Oftentimes I’ve witnessed, on a plethora of investment message boards, the prideful touting of various posters annual/aggregate returns in relationship to the markets; on occasion including myself. Covestor has become a vehicle for investors to provide a basis for their boasting with intangible evidence, again, myself included. Therefore, I decided to use my self as an example with this experiment to show that, to a large degree (IMO 100%), what is stated as the ‘Covestor Return Since Inception’ does not represent the ‘Actual Investment Return Since Inception’.

The main reason for this inaccuracy is that Covestor does not weigh the Aggregate Return based off of how much capital was invested into the portfolio, rather, it weighs the Aggregate Return based off of total account value appreciation/depreciation over time, as well as other factors, completely disregarding any invested capital employed. This is a fundamental flaw in rudimentary accounting.

I’ll use my Covestor linked Brokerage Account as my example. I have four Brokerage Accounts – one in which I set into service a few days ago. From the four accounts I own I chose one of them to link to Covestor.

This account was started on November of 2007 with a meager $500 capital investment. my Annual reporting period for this account will always be in November. The total Invested capital for the fiscal years are as follows:

November 2007: $500.00 (Starting Capital Structure)

November 2008: $4,133.79

November 2009: $1,449.72

As of November of 2008, my Covestor Brokerage Account had a Portfolio Value of $1,627.47. OUCH!!! During that period, I invested $4,633.79 and lost $3,006.32 of that capital; an annual return (loss) of (64.88%). Without making any excuses and without the need of doing so – recessions are clearly difficult periods.

For the following period, I invested an additional $1,449.72 of capital into the business. This now brings the Total Invested Capital as of 2009 to $6,083.51.

As of November of 2009, my Covestor Brokerage Account had a Portfolio Value of $23,922.26. With Total Invested Capital now being $6,083.51, my Actual Annual Return for the period ending Nov. 2009 was 293.23%.

2008 Annual Return (loss): (64.88%)

2009 Annual Return (loss): 293.23%

Therefore, my Aggregate Return (Return Since Inception) is the difference between the two reporting periods; 228.35%. My Averaged Annual Return therefore is 98.30%:

AND

OR Use a Texas Instrument BA II Plus Calculator (I can do both)

My Covestor account states that my Return Since Inception is 658.21% and 877.84% with Cash included. Obviously this data is incorrect as is the case with nearly every (I believe all) portfolio’s linked and especially ‘not’ linked to the Covestor platform.

Although 658% & 877% are much prettier numbers and ones that ‘have’ given me Delusions of Grandeur in the past as well as seeing other Covestor members often suffer from this ill repute, it is not the correct number nor is its method for arrival a correct process in determining the Aggregate and Annual Return.

Therefore, it is clearly possible that someone being listed on the Covestor Rankings in position #100 to have an ‘Actual’ Aggregate and Annual Return of a much higher percentile than the individual who is ranked #1; because #100 may have only invested a small amount of his capital once and never added to it again. #1, on the other hand, may have invested capital into his portfolio on a regular basis and in large quantity.

I encourage all to investigate their own portfolio’s and arrive at the proper and correct returns. You may find a number that you are more than happy with, such as I have, without the need of hyperbole.

“You don’t know who’s swimming naked until the tide goes out” – Warren Buffett

“I’m wearing underwear” – Jim Hodges

All the best,

Jim

* As of December 22nd, 2009: Averaged Annual Return = 115.39%

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El mundo financiero, dinámico como el que más, siempre está expuesto a sacar partido a las múltiples posibilidades que nos ofrece la red de redes y, esto sin tanta  frecuencia, a sorprendernos con innovadoras propuestas. En esta serie trataré de darlas a conocer.
El primer capitulo tratará sobre la fusión de las finanzas con la tendencia del marketing online más recurrente en los últimos tiempos:

= REDES SOCIALE S + INVERSION

Nueva York,  Junio de 2007, tres traders con una amplia experiencia en el mercad o de valores crean la primera red social de inversores donde los particulares pueden competir con los mayores profesionales del sector.

Una idea a primera vista sencilla, una red social financiera en la que cada inversor puede probar su valía frente a los mayores profesionales del sector. Dentro de la cultura del mercado de valores siempre ha existido entre los inversores experimentados la creencia de ser mejores que los gestores profesionales,  ya sea por instinto, por conocimiento de mercados concretos  o por desconfianza en la gestión privada.

Covestor creó un marco donde se podría comprobar esta creencia, con rankings de todo tipo (mayor rentabilidad por riesgo, mayor diversificación, traders más activos, etc…) y en el que se podía observar no solo la evolución de la cartera sino también la evolución personal , lo  que era un portal para retarse acabó siendo una enorme red social de fanáticos de la inversión. Se generaron blogs, estos blogs se potenciaron premiándose (apareció el ranking top writers), la gente discutía sobre sus carteras, aparecieron los generadores de opinión bursátiles  y se empezaron a replicar las carteras de los traders de mayor reputación, aquí cambio todo de nuevo.

La nueva idea de negocio de COVESTOR es el poder invertir tu capital replicando carteras de otros inversores altamente contrastados. La labor de Covestor es de altísimo valor para sus usuarios, crear una red social (el fenómeno de moda) enfocada al sector de las finanzas ha generado una mayor interacción entre todos los traders que, en principio, debe reportarles unos altos beneficios  sin la necesidad de tener altos conocimientos en cada mercado particular y, además, por cada miembro que replique tu cartera, recibes compensaciones como si fueses profesional.

El ejemplo más evidente es el de Timothy Sykes (emblema de Covestor), este joven de New York cuando  todavía estaba en la universidad convirtió en cuatro años  los 12.415 Dólares que recolecto  en la celebración de su BarMitzvah en una cartera de 1,4 millones. Relata , actualizado más de una vez al día, todas sus experiencias en su propio blog y sus hazañas le han llevado al primer puesto en el ranking de popularidad de Covestor , a comercializar un libro y un DVD. Actualmente tiene más de 3600 seguidores de su cartera (que invierten su capital en las mismas inversiones que él).

Si el valor es intangible para sus usuarios, para la compañía es evidente,  a día de hoy (en 3 años de actividad) su valor se estima en los 7,5 millones de dólares, se gestiona aproximadamente una cartera total de más de 100 millones de dólares con inversores de más de 40 países. Los datos de navegación y los rankings según visitantes diarios /paginas mostradas son espectaculares para una web de un sector tan teóricamente especifico como es el de la inversión en renta variable.

Esto nos demuestra que la innovación sigue y seguirá siendo la opción más rentable  en cuanto a desarrollo de negocio y que el mejor medio para ella es Internet. El mundo de las finanzas no se queda atrás y, pese a que para algunos la evolución en el marketing online financiero sea crear nuevas marcas online de entidades bajo etiquetas como el low cost banking o costosas campañas virales de indemostrable efectividad. Internet es un medio único y dinámico en el que siempre hay lugar para la innovación, algo tan sencillo como fusionar redes sociales + inversión es un ejemplo evidente.
En breve más propuestas interesantes sobre marketing online financiero.

Covestor:
Covestor.com

TimothySykes
Página Personal de Timothy Sykes
Blog de Timothy Sykes

I’m not particularly a fan of these Mainstream Media (MSM) overviews of Internet tools.  I find, more often than not, that they’re typically short on analysis and don’t help investors really navigate what’s really out there, why these tools are important, and how investors are successfully using them.

This short video piece (2:45) ran late last week on the Wall Street Journal’s website (sorry, couldn’t get the video to embed for some reason).  It’s a cursory overview of some sites focused on personal finance (Mint, Wesabe) with the perspective of more people wanting/needing to take control over their finances and investments in light of the recent financial tsunami.  The interviewee is Shelly Banjo, Dow Jones Newswire’s reporter on wealth management.

A couple of sites are mentioned explicitly.  Simplifi, a site that helps investors build their own financial plans, is mentioned as a good resource for do-it-yourself investors.   Covestor, a tool that allows investors to see what others are actually doing with their investment money, is cited as an important site “so you don’t have to take advice from some financial advisor trying to sell you something”.

