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SEO & Liquidity Market Theory

18 May 2004

This article briefly talks about some stock market theory before leading into some SEO tips.

Trim Tabs Investing

Trim Tabs Investing is a book about using liquidity theory to beat the stock market. Many people believe earnings or forward earnings drive stock prices, but that generally is only true over long periods of time.

There is a fundamental disconnect between value and stock price based upon short term supply and demand.

The House

Current stock price matches supply and demand given:

• the number (and value) of shares on the market
• the amount of money chasing those shares

Much like a casino has a gambling advantage, company insiders and corporations have the advantage. My controlling the number of shares (float) they can sell shares high and buy shares low.

When things go exceptionally bad in the market you may notice that some free cash flow positive companies intentionally give bad data as far as future visibility goes to help further depress their stock value so they can buy back more of their shares while they are cheap.

Brokers

Stock brokers invariably give a rosy picture of the future. Their goal is to encourage transactions so they can:

• create more players (bring more investors to the market)
• justify needing portfolio management
• sell more IPOs

By always making it seem like everyone is making money in the growing market they make the market seem appealing, and they try to make you think that you did a bad job managing your money if you lost money.

Punishing Google

This part was not in Charles Biderman's book, but is my opinion.

In well under a year Google's stock rose from an IPO price of $85 to a current day trading price of $239. Google wanted to IPO in the range of $108 to $135. Prior to Google's IPO the market was exceptionally negative, causing lower stock demand requiring Google to lower their float and opening price. Why?

Stock brokers usually make a fat commission on IPOs (3-5%) while doling the stock out to their buddies prior to the average investor on the street being given a chance to purchase stock.

Google allowed anyone to buy shares and cut out the hefty commissions. Brokers make far more money selling IPOs than selling secondary offerings or merely brokering the average stock buy or sell transaction.

Brokers and industry analysts had nothing but negative things to say about Google, questioning the viability of their business model and the lack of forward guidance. The two primary reasons for this were most likely:

• Punishing Google for cutting out their commission
• Ensuring they could still get shares at below market value so that they would still be able to sell them for an immediate price increase

Analysts

Are usually well aligned with brokers and the stock they sell. Their advice is usually a bit too rosy and they may not change their views or recommendations until after you have lost your money following their advice.

The Players

Most individual investors are the dumb money. They follow trends thinking that the near term future is going to be patterned after the near term past. This causes them to have maximum market exposure prior to market crashes, as many even take out loans to invest into the market. It also causes them to sell their shares near market bottoms to "cut their loses".

Trading with emotion and being reactionary make most stock buyers make bad decisions.

As a Disclaimer

A bunch of the ideas (almost all of them in fact) are some of my interpretations from Charles Biderman's Trim Tabs Investing book.

His methods of measuring inflow and outflow are documented in his book. He also states that the average investor can do well dollar cost averaging or buying and holding stocks of quality companies.

His Trim Tabs Investing is on a macro level, not a stock by stock level, and he only recommends it for more advanced stock buyers. Here is a 22 minute audio about liquidity theory.

How the hell does an investment book relate to SEO?

An Information Marketplace

Much like the stock market is a stock marketplace the web is an information marketplace. Goods, services, software, and advertising are exchanged for cash.

The search engines and most technologically advanced SEOs would play the side of the house. The average new webmaster and new SEO play the side of the players.?

Leading Market Indicator: An Advertising Marketplace

In many industries the competition in the ads or the organic search results may be fierce, while the other may be less competitive.

If one is competitive and the other is not you may be able to profit short term from creating a strong market position in the other.

If people are paying too much for ad space, instead of trying to buy ads it may be a good business model to selling them.

If people are overbidding the value of ads in a marketplace it means there is more demand than supply. By ranking well in the organic search results and selling ad space you can effectively broker ads to that excess demand.

Using Lagging Indicators

Many SEO techniques are not forward looking. In missing that, people can over invest into ideas that will not bring long term profits. It is not always easy to know what will happen going forward, but there are tons of profit opportunities.

Today a foreign SEO complained to me that his market was a bit behind the US. That might be a bad thing, but it also could be good.

Most likely if the market is behind it means there will also be less competing sites, so you may be able to do well creating affiliate sites or sites that make money selling ad space.

If the local search technology lags the global technology you can learn a bunch about new filters and algorithm shifts in the global markets.

Perceived Value

When recently selling advertising space an advertiser asked if (or why not) we had any advertisements from competing sites.

Few people lead markets. Most follow what others are doing. Right now everyone and their dog has a mesothelioma website.

Like cash to the stock market, there are a limited number of search queries and a limited amount of demand for information on that topic. As people chase and chase and chase an idea the extractable value per website is continually decreasing.

This is one of the reasons it helps to create niche channels instead of trying to rank for overtly competitive hyper saturated terms.

Longer Keyword Phrases

As more marketers become aware of a keyword phrase the market gets more competitive. While there may be a lot of volume for generic terms, there is also a lot of market hype around them. Google has over 4,000,000 pages about mesothelioma.

As people refine their search queries they come closer to what they actually want. Longer search queries have less competition and more value per search.

In finding the hidden valuable keyword phrases you may be able to do exceptionally well because the average marketer might have poor market data for those terms. Many of these terms are easy to rank for on pages deep in your site and lazy marketers will likely miss many of them.

What SEO Technique is Hot Right Now

For a while directories were cheap marketing. Now everyone and there dog runs a general directory. By the time any SEO technique spreads to mass market appeal it starts to lose a good portion of its value. This is the same reason many of the most aggressive techniques are never shared in public. The value of a given technique is often inversely proportional to the amount of market data available about it.

Going forward I will still want Yahoo! Directory and DMOZ links, as they likely satisfy many search algorithm criterias outside of being just another link. With:

• how many directories are on the market
• many directory owners being greedy and running a bunch of general directories. If people promote a bunch of general directories together they are interested in cashing out, not in providing value to the user or webmaster who uses the directories.
• the low cost of building a crap directory
• the increasing price some junk directories are charging
• Google not caching many directories
• the lowered value search engines are (or will be) placing on those links

I no longer recommend directory registration as much as I did in the past. I will still do it to some extent, but other ideas might make better forward looking SEO investments.

Vertical Search

Google has been advertising their local search off the web. Major search engines have also been putting more effort into trying to understand the intent of user queries.

Once they feel comfortable with their understanding of user intent and feel their vertical services are of high enough quality vertical search may become incredibly important. How you name something and how you comply with the various vertical search algorithms may be a huge SEO factor going forward.

Interesting Algorithms

Most times doing any one thing wrong will not usually get a site banned. At the same time, most top ranking site probably do not match up better than all other sites with every part of a search algorithm.

You do not have to do everything "the best", but there is a ton of new search related research coming out all the time. Even if you do not fully understand the math behind TrustRank, what Latent Semantic Index is, or all the deepest details of a new patent, you can still see the goals of what they are trying to accomplish and then try to build pages and links that would work well within those goals.

Every page and every link will probably not match the goals of all the various algorithms, but it helps to build at least a few that should match up well with many of the forward looking technological changes.

- by Aaron Wall

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