Skin in the Game

By: Wayne Mulligan   Skin in the game. Some investment newsletters have it... Other don’t. You see, while some newsletters make a big show about investing in the ideas they recommend, others insist on staying on the sidelines. For many newsletters—and for investors like you—this topic inspires great debate: Newsletters that invest could be taking advantage of you! The “independent” newsletters have no conviction in their ideas! What’s really going on here? Today, I’ll give you my thoughts on this issue… And then I’ll show you how Crowdability handles it. The Argument For Having Skin in the Game… Some high-quality publishers—like Motley Fool, for example—think they should invest in the ideas they recommend. They think it sends the right message: We have so much belief in our research, we’re willing to put our own money on the line. Certainly they hope they’ll make money on their investments— But they also hope this tactic gives subscribers comfort, and makes them more amenable to keep paying for their subscription. And the Argument Against Having Skin in the Game Other high-quality publishers take the opposite position: First of all, they argue that steering clear of investing in their own recommendations allows them to remain objective. They can look at each trade through clear eyes, with none of the powerful emotions that grip an investor once he’s committed to a trade. (For example, how many times have you held onto a losing position? Even when you knew you should cut your losses. We’re all guilty of it.) By keeping their ideas at arm’s length, publishers believe they’ll be better equipped to serve you. But there’s another reason they don’t invest in the trades they recommend: Conflicts of interest. Conflict Perceived is Conflict Achieved Many years ago, the Managing Director of the first investment bank I worked for took me aside. “Wayne,” he told me with passion. “Even if there’s just the potential for a conflict of interest, there’s a conflict of interest.” For example, let’s say a newsletter you subscribe to recommends a small-cap stock. The stock’s trading at $1.00 per share, and it trades just 50,000 shares per day. And imagine that as soon as you (and hundreds of other subscribers) buy into the stock, it shoots up to $3.00 per share on big volume. Then, a few days later, it sinks back down to $1.00. Sure, it’s quite possible that nothing “shady” happened here… But it’s also possible that the publisher owned the stock at $1.00 per share. How do you know it wasn’t selling shares when you and others were buying? This process is known as “front running.” Basically, the newsletter writer believes he can drive the price of the stock higher, so he takes a position in it before he publishes his report—he takes a position “in front” of his subscribers. Regardless of whether this is illegal, it’s wrong. The thing is, plenty of reputable newsletters—newsletters that would never consider front running their customers—make investment recommendations that they also have stakes in. Unfortunately, as my former boss taught me, even the perception of a conflict can create a conflict. Why It’s Different for Start-Ups But with start-ups, there’s no such thing as front running. With start-ups, to put it simply, all investors get in at the same time… And they get out at the same time. We all get the same price and the same investment terms. There can be no perceived conflict, and there can be no actual conflict. How We Handle “Skin in the Game” And that’s why we’ve decided to invest in the opportunities we recommend to Crowdability subscribers. In fact, on tonight’s live (online) presentation, we’ll tell thousands of our readers about the first investment we’re putting our money into, right alongside theirs. If you’ve already registered for the live event, we look forward to seeing you tonight at 8pm Eastern! Best Regards, Wayne Mulligan Founder Crowdability

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