Frustrating to see MSM’s  quick gloss-over of security and privacy issues.  When asked about security with some of these sites, Banjo responds, “It’s OK.  These sites have to be secure so people will use them.  So, they’re OK.”  In a way, she’s right.  No one would use these systems if there was a likelihood that his entire financial history and net worth made its way online.  Security is an important issue — I don’t think it’s enough to reason-away security issues.  Be sure to check security/privacy policies of any site you may consider using for online investing/personal finance.

Anyway, also check out Banjo’s “The Best Online Tools for Personal Finance” that ran in today’s WSJ.

Slow death of the newspaper and how investment decisions are affected

While news and the proliferation of information is booming, clearly the newspaper industry is on its way out.  Its current revenue model just can’t support a quality newsroom in the face of widely available free information on the Internet.

Numerous industry analysts continue to discuss the evolution of the news business (see Jarvis and Rosen as two of the best) but no one seems to be discussing the fact that beyond local news,  many investors who are less Internet savvy still receive much of their investment ideas/information from the old-school paper.

Older investors disproportionately hurt

While my 96 yr. old grandfather learned how to use Yahoo Finance before his death two years ago, I think older investors are hurt the most  by the demise of the paper.

This affects more than just getting stock quotes from your local Sunday edition.  This is about generating new ideas and monitoring stocks in existing portfolios.

Given the fact that we know investors are totally prone to home bias, that is over investing in domestic and even local firms in spite of knowing that investing more abroad lowers risk, the loss of a local paper can be really detrimental in both the discovery and analysis phases of investing.

5 things that need to happen for investors in a post newspaper world

I wanted to use this post to explore some ideas how investors can make better, more informed investment decisions in a post-newspaper world.

1. More Internet consumption: I know this sounds so intuitive but there really has never been anything to compete with the level of breadth and detail on stocks, mutual funds and ETFs that the free Internet offers.  We have to help investors migrate away from newspapers as sources of financial information and hook up to their digital counterpart.  This is happening anyway as younger generations cut their teeth on Internet tools but we’re still a long way away from general literacy in using financial tools on the Internet.
2. Financial tools education: This will require new sorts of financial education on how to use such tools.  This education should address both older investors who are not as generally familiar with the Internet, as well as younger investors who live and work on the Internet but need some more hand-holding in terms of learning how to access financial information.  I give monthly investing seminars and am always interested to see how familiar average investors are with what’s available.  Generally, they are open to help and can use it.
3. Evolution of the investment newsletter: As the ad-based model of media also suffers from a depressed advertising cycle, I predict investors will turn more to premium, subscription products.  Unfortunately, much of the financial newsletter industry is based on unsubstantiated hype.  Performance is important but so is fitting investments into an overall plan, managing risk, explanation, and creating an investment system that jives with investor lifestyle (people working 60 hr/wk should not be daytrading). Investors need to see:
   1. Audited performance metrics: New web firms like Covestor allow investment advisors to audit their risk-adjusted performance.  Investors need to better understand the power of these tools and how to use them in terms of do-it-yourself investing or hiring a professional.  Mark Hulbert has been monitoring the industry for years.  We need more.
   2. More types of newsletters: Most newsletters take a trading focus.  It makes sense because they are competing on performance.  Performance is just one (important) criteria, though and we need to see more newsletters that differ in style.  Buy and hold, dividend investing, retirement investing, macro, etc.  Investors need to be able to size themselves up, determine their needs and then accurately shop for the premium product that best fits their requirements.
   3. More responsible marketing:  Some many people are susceptible to predatory and misleading marketing of newsletters.  “Up 1000%”, “Profit Machine”, “Minting Money” — terms like this make investors think that newsletters are sure things.  They’re not and the volume of spam I receive with messages like these is increasing.  Newsletter will play an even more powerful role as more people decide to take a do-it-yourself approach in the wake of this market fallout.  Like Sean, I believe that we’ll see more hybrid “do-it-yourself-with-professional-guidance” models emerge.  Newsletters must take on more ethical responsibility.
4. Changing Investor Relations role: Like most industries connected to the meltdown in the financial sector, Investor Relations is looking itself in the mirror and grappling with its future.  For sure, it’s not going away as someone needs to play the role of matchmaker between company and investor.  But that doesn’t mean the current model of press release + road show with mutual funds + conference is the only way forward.  The Internet has changed the way people invest and how they research investments.  IR is beginning to realize the power of social media and needs to step up to best represent their firms and position themselves for the changing needs of investors.  There is so much that can be done here — new models, new distribution, new clients.
5. Better alerting systems: A moderate to heavy Internet user who monitors his/her portfolio with some regularity should notice big changes.  Probably not with enough forewarning to do something about a problem immediately but within enough time to make a decision.  Do I want to stay in this stock after the company has cut its dividend?  Made an unsolicited offer for a competitor?  Others need a better way to monitor their portfolios according to their requirements.  If a retirement investor wants to take an active role in managing the portfolio and doesn’t hear from a broker regularly or check the Internet, there’s going to be a problem.  Google Alerts can help investors stay abreast of breaking stories.  But it’s not good enough because it requires some understanding of how to structure the queries.  Many brokerage platforms allow SMS messaging for extreme price movements but investors don’t know how to use these things.

We are witnessing the changing of historical proportions as we cope with the evolution of the media industry.  Although much of investing has moved online, many are still attached to the old form newspaper.  I’m looking forward to seeing the changes happen that bring every investor into the fold.

Additional Resources

• Don’t forget to subscribe to receive free daily updates from NewRulesofInvesting.
• How an investment advisor is using new media to grow his business
• IRWebReport: a good resource for changing IR industry and here’s a recent presentation on IR 2.0
  

It’s still early days for financial advisors adopting social media.  There are compliance issues, structural issues and just questions as to the ROI.  There are a few early adopters investment advisors, though, who have seen the light and are not only using social media, but building their practices via new media.

EPIC Advisors and its Social Media strategy

Sean Hannon, founder and CEO of EPIC Advisors, is ahead of the game.  After cutting his teeth at Goldman Sachs and JP Morgan, he set out two years ago to found his own Registered Investment Adisory (RIA), EPIC Advisors.  I had a chance to speak with him today.

EPIC’s business

Sean’s firm has over 90 clients ranging from high-net worth individuals to families beginning to grow their retirement nest eggs.

• Transparency: Sean believes in a uniquely competitive level of transparency and runs his business accordingly.
• Communication: Communication is extremely important for him and he works hard to ensure that clients are never surprised by his activities.
• Personalization: The RIA structure and the Separately Managed Account (SMA) provides many investment advisors with a scalable solution to servicing numerous clients.  The adviser manages a model portfolio which is replicated out in client accounts on a prorated basis.  Hannon works hard to overlay client-specific activities on top of his portfolio so that each client has a customized portfolio inline with their individual  objectives and circumstances.
• Value add: While such transparency may be a double-edged sword,  he ensures that he provides real value at every step of the investment process.

3 Ways to Grow an RIA

How he’s building his business is a how-to guide for financial professionals looking to build their business beyond the boundaries of their traditional extents of influence (community, city, state and even country).

According to Hannon, he’s got a three pronged strategy to grow his assets:

1. Performance: Hannon is no slouch when bringing home the bacon for his clients.  He believes that in a sideways market, financial advisors must perform or clients will defect to cheaper internet trading.  Hannon uses the Covestor platform (see his profile) to audit his trading performance.  Since August 2007, he’s returned almost 200% using a long-short strategy (with about 20-30% equity exposure) that has evolved into more of a short-term trading strategy attune to this market.  He ranks at or near the top of all investors on Covestor.
2. Service: Clients have different requirements and needs.  EPIC designs trading and communication strategies in different ways to match client specs.  Social media plays a role here as Hannon attributes some level of customer retention to the fact that clients can log into Covestor at any time to stay abreast of trades in their account as well as ongoing blog commentary published by Hannon on Covestor as well as on SeekingAlpha.   For other clients, he’s using an inhouse email newsletter to keep them apprised of this current views on the market.
3. Reach: Sean’s got about 3000 people signed up to EPIC’s newsletter (see the most recent newsletter: Epic Insights 2009-05-11) and numerous others see his commentary and performance on Covestor and a similar site, MarketGuru. This broad coverage, blanketed wider via syndication of his content on SeekingAlpha, has enabled EPIC to land investors in tens of states and in four countries.  As investors consume Hannon’s content, a certain percentage become actual clients.  Combined with traditional networking and local seminars, Sean’s got a steady stream of prospects.

