Market Wiki

In the case of capital market research, the advantages of an “open wiki” far exceed the disadvantages.

The example of Wikipedia indicates that the vast majority of contributors to an open wiki only add one or two articles, or make minor changes to existing articles. This is to be expected when dealing with a universal field of knowledge in which no one knows everything.

The spirit of open source research is to look at everything, without pre-determining what constitutes a “reliable source”. Truth and accuracy is determined by a variety of means, of which the nature of the source of information is only one factor.

Capital markets are so complex, requiring so many different skills and life experiences to understand, that to arbitrarily limit participation is to reduce the chances of truth to emerge.

Open access encyclopedias are indeed subject to vandalism, sabotage, and the publication of false information. But open access also increases the chances that such defects will be quickly found and removed.

Open source intelligence involves not just a willingness to examine information from any source, but, more importantly, the skill and expertise in evaluating such information and in weeding out material that is false, misleading, or irrelevant.

Existing capital market wikis

There are hundreds — probably thousands — of websites devoted to the exchange of opinions about capital markets. These are generally organized as forums, chat rooms, social networks, or blogs that admit comments.

There are also many financial institutions that claim to have internal, in-house systems of “collaborative research” on financial topics.

However, there are relatively few, open financial wikis that are devoted to finance or capital market research or comment.

As of September 2009, here are some wikis that deal with capital markets:

As of 2009, Capital Market Wiki was the only collaborative research vehicle designed to meet the requirements of Post Modern Security Analysis.

Next Lesson: Post Modern Security Analysis: Part Eight (Truth, Facts, and Opinion)