Sunday, February 1, 2015

Paper: "Talking Your Book: Social Networks and Price Discovery"

"Alpha Architect" talks about a paper called "Talking Your Book: Social Networks and Price Discovery".

"If I already have all my money in a stock or I’ve hit a risk limit in my portfolio (e.g, 10% of NAV), there is no cost to sharing my private information. Perhaps I’ll get lucky and convince another value investor that the stock is cheap and the price will rise.

1. Find honest to goodness undervaluation or overvaluation. (Obviously, if you aren’t discovering genuinely “good” ideas, talking your book is not going to work.)
2. Take a full position in the stock.
3. Crank on your PR engines and spread the word about your idea (VIC,, SeekingAlpha, etc.). Here is a paper looking at the performance of Seeking Alpha posts.
4. Drive prices closer to fundamentals in a shorter amount of time.
Related to this, a paper called "Facebook for Finance: Why do Investors Share Ideas via Their Social Networks?":
"My 'diversification' sharing model suggests that capital constrained arbitrageurs will share ideas to gain access to new ideas and lower their portfolio volatility. My 'awareness' sharing model suggests that arbitrageurs share their private information to attract additional capital into their asset market."

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