EPIC’s How-To Guide of New Media for Financial Advisors

To summarize, Hannon and EPIC are definitely leveraging new media to build their business.  They do this in a variety of ways:

• Syndication: For a small outfit in New Jersey, Hannon is literally reaching millions of potential clients by sharing his content with third-party aggregators.
• Different Media Formats for Different Clients: Hannon believes that investors are turning to internet investing in the wake of poor performance and poor professional value.  EPIC’s newsletter addresses these investors who want to manage things themselves but need professional support.  He gives investors activities to implement the beginning of each week — active but not too onerous.
• Broad Sales Funnel: Between the newsletter, Covestor, and SeekingAlpha, Hannon has essentially blown open the sales funnel to not only broaden his reach but to fill his sales pipeline with the right people, the type of people who appreciate his value offering.  Better and quicker match for both sides.  (See my post on Sales 2.0 and how to implement this for your business.)

Future of the Financial Advice Industry

It was clear that Sean Hannon understood his business very well and how to leverage social media to get there.  I asked him about his views on the brokerage/financial advisory business in general and he had some interesting views:

We’re moving away from overpaid brokers using poor performing mutual funds and headed towards a market of value added services for the bulk of investors.  Many investors will adopt do-it-yourself Internet investing and still require professional support.

Hedge funds, RIAs with good performance — they’re OK.  In some way, outside of that, at the macro level, we seem to be headed back to the 70’s, retrenching in a way that niche-y, non value-added pieces are falling away.  Investment advisers will be paid for performance and risk mgmt, Financial Advisers will get paid more on structuring asset allocation, and brokers will be paid for good stock picking advice.  The rest will go away.

Interesting stuff.

Additional Resources

• Don’t forget to subscribe to receive free daily updates from NewRulesofInvesting.
• EPIC Advisors
• EPIC Insights Newsletter
• Covestor

Image is a Stonehenge predawn panorama in the public domain, available on Wikimedia Commons.

There are many new faces on the scene in online finance.  As we move away from mere trading platforms and portals to more social media-like applications, we’ve taken a stab to enumerate some of the top thinkers/movers/entrepreneurs in the space to keep tabs on.

I used a variety of slippery factors like vision and influence and combined it with the track record of the individual/firm and then threw it into a blender.  The list below is in no particular order.

Top Finance 2.0 Personalities

1. Steve Carpenter, CEO/Founder, Cake Financial: Cake has risen to prominence by layering an analytical layer on top of clients’ existing investment accounts to help make sense of what’s going on and make better decisions in the future.  Steve has been an outspoken investor advocate promoting the need to understand the investment process and learn from others.  Because Cake has processed data over 1,000,000 retail transactions, the firm is in a great place to provide network level statistics into buying and selling as well as help investors learn from one another.
2. Aaron Patzer, CEO/Founder, Mint.com: Well, Aaron’s voice has been heard as far as Davos. Helping over 900k users track their expenses and lower their burn rate, Mint has quickly risen to prominence in a field dominated by offline giants like MSN Money and Quicken.  With this view into consumers’ pocketbooks, Mint has an interesting perspective in what’s happening at the macro level.
3. Perry Blacher, CEO/Founder, Covestor: Covestor is the leading portfolio sharing service where investors subject their trading activity to an audit as a check for authenticity.  In the future, I expect Covestor-like communities to be a leading channel for smaller asset managers to market themselves and their strategies to willing investors.  Covestor is syndicating some of its participants’ trading logs for publication on TheStreet.com, bringing this model more into the mainstream.
4. Felix Salmon, Reporter, Portfolio.com: How is it possible for someone to write so much content that’s always good?  Salmon is seemingly ubiquitous these days and from my perch, seems to have found his voice and sway during the financial meltdown.  Salmon is a big proponent of the financial blogosphere and has used his mouthpiece to shine a lot of light on some great new econobloggers.
   
5. Darrell Heaps, CEO/Founder, Q4 Web Systems: Q4 has built an enterprise level content management system (CMS) used by publicly traded firms to communicate their financials.  Think of it as WordPress for compliance-focused corporations.  As an SaaS application, it’s pay as you go and accesible over the Web.
6. David Jackson, CEO/Founder, SeekingAlpha: David was very early with financial blog content aggregation.  The money quote: “We’ve basically taken a whole investment bank research department and turned it on its head.”  SeekingAlpha has given a voice to financial bloggers, both small and large and given its landmark deal with Yahoo Finance, took financial blogging into the mainstream.
   
7. Paul Kedrosky, Speaker/Analyst/Investor, Infectious Greed: Dr. Kedrosky is everywhere you want him to be these days talking about the markets and the systems that power them.
8. Dominic Jones, Principal, Clarity! Communications: Dominic has been extolling the virtues of adopting new technologies and social media for corporations and the investor relations professionals who represent them.
9. Roger Ehrenberg, Analyst/Investor, Information Arbitrage: Ehrenberg’s backround as a derivatives trader/salesmen/general Wall Street guy enables him to take an inside look into what’s unfolding currently in the financial world.  Ehrenberg is also a seed investor and gets an up-close view on new ideas/products coming online in the investing space.  He was an investor in the well-documented flameout of Monitor 110, a highly-touted next generation research platform and has helped launch StockTwits.
   
10. Barry Ritholtz, Analyst/Founder, The Big Picture: Ritholtz’s popularity has continued to rise as the investing public’s demand for strong opinion has increased.  Barry scours financial data and info on alert for any BS.  There is also a premium subscription product Ritholtz’s sells to leverage his research.
    
11. Planet Money, Multiple Contributors, NPR Show/Podcast: As a professional, I find Planet Money’s daily podcasts entertaining and enlightening.  Designed to help non pros make sense of financial news, the programs contain great interviews, explain leading indicators, and help everyone better understand the tumultuous financial seas around us.
    

Think someone else belongs on this list?  Let me know in the comments or email me at zack.miller @ gmail.com

Photo credit: Wikimedia Commons

This post appeared recently on IRWebReport as part of a guest contributor series I’ve been working on.  I thought it was a good overview and appropriate here for NewRules.

Dominic Jones is really a thought leader in his field and is really ramming it home on his analysis of how social media is impacting investor relations and what firms should do about it.  Check out the site and subscribe here.

THE recent emergence of online investor communities that are registered as investment advisers with the US Securities and Exchange Commission is producing a new brand of influencer that investor relations professionals need to pay attention to because they could challenge traditional Wall Street analysts in shaping investor opinions.

In my last post, How new finance websites affect investor relations, I detailed several strong trends that are changing the way investors make investment decisions. These evolutionary changes will affect the way investor relations is carried out and will define future criteria for success in the IR field.

Driven by a move to truly fair disclosure, mass adoption of social media like Facebook and Twitter, and the proliferation of financial content written by professional bloggers, we’re seeing entirely new practices emerge for making investment decisions.  One of the more important game-changers for the IR field is the rise of the expert investment community.

What are expert investment communities?

Expert investment communities are affinity groups of successful investors who create and share their analysis of the markets and stocks within a social network. These types of groups used to exist offline in the forms of neighborhood or office investment clubs.

But with the advent of social networking tools, global online communities are sprouting up, bringing with them experts with deep knowledge and influence in specific sectors, trading strategies, individual companies, and geographies.

Typically, expert communities work like this:

• Investors sign up at sites like Covestor, Vestopia and Cake Financial and are required to link up their online community accounts to their actual investment accounts;
• The investors’ recommendations to buy or sell stocks are verified against real trades in their brokerage accounts;
• Investors are encouraged to write about their trades, explaining the strategy backing each move;
• Top performers in the online community across different strategies and risk profiles are ranked on a variety of criteria; and,
• Other investors can peer into each others’ activities — learning, interacting, and bettering their own investment processes.

