Socially responsible stock recommending 8 comments

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I was reading a very interesting thread on the Wallstraits forum the other day on this share forum called THE Value Investment Community by Analytics Asia. Basically, it was a backlash against Curtis Montgomery, otherwise known as Sage on the Wallstraits site, for some dubious practices, which allegedly included (1) selling some of his recommended stocks without informing forummers (especially his paid Intellivest subscribers) until much later; (2) having related-party interests in some of the companies he recommended, such as providing investor relations services; (3) engaging in non-Buffett style wheeling and dealing of stocks even as he professed to be the Singapore equivalent of the American billionaire.

For those not clued in on Wallstraits, it is basically a value investing site which has modelled itself on Warren Buffett's investing philosophy and techniques, and has made some inspired stock picks in the early years of the new millenium, such as multibaggers in Osim (its star pick), People's Food and Celestial Nutrifoods. It has a paid subscriber's site called Intellivest where Sage reveals his portfolio picks (he actually buys into his stock recommendations) and promises to inform subscribers when he buys and sells the stocks. On the strength of its stellar 2001-2003 portfolio performance, the site has managed to garner a substantial number of followers, both paying and non-paying. Sage has even written a few books on his investment philosophy and techniques, such as Building The Perfect Portfolio.

My first thought on reading the anti-Sage comments in the Analytics forum was that if the Wallstraits portfolio had continued to perform well over 2004-05 there would not have been any complaints. That is basic human nature: waxing lyrical when things go smoothly, witchhunting when they turn sour. The Wallstraits portfolio has not exactly outperformed the market over this 2003-05 multi-year bull rally, its picks having done poorly (eg. United Food, JEL, Ace Achieve, Bright Orient, Westcomb, and recently its core holding Zhongguo Powerplus). Hence the knights of the long knives.

I cannot help but sympathise with Sage; his professed value-add of recommending Intellivest stock picks to subscribers and his personal objective of making money from his stock portfolio are difficult to reconcile, especially as his operations, both on the Wallstraits forum and his personal portfolio, have reached a significant scale. Imagine: if he fulfils his promise and declares his buy or sell intentions to subscribers almost immediately, how is he going to get a significant line of stock at cheap prices, or dispose of his existing line at good price levels? The prices of his stock picks will be bid up, and that of those he intends to sell will be bid down. Yet if he chooses to undertake distribution quietly and inform subscribers after the event, his significant selling (given that each of his portfolio stocks tend to be $200K or more) would have caused a drag on prices (especially given the illiquid nature that his stock picks tend to exhibit) and subscribers would be complaining (as they are now) of being kept in the dark (or they could even be buying on Sage's recommendation while he was selling). The curse of the large investor is now compounded by the moral duty of the stock advisor.

I remember Jim Cramer, a well-known hedge fund manager in the 1990s, who wrote newspaper stock recommendation columns on the side. He was once investigated (although later exonerated) by the SEC for pumping up stocks (through the newspaper columns) that he held in his portfolio and then disposing of them in the buying interest that followed his newspaper recommendation. Singapore is probably less advanced and stringent than the US in terms of market regulatory practices, but I wonder if there will come a day where regulatory scrutiny will make it impossible for business models like Wallstraits' to operate. They would probably have to get some kind of broker's or investment advisor's licence which would subject them to all kinds of regulatory audits and standards. And they would have to make sure that they follow buy-and-sell rules that would not get them embroiled in "pump and dump" accusations every now and then. I don't know about Sage, but if I were managing a personal portfolio of his size (~S$3M), and compared to the Wallstraits subscriber income(say, 100 paid subscribers X $100 annual subscription fee = $10000 annually) I would prefer to concentrate on maximising income from the former.