This trend is one worth watching.  While we’re still in the early adoption phase of growth, firms like Covestor have tens of thousands of subscribers, which is more than 50 or 100 times as many clients that many money managers work with at various professional firms around the world. This amounts to many billions of dollars in accounts being tracked.

While this is just a small piece of all assets under management globally, expect these numbers to grow. And as the competition for assets continues among asset managers, expect some larger investors to bring their assets under the community umbrella for tracking.

Investor relations professionals should not make the mistake of dismissing these communities as just another form of stock message board. What distinguishes these sites is that are inherently more trustworthy and transparent since they plug into members’ actual investment accounts to monitor the success of their investing.

In addition, while the communities are comprised of professional investors and arm-chair analysts alike, the sites continuously raise the bar on participation because they layer performance on top of all opinions generated in their sites.

Which are the major new investment community sites?

Covestor: Think of Covestor as the eBay of expert investing communities. Anyone can set up an account, hook it up to an investment account and begin trading and writing. Top performers typically significantly outperform stock indices, even if it’s just over the short term. While investors’ trades get logged, so too are their trading journals. Investors are encouraged to write about their portfolios and their trades. The whole point here is to provide a platform that verifies actual performance and identifies outperformers.

Cake Financial: A sort of different animal than Covestor, Cake Financial has tracked over 1 million client transactions. Rather than creating a playing field for investors to compete, Cake aims to help individuals make better sense of their portfolios and the performance of their investments. While top investors do get bubbled to the top, Cake also takes a horizontal view of its participants and produces community-wide statistics as well (I will write about this in a future post). When investors research an individual stock, Cake provides the community view of that security as a benchmark.

kaChing: Recently launched, this site has been the most active financial applications in the Facebook community. Unlike Cake and Covestor, kaChing has lowered the participation bar by allowing everyone to participate without linking in real trading dollars. It uses virtual investment dollars. However, individuals managing their own portfolios can pay a subscription fee to kaChing to mirror a particular community member’s portfolio. This incentivizes vast participation in the kaChing community of portfolio managers, both professional and amateur. According to TechCrunch, “of the 350,000 portfolios on kaChing, 1,500 have actually generated positive returns over the past seven months.”

Investing community sites, like Covestor above, audit real trading activity.  In turn, users can pay Covestor to receive real-time updates from other users they wish to follow.

How are investors using these sites?

The trend is for these sites to register to become licensed investment advisors and investors using these systems will be able to choose to either pay to follow specific members’ moves, like subscribing to a premium investment newsletter, or the investor can open an account with these sites and turn their portfolios over to the portfolio managers participating on these sites.

Once the regulatory hurdles are behind them, these expert investing communities will act as a clearinghouse of sorts for both well-known and undiscovered asset management talent. As the financial turmoil works its way through the industry and assets become harder to attract, look for these sites to grow with even more raw and mature talent.

Some portfolio managers have told me as well that they are using these sites for idea generation and to peer into what their competitors are doing.  This voyeurism will continue to drive more professionals looking for good ideas to the sites.

How IR can prepare and respond to this trend

Embrace social media: With significant trend wind behind these expert communities’ backs, these early successes promise more significant adoption in the future.  IR professionals need to understand these communities work, how investors are using them, and how their usage leads to making investment decisions.  Social media is a double-edged sword for investor relations.  The central locus of contact with a select group of asset managers has become much more diffuse.  Professionals who know how the investment landscape has changed and how to use it to their advantage will find opportunities with social media to create very focused and targeted financial communications.  Keep in mind these are not just geeky daytraders who are populating these communities — professional money managers are participating alongside armchair analysts.  IR needs to ensure that their online disclosure information is in a format that yields to the needs of investors who likely are basing the vast majority of their research on online resources.

Encourage long tail stock ownership: While targeting institutional investors is still a powerful primary strategy to make an impact in IR, these expert communities are providing a tremendous opportunity for investor relations in that all of a sudden, there are entire communities open to finding good, well-reasoned investment ideas.  The long-cycle process of convincing a large fund to invest can be supplanted with a newer model of convincing numerous smaller investors of an opportunity.  Because these sites operate via social networking technologies, if one influential investor decides to invest, there can be viral ripple effects throughout a broader base of investors.  IR can focus on connecting with top performers or influential figures within these expert communities to spread the word and diversify the investor base.

Market research: Because traders in these communities are encouraged to write about their trading, there is a tremendous amount of opinion to be mined within their web pages.  Understanding the reason behind the investment is paramount to modern IR professionals.  Instead of getting some polite niceties kicked back at you during a roadshow or from an expensive investor perceptions audit with professional money managers, all walls come down to give you and unfiltered view of why investors are choosing to pull the trigger on certain stocks.  This treasure-trove of information should help to make your communications sharper and more targeted.

Here is a list of 5 services I either discovered or start using this year and that I wish I had invented or been a part of their founding team:

1. The Hype Machine: Music blog are the best venue to discover new music. Hypem aggregates those blogs, plays you the music they suggest and plays around with the gathered data in useful ways. Their biz model is pretty straight forward: they charge a referral fee for suggesting you new music (the radio industry should take note). Why I like it: simple, game changing and clear monetization strategy. My suggestions for 2009: FB app/ FB connect.
2. Rescue Time: Tracks you activity at the desktop and on the web and seemingly categorizes the sites and applications to brake down activities into core tasks (e.g.; communications, social networks, news, design, programming, etc).  Is very difficult to assess the actual productivity of multitasking: work is spread and goals are approached in small increments of effort and attention. Is crucial to assess how much time is being wasted. Rescue Time also provides several ways to organize and play around with the data to optimize your use of time. ). Why I like it: simple and useful tool to combat Information Overload  which is  the main backslash of the current state of technology and the “now” culture . My suggestions for 2009: Share data on top of social graph (compare computer/desktop usage with other users like me –my age, my profession, etc-) and integrate with mobile (we spent significant amount of time talking, texting and browsing on the mobile).
3. Dropbox: Share desktop files. Why I like it: It works flawlessly and  it takes away two or three clicks from sharing files via email or IM. Also, is idiot proof. Finally, it also serves as a nice file backup solution. My suggestions for 2009: Log of document modifications.
4. Evernote: Take notes, snippets and even pictures of thing you write or see and store them and organize them on Evernote. “Remember everything” is their motto. An interesting article (or as section of it) online, something you read on a book or a note taken at the back of a napkin can all be centralized and organized at evernote. Their image to text conversion technology is beyond impressive. It is in effect an alternative memory. Why I like it: Kick ass image to text technology, fluid multi platform integration (including mobile) and perhaps the best solution out there to expand the otherwise information overloaded clutter memory. My suggestions for 2009: Generate auto tags from the text, semantically organize those tags and build a new Wikipedia from meaningful sections of content and quotes (on the other hand…I might just do that myself )
5. Covestor: Share your stock market trades. As simple as that but it makes all the sense in the world.  I just  started using it but I  have been looking at the site for a long long time. Other services like Mint.com and other personal finance solutions where you get not only to save your data but also compare it are of great value because they can help you make more money and spend less. They teach you something.   Why I like it: Gives you access to smarter investors and hence it helps you make money. My suggestions for 2009: Not a long time  user so can really comment on it. Perhaps there is a place here to make a note for myself and remind me to start using it more in 2009.

There are two common threads on these companies: info aggregation and re distribution and information overload solutions. Also, they all have clean and easy to use UI.

This post appeared recently on IRWebReport as part of a guest contributor series I’ve been working on.  I thought it was a good overview and appropriate here for NewRules.

Dominic Jones is really a thought leader in his field and is really ramming it home on his analysis of how social media is impacting investor relations and what firms should do about it.  Check out the site and subscribe here.

AT New Rules of Investing, we analyze a new generation of investment sites changing the landscape of how investors consume financial content.  As investors encounter information from these new sources, it is affecting how they ultimately make investment decisions.

Combining social media, the proliferation of financial content written by professional bloggers, and the leveling of the playing field that Reg FD brought, IR professionals must concern themselves with understanding these new models and devise a strategy to address them as more and more investors turn away from consuming traditional investment media and turn to these new methods.

Before describing in detail the changes taking place in online finance, it’s important to look at what’s driving these changes and how they have affected traditional channels of financial content:

• Costs of web publishing now equal zero given free blog hosting technologies and this has spawned millions of smart people writing about stocks via blogs.  Gartner forecasts that at the end of 2007, the number of writers who maintain a personal Web site reached 100 million.  Others think that if you add in the huge growth in popularity of social networks, their own form of blogging, the numbers get much bigger.
• Mainstay sites like Yahoo Finance and Marketwatch have taken notice and are expanding into these spaces with 2nd generation message boards, collective intelligence (crowd sourcing), aggregation of blogs, and advanced stock screening technologies.

Expert investment communities

What is it: Expert investment communities are affinity groups of successful investors creating and sharing their analysis of the markets and stocks within a social networking framework.

What’s new: What distinguishes these sites from the activity found on message boards is that the sites actually plug into its members own investment accounts to monitor the success of their investing.  Comprised of professional investors and arm-chair analysts alike, sites like Covestor and Vestopia continuously raise the bar on participation in these communities because they layer performance on top of all opinions generated in their sites.

How investors are using these sites: The trend is for these sites to register to become licensed investment advisors and investors using these systems can choose to either pay to follow specific members’ moves or the investor can open an account with these sites and turn their portfolios over to the portfolio managers participating on these sites. Covestor has recently signed a deal with TheStreet.com to syndicate some of the content created on Covestor onto TheStreet.com’s website.  Investors are ranked brutally by their performance and risk rankings. One such site, Cake Financial, has tracked over 1 million transactions on its platform.

What it means for IR: If investors continue to move towards basing decisions off the moves of experts, expert opinion gains more and more credibility. As consumer products marketers have learned to tap into influential online communities, IR professionals need to expand roadshows (both virtual and real) to include getting exposure to these experts.  These are the new influencers.  Targeting these communities for influencers may be a more powerful way in the future for getting the work out.

Piggybacking the pros

What is it: Certain web businesses like StockPickr are constantly monitoring SEC filings and publish 13D/13F findings to their own websites, creating guru portfolios around hedge funds and mutual funds for investors to piggyback on for investment ideas.

What’s new: While the SEC has published financial filings for public consumption for years via its EDGAR system, the interface is designed for data mining, not for idea generation or stock discovery. The piggybacking systems have done the hard work for investors by data mining and arranged the content around the moves of guru investors like Warren Buffet and Carl Icahn.

How investors are using these sites: Investors can literally drill-down into SAC Capital’s Eddie Lambert’s portfolio, monitor his moves in and out of particular companies and use this information as an input into stock purchase decisions. Investors are compiling “all-star” portfolios by picking top picks from a multiple of guru portfolios.

What it means for IR: IR professionals need to gain awareness that investors are creating portfolios based on piggybacking professional portfolios. People in IR should spend the time understanding who owns their firm’s stock publicly and use that information to gain credibility for retail investors. Hedge fund managers are notorious piggybackers as well.

Investment screening 2.0

What is it: Combining technology and computer algorithms, investors can utilize new stock screening systems to approximate the same strategies employed by guru investors when sizing up prospective investments.

What’s new: Many professional investors have written and spoken about the criteria they use in making investment decisions. These criteria are beginning to be computerized and made available to individual investors looking to employ these same strategies.

How investors are using these sites: Validea is a pioneer in this field and publishes premium content to its website and via a newsletter and provides portfolio management services as well. Validea has created computer algorithms to approximate strategies employed by investor heavyweights like Ken Fisher and Peter Lynch and then scans through thousands of stocks to find those companies that would satisfy these pros’ investment criteria.

What it means for IR: Screening technologies are employed by professional investors and are now being filtered down to the retail level. While certain investors are driven by models, the most important part for those in IR is to get their firms into the traditional funnel that begins the stock screen.  Once in the running, make yourself available via a wide variety of media to flesh out the story to investors.

Long tail investment opinion

What is it: As publishing costs have been pushed to zero, amateurs and professionals alike are using blogs to help promote themselves and their businesses.  Employing a traditional editorial filter, aggregators like SeekingAlpha have emerged and collect thousands of the various financial blog postings into a standardized platform.

What’s new: Just a few years ago, investors had just a handful of traditional media sites to check for financial news and commentary.  Employing professional journalists, the focus was on publishing accurate news. Given the cost of publication, sites like Yahoo and Marketwatch focused on just a few hundred of the largest stocks.  The emergence of financial blogging has encouraged bloggers to specialize in analyzing specific fields that don’t exist as such in traditional equity research teams (homeland security, consumer electronics), specific companies (eBay, Apple), and specific geographies.  We’ve essentially moved from the fat head to the long tail of financial content.

How investors are using these sites: SeekingAlpha came out of nowhere and has become one of the largest financial websites online.  With over one hundred daily articles and thousands of smart analysts, SeekingAlpha and its like are convincing investors to turn to these sites to find opinionated commentary (not news).  SeekingAlpha has further democratized financial content by freely diseminating quarterly earnings call transcripts to its community.  See the ranking graph to the right to see how SeekingAlpha is gaining on sites like TheStreet.com and Forbes.com.

What it means for IR: Like expert investment opinion, a whole new class of influencers has emerged with vast reach over a pretty sticky subscriber base.  As IR professionals have traditionally pitched editors of influential subscription research products, bloggers are usurping the power of these longstanding products. In fact, many of the top Forbes newsletter publishers are turning to SeekingAlpha as a marketing channel. Blog aggregators like SeekingAlpha don’t go away as they become even more important as more blogs are published. Leading IR pros are already turning to the aggregators as this content is showing up on Yahoo Finance, Marketwatch, E*trade, and Reuters. There will be tremendous opportunities for next generation IR to gain exposure via thoughtful products like sponsored interviews and surgically-targeted advertising.

Crowd sourcing

What is it: While expert communities are designed to create a hierarchy in performance to bubble up true investment experts, crowd sourcing technologies are based on research that says that the aggregate opinion of the crowd has statistical significance for investors.

What’s new: The Internet has enabled the creation of affinity investment communities with requisite new tools to extract and monitor sentiment change within the community.

How investors are using these sites: Still early in their maturation process, investors are going to sites like piqqem and Marketwatch’s Community site to see what the top and lowest rated stocks are as well as searching for the opinion on specific stocks they are interested in. So far, crowdsourcing should be seen as just another input into investment decisions.

What it means for IR: As the opinion of the crowd carries more sway in overall investment decision making, IR pros will need to focus their attention on influencing the view of the crowd. This stands in stark contrast to many IR activities today that focus on garnering the attention of just a limited few investors.

Takeaways for the IR field

I’ve tried to briefly explain a few underpinnings of the recent changes in the investment research process. New Internet technologies, combined with the current environment of consolidation within the equity research community, are empowering investors to consume a lot more information about stocks, albeit via different channels than what we’ve used traditionally. IR professionals must recognize that the early adopters of these technologies and platforms will be followed by critical mass. The after-effects of this evolutionary process entails a shift of power to new influential individuals and online communities. Bloggers and other experts have the ability to hold sway literally over millions of readers. Professionals who understand the new rules of investing and structure their work accordingly have the ability to harness the vast power of these new technologies and platforms.

TechCrunch has a great writeup today abou upstart, kaChing, the most popular investment app currently on Facebook.  It’s a pretty extensive writeup so I don’t have a lot to add here.

I would say that unlike Covestor or Vestopia/PersonalRIA, kaChing doesn’t require real money to be put to work behind the portfolios.  So, when investors choose stocks short and long, they are doing it with play money.  This definitely lowers the bar for participation.  I’ve seen literature (gotta find a link to it) that says that for crowdsourcing/wisdom of the crowds in the investment field, real money doesn’t tip the scales to the community’s predictiveness towards price movement. I’m not sure that’s the case in an expert community which is geared towards bubbling up exceptionally good managers.  Having been an analyst at a hedge fund, I can say that we certainly behave differently when there is real money on the line (especially, our own and not OPM) than when it’s fictitious.  Just a point.

It looks like kaChing has the investor base and user base to leverage into becoming a formidable player in the field and helping to prevent future Madoff-like scandals by creating a whole-new level of visibility into fund managers’ workings.  It will be interesting to see how kaChing and Covestor, both predicated on creating open systems, compete against a PersonalRIA/Vestopia which limit the participation to professionals on the portfolio side (while anyone can be a user).

All these systems will need more data and history (most investors look at 1,3,5 years history when chosing a mutual fund) to begin to chip away at the traditional marketing methods of mutual funds.

Don’t forget to sign up to subscribe to New Rules of Investing today.

There is not a soul in the world that I live in that has not been touched somehow by the Madoff scandal.  Read Paul Kedrosky’s take on the “fraud of frauds“.  He’s got a great read on the whole thing.

There are so many questions still left unanswered but I’d like to discuss what to do going forward.  And I don’t mean from a regulatory point of view (for gosh sakes, the SEC didn’t find anything on the guy and even considered using him to help craft rules to govern hedge fund oversight.  The irony!).  I’d like to talk about an existing platform (and others like it) that would have enabled any daytrader in his pajamas to sniff out ol’ Bernie.

Review: What are expert investment communities

We’ve written extensively about expert investment communities.   Expert investment communities are affinity groups of successful investors creating and sharing their analysis of the markets and stocks within a social networking framework.  These types of groups used to exist offline in the forms of neighborhood or office investment clubs.  With the advent of social networking tools, entire communities are sprouting up online and experts bubbled to the top with knowledge and influence in specific sectors, trading strategies, individual companies, and geographies.

Expert communities work like this:

• Investors sign up at sites like Covestor, Vestopia and Cake Financial and are required to link up their online accounts to their actual investment accounts
• Recommendations to buy or sell stocks are backed by real trades in the investor’s account
• Investors are encouraged to write about their trades, explaining the strategy backing each move
• Top performers in different strategies and with different risk profiles and participants are ranked on a variety of factors
• Other investors can peer into each others’ activities — learning, interacting, and bettering their own investment processes

How Covestor could prevent $50B frauds

I wrote yesterday how Timothy Sykes’ business is booming. One of the way’s he’s marketed himself (and yes, does he love marketing himself) is via his performance in Covestor, the leading investment community, tracking thousands of participants and multiple billions of dollars of portfolios.  So, Tim has taken his trading god persona and verified his performance on Covestor (check it out — he’s up 5,413% annualized since inception by shorting penny stocks).  Think of it as the Good Housekeeping seal of approval.  No more boasting, no more locker room conquest stories.  Everyone can see what an investor has done and the trades it.

With Covestor, what can Timothy Sykes, Bernie Madoff, Jim Cramer, et al not do?  Fudge the numbers.  Covestor provides a level of transparency into asset managers not seen before.  While many funds and hedgies may refuse to join to avoid giving away the secret sauce, at some point, platforms like Covestor may just become the de facto, pay-to-play standard.

It may be too late for Bernie and those numerous investors burned by him but it may just save the industry.

Say what you want, but Timothy Sykes is a master marketer.  The young upstart money manager and stock analyst is seemingly ubiquitous these days.  He’s cocky – sure, he’s pretty full of himself.  But there is so much to learn from Timothy, it’s worth spending some time to understand how a master builds his investment newsletter business.  I say “business” because he’s not only publishing research that investors are paying for but he’s created more revenue streams based on his reputation and performance shorting penny stocks.

Defining the core offering and build the brand

While Mr Sykes has broadened his reach into new revenue streams, he stays focused on his core offering: himself.  Timothy has a knack at picking penny stocks that go down and profiting from them.  He’s parlayed his money-making ability into a persona that transcends selling an investment newsletter.  He’s become the go-to guy for investors looking to make profitable trades.  In good markets and bad, Timothy is riding high in roiling markets and taking his game to a new level.  No matter what, Tim is building out his most valuable asset, himself.

Spreading the theme

After establishing his penny stock short selling theme (see our article on how to pick a theme), Tim has established himself as a trading god persona.  He’s capitalizing on his success via participation in Covestor, the leading expert investment community.  He’s been a top investor there in 2008 and if this works as it’s supposed to, Tim stands to gain from additional subscription revenues as well as the potential to manage additional assets.

Tim is on Twitter, Facebook, and YouTube.  His presence can be felt in the many channels that I interact with on a daily basis.  I can’t turn (virtually) without seeing how well Tim is performing this year.  It makes me not only want to subscribe to his stock newsletter but need to subscribe to his newsletter.

Expand laterally with products

Old school newsletters were pretty much basic blocking and tackling.  Marketing’s goal was to sell more stock newsletters.  Some broader thinking newsletter publishers also created asset management businesses to capture more business (see Al Frank Asset Management/Prudent Speculator).

Once a solid value proposition has been established (Tim is the bomb in shorting penny stocks and can seemingly do it under many different circumstances), Tim blows it out in terms of productizing his brand.  In his store, he’s got training DVDs, stock alerts (his version of  a newsletter), seminars and personal training sessions.  The descriptions, high-res photos and the overall feeling that I can make money with some of this stuff, shows that Tim Sykes has got it going on in terms of his newsletter business.

I pulled together a summary of what I think makes Timothy Sykes so successful.

Tim’s 4 Rules for Success in Building a Investment Newsletter Business (according to New Rules of Investing)

1. Have a strong value proposition (short selling penny stocks)
2. Explain the value proposition (How can I make money from it)
3. Explain it again and everywhere (Twitter, Facebook, etc.)
4. Blow it out via great packaging (training videos, alerts, seminars, etc.)

Whether you’re at idea stage with your fianncial newsletter or already publishing, it’s important to look around and learn from those who are doing some things right.  Even if you can’t short penny stocks (who does that?? as well as Timothy Sykes can, you can certainly learn from what he’s done with his business.

For more tips, read more about how to start up an investment newsletter and check out our page of all the newsletter resources you’ll need to get your newsletter off the ground and making some dough.

Don’t forget to sign up to subscribe to New Rules of Investing today.

We’ve spent time exploring expert investing communities on the site recently.  Activity in these communities contribute to certain experts bubbling up to the top, thereby revealing and tracking those actions of a select few emergent experts.

We now turn our attention to sort of the other side of the coin: crowd sourcing for stock picks.  Crowd sourcing or alternatively, the wisdom of the crowds, dictates that there is certain value in the aggregate opinion of the crowd and that opinion is actionable for investors, in our case.

We’ve had the opportunity to discuss this model with Stephanie Gerson, Social Media Strategist for a recently launched site called Piqqem, focused on harnessing crowd sourcing specifically aimed at publicly traded stocks.

What’s the elevator pitch for Piqqem?
SG: Piqqem is a new way to predict the movement of stocks.  It’s new because it leverages the wisdom of crowds.  Specifically, Piqqem captures users’ stock predictions, analyzes them, and then displays aggregate results back to the users, enabling them to see what ‘the crowd’ thinks about particular stocks.  As opposed to other social investing sites that try to find the best pickers in the crowd, Piqqem aggregates the opinion of the crowd, therefore capturing and displaying the stock market wisdom of crowds.  Please see the attached summary for a longer elevator ride.

How is this different than other expert communities like CAPS and Covestor?
SG iqqem differs from other sites in that we believe the crowd has more knowledge than any single individual. Instead of looking for the best individual stock picker and weighting votes based on investment ability, which is what CAPS and other social investing sites do, we look at aggregate opinion and allow everyone to vote as much as they want. This orientation towards crowd wisdom manifests itself in our crowd indicators, such as top rated stocks, most active stocks, stocks with most rising sentiment, and stocks with most falling sentiment.

OK, I understand the difference between locating and following individual experts. Piqqem focuses on community sentiment.  How is this useful for investors?  Are you going to put metrics behind the indicators, to give depth to them beyond just ‘positive’ or ‘negative’?
SG:Three answers:
1.  Piqqem is useful for investors as a source of financial information, and a unique one at that, because it leverages the wisdom of crowds.  That said, we’re not suggesting that Piqqem is a silver bullet, but that it should be used in conjunction with other sources – such as expert analysis, the market, and yes, other social investing sites.

2.  We have Wisdom lists of crowd indicators, which include Top Rated (‘positive’) and Lowest Rated (‘negative’), but also other metrics such as Rising (equities with the most improving sentiment) and Polarizing (equities the crowd agrees the least on).

3.  Regarding depth, users can also make User Takes (comments on their predictions) and Price Piqqs (predictions of stock prices at future dates, which have more ‘depth’ than ‘positive’ or ‘negative’ arrows).

How big does the Piqqem community have to be to register statistical significance in the rating system?
SG: We believe that a relatively small number of people can spot a trend in some stocks – perhaps as few as a few hundred active users for certain stocks.  Obviously, the more the better though

You’ve assembled an impressive roster of talent for a young company.  How are you planning on leveraging this talent?
SG: Yes, we are very proud of our investor roster.  They are a diverse set of individuals and they each help us in their own unique way.

What’s the next step for Piqqem?
SG: Our current focus is to grow our user base.  However, like most technology companies our engineers continue to work on many interesting innovations that you will see released in the not too distant future.  Unfortunately, we can’t pre-announce those features just yet.

Thanks, Stephanie.

Most people who trade relatively frequently don’t realize huge profits.  Their losses typically match their gains, cancelling out much of their activity and racking up transaction costs.

Others, particularly whom I like to refer to as guru investors, just print money.

Expert communities are powerful but only show part of the story

While this year’s market has been tough on pretty much anyone, it’s important to keep some perspective.  Investors like Eddie Lampert, George Soros, Ken Griffen — these guys have posted huge results for years.  We’ve spent a lot of time focused on expert investment communities made up of smart people like you and me.  Combining both financial pros and amateurs, sites like Covestor provide a framework for community validation, participation, peering.

• Validation: good expert investment communities require hooks into real trading accounts so that all trades are logged and verified.  This means that participants back their picks up with their own money and that stats and performance are objective and not the “I-caught-a-fish-this-big”-type of comments most traders use in their discussions with their peers.

• Participation: While some expert investment community sites limit participation in the community to vetted professionals, others have pretty open standards for participation.  These sites are part Yahoo Finance, part E*Trade, and part Facebook.

• Peering: Most general social networking/community sites are structured as inverted pyramids.  Only a small percentage of users actually generate content while the vast majority likes to watch what’s going on.  This spectating doesn’t necessarily mean that these users are passive — statistics I’ve received from sites like Vestopia show that these passive users actually are compelled to take action offsite with increased trading activity.

The point here is that the cream rises to the top.  Your neighbor with an internet hookup and a subscription to TheStreet.com can have an amazing trading record vis-a-vis his peers.  But, he’s managing money in the thousands of dollars.  What about the big boy hedge fund/mutual investors managing millions or billions?  They’re not participating in these expert communities (at least not yet).

Piggyback the big boys to profit

While many investment managers ultimately fail to beat the averages over the long term, some consistently do, while others have periods of strong outperformance only to lose their hot hand at some point.

With a combination of technology, regulation, and new business models, investors can follow almost every move of these large players and invest alongside them along the way.  In fact, investors can access all of this information for free.

The result?  An investor can mimic the performance of some of the best money managers out there or decide to put together an all-star portfolio that combines specific stock picks from a number of these guru investors.

Our next post will discuss Rule #2 of our New Rules of Investing and how to put together a portfolio by piggybacking world-renowned investors like Warren Buffett, Carl Icahn and Mohnish Pabrai.

Make sure you check out the second part of this series, How to piggyback guru investors, which explains in easy steps how to monitor professional investors’ portfolios.

Subscribe to New Rules of Investing to learn more about piggybacking guru investors and other ways to profit via Investing 2.0.

Interesting conversation going on at the Future of Business Media (FOBM) going on this week.  Today’s event focuses on the media’s role in the financial meltdown we find ourselves in today.  In a world of 24-7 financial news, the media has gone from reporting the news from a birds-eye view of the events to actually morphing into one of the participants.  In fact, I’d say the media industry is a market marker in attention liquidity, a force on the demand creation side of the market.

I’m not sure the purists in the media understand this yet (or at least, will admit to it).

“This is not a press-driven event. These guys are doing a pretty responsible job, all things considered,” said New York Times (NYSE: NYT) Talking Business columnist Joe Nocera. “Things have improved considerably since the days of the internet bubble, when everyone was saying ‘rah-rah-rah’ – there’s a lot less ‘rah-rah-rah’ now.”

Hard to be a cheerleader when the markets have moved down 40% in 1 year but that’s not the point.  The media didn’t cause the structural problems that the market is reeling from but it does create a picture of the status of events through which people view things.  I suggest waking up early and refreshing MarketWatch’s homepage every 30 minutes until the market opens.  Talk about manic-depressive.  Headlines accentuate moves in the market.

Which brings me to the nature of my point.  As social investing sites like Covestor or StockTwits become more frequently implemented in the investment decision making process, sentiment on these sites will also contribute to influencing movements in stocks.  As these sites become more specialized, sector experts emerge from within the participants, and investment sectors ultimately become narrower, participants in expert communities garner more and more influence.  In fact, because many of the long-tail stocks these sites address are small caps with very little media and analyst converage, expert communities are essentially providing the attention liquidity to these companies.  With this knowledge comes influence.

]]> http://newrulesofinvesting.com/?p=231 Tue, 07 Oct 2008 09:58:49 +0000 Zack Miller http://newrulesofinvesting.com/?p=231

While it feels like investors, companies and analysts and IR pros are so shell-shocked with our current state of affairs that everyone seems to be sitting on their hands, there are those who have a plan.  Like every market-moving event, there are opportunities to be made.  Those banks like JPMorgan are taking the financial meltdown as an opportunity to scoop up competitors, their assets and other struggling financial institutions (Bear Stearns, WaMu).

Uncertainty requires us to act conservatively and protect ourselves, trading partners and customers, but for those cash-rich firms or visionaries who can see through the panic, we’ll see some bold moves throughout the financial services value chain.

I recently posted on how consolidation will affect the investment research industry and I think we’re just at the beginning of a long process of change (both good and bad) for investors, the companies they invest in, and the financial services firm who cover them with research.  Look to expert communities like Covestor and MarketGuru to play a key role in how retail (and institutional) investors do their research.

I was just reading 10 ideas on doing investor relations in a bear market.  The blog’s writer, Dick Johnson, has more than 30 years of experience which means he’s seen both sides of the cycle.  His cool-headed, nuts-and-bolts approach dictates for IR professionals to be proactive in this market.

Dick prods IR pros to be visible even when everyone is scared to death.  At some point the markets will turn around.  Dick also encourages telling the long-term story.  While most of us are swayed in the ins-and-outs of daily trading, the long term story is what should matter and IR pros should frame their pitch with the end in mind.

He ends his litany of 10 suggestions with recommending focusing on the business, not the stock price.  While investors may worry about their own current performance, the most important thing is “where the business stands today — and what the management is doing for the future.”

I do believe we’ll continue to see a convergence of research/IR/PR functions.  What most companies require is someone who can tell the story and get the word out and attract investor attention.  The story and performance must close the sale.  What most investors need is quality research on a broad swath of companies and industries told in a jargon-free way that tells what can go right and what can go wrong.  The rest, as they say, is just commentary.

(Hat tip: IR Web Report)

We are all aware of blogs, RSS, social bookmarking and social networking sites. This is all part of Web 2.0

This has now been applied to stock market investing by Covestor.com

Covestor is a site that allows you to track the stock portfolios and trading strategies of successful stock market investors. You can compare how your stocks perform compared to other investors and funds.

Here are the Top Ten investors on the site as of October 1st:

1. TimothySykes
2. rglantz57
3. kusumo
4. tbohen
5. AdamN
6. Woodshedder
7. JohnCA
8. Mindzio
9. mtollefsen
10. YngvaiMalmsteve

The above list is from Stock Trading To Go – another site worth looking at if you would like to learn more about stock trading.

Covestor, a leading investment expert community site, announced yesterday that they have begun a program where Covestor members can write articles to appear on TheStreet.com site.  These articles, after passing through an editorial filter, will appear in The Street Picks section on the large financial media site.

In addition to expert content cross-posted to TheStreet’s site, Covestor has also begun bubbling up TheStreet’s content onto their own research and trading platform.

This is an interesting deal for a variety of reasons:

• Added reach for Covestor and its experts: Covestor is a community of experts which requires numerous, though not huge numbers, of people to participate by picking stocks and developing a track record on the platform.  Once the community is populated, the model requires lots of other to spectate on top of the activity occurring withing Covestor and a proportion of these spectators to perform revenue-producing activity, which will probably come in the form of subscription rates or investment management fees.

By cross-posting Covestor content onto large sites like TheStreet.com, Covestor now reaches millions of potential users of their service by showcasing their expertise, activity, and performance of their members.

• TheStreet.com inches closer to emulating an aggregator model: Like Yahoo Finance or SeekingAlpha, aggregators bring in big traffic by pulling together disparate information and content from various and varied sources.  TheStreet has always built its service offering around big names like Jim Cramer.  By opening up to an editorialized blog offering, like the one that will essentially emerge from Covestor, TheStreet.com will now immediately add a lot of different voices and content to their site, essentially making a step towards displaying the long tail of financial content.

Covestor, a leading investing expert community, recently announced a new feature enabling Twitter integration into its trading platform.  According to the company, “When you execute a trade with your broker you can now keep your followers on Twitter up to date, per the other members following you on Covestor.”

Because Covestor and other expert communities thrive not only on investment performance in terms of ranking experts but also incorporate the blogging of trades and the rationale behind them, the twitter will also include a link back to the Covestor site to link up readers with the expert’s trade blog.

Interesting little piece of functionality.  It got me thinking about how social networking tools can be further integrated into Covestor and other expert investing networks.  In addition to just announcing a trade to an expert’s followers, outside social networks can be co-opted into investing networks like Covestor in some of the following ways:

• extend reach: the scope and reach of some of these expert investment networks is pretty limited (although most of the larger networks like Covestor and Vestopia are syndicating their content using SeekingAlpha and TheStreet.com).  Using larger social networks like Facebook and Twitter allows the expert to broaden their exposure and further cement their reputation as an expert.
• fresh meat: expanding reach by co-opting external social networks provides stables and stables of potential new recruits to the investing expert communities. While we shouldn’t expect that everyone has the talent and time to participate in a community, certainly many wouldn’t mind spectating passively on the activity in these communities.
• analytical layer: Imagine an aggregator like SeekingAlpha integrating an analytical overlay onto some of the blogging going on on the site.  Now, in addition to well-reasoned and some prolific blogging, readers have a way to judge exactly how well these blog analysts are doing with their suggestions.   This would work on SA but also on TheStreet and it’s RealMoney section.
• cross-pollinating experts: this is very interesting to think about.  While an expert in Gerson Lehrman’s expert network may indeed be proven as an expert in investing in retail facilities in the Middle East, he doesn’t carry that same type of clout in a cooking community.  When social networks intertwine, we’ll end up seeing some type of expert status portability across communities — some of which will cary cache, while others not.  Look to see more narrowly defined expert communities in investing emerge out of sites like Covestor or MarketGuru.

Covestor says that it has some more Twitter integration coming up in the future, so keep your eyes out.

Received a mail from Covestor telling me I had reached the top of their rankings–a very pleasant surprise.

Out of the tens of thousands of investors, I have ended up number 18 on the top list by Sharpe ratio (a measure of risk adjusted returns.) Now admittedly I have only been sending Covestor data for a few months, but I’m pleased. By comparison, it isn’t bad but it is well below their number 1 player, Timothy Sykes.

This image shows my performance vs S&P 500.

All the better, I feel, since July was a super-sucky month for all types of assets. The Greenwich Global Hedge Fund Index was down -2.31%. The Ftse 100 was down 3.8% and the MSCI World Equity was down -2.53%. S&P 500 was down 0.84%

My tips for anyone in this choppy up-and-down market: use a cheap brokerage (like Thinkorswim), it encourages you to get out quickly since transaction costs are low. Understand technicals so you can time entry, because assets are bouncing around. Take your profits quickly and cut losses fast.

Kudos to my friend Perry for making Covestor as enticing as it is.

I’ve been mulling over the issue of describing risk in expert investment communities.  Part of the value proposition of the community concept is the clearinghouse-like pairing of “advisor” to “advisee”.  Users looking to tap expert advice in these expert networks need to be able to size up a potential advisor/guru on a variety of fronts for these communities to best work.  While there will always be fast money chasing the hot hands, longer terms investors do require a better fit when looking for an asset manage.

So, here are the 3 ways that expert communities can address risks for their community members:

• performance/suitability: while pure performance is actually an easy-ish thing to do, the hard part of measuring portfolios is the qualitative side of performance in terms of describing risk.  Here, metrics like Beta and Sharpe Ratio help to benchmark portfolios to a given standard measurement but the questions remains how to match up a given portfolio to a user’s own profile.  If I see that a top performing expert has a Sharpe Ratio of x, a Beta of Y, what does that mean for me?  Is it a match?  Or are we emphasizing different things?  While some communities have created basic tools for measuring risk, others have employed heavy-hitting academics in this field to best quantify/qualify risk.  It will be interesting to see how differing descriptions of performance and suitability contribute to the success of these communities.
• explanatory style: Here, sometimes the process is more important than the outcome.  I assume some users (myself included) are turning to tap the expertise in an expert network by following the investment process of the gurus.  They want to read their insights, understand better how and why an advisor decided to make a particular trade.  Although it may not be high-brow to admit this but for a lot of investors, the explanatory style of the person they choose to follow and what MarketGuru’s CEO calls “follower care” (the work an advisor puts in to continually guide his followers through the process) may be actually more important than investment returns (at least in the short term).
• lifestyle match: Barry Ritholtz addressed this in a piece he wrote for TheStreet.com 3 years ago but I think it’s good to rehash.  As he puts it, “…some investors undertake a trading regimen that requires far more time than they have available. “  Clearly here, it’s important that users/followers in communities like Vestopia or Covestor recognize the time requirements implicit in following different experts.  Some gurus are more buy-and-hold oriented while others are actually trading a lot.  One style is not necessarily better or worse — it’s just important that the style matches your own. As these communities roll out portfolio management tools that allow a user to automatically conduct trading based on their guru’s movements, this issue becomes mitigated.  Nevertheless, this is an important issue for participants.  From the other perspective, it’s also important as advisor/gurus market themselves accurately to help ensure a good match between styles — for best “follower care”.

We are still very early in the evolution of expert investing communities.  While firms like Marketocracy have been doing their thing for years, the recent startup environment and investments made in this space have contributed to a flurry of activity and with some extremely smart and enterprising founders addressing this space, I expect to see sea-change type activity in how investors invest over the next few years.  Exciting stuff.

Today’s post was previously posted on another site I run.  I’m consolidating my posts and anyways, it probably makes more sense contextually to be here.  This post was the product of some of my work with the Tech Dirt Insight Community.

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Using a similar framework to O’Reilly’s Web 2.0 definition, let’s first define what Mobile 2.0 is all about. Once we define what is is, we can discuss applications for social network over mobile.

Mobile 1.0 vs. Mobile 2.0
ringtones, ringbacks <—> Vringo (video caller ID)
reading <—> publishing/participating
pull <–> push
connected to PC environment <–> connected to my web environment
411 <–> Google411
GPS <–> Google Maps
p2p <–> p2community
Dodgeball <–> facebook, android
casual gaming <–> networked gaming

Social Networking’s Dirty Secret: Socially-accepted voyeurism
As Benchmark Capital’s Michael Eisenberg, is fond of saying: the secret to successful social networks is how well they leverage voyeurism. People have an innate need to see what others (especially people they know) are doing.

Facebook’s overwhelming success points to this. From a business user’s perspective, Facebook came out of nowhere and trounced LinkedIn . I have stopped paying for a LinkedIn subscription and migrated my network over to Facebook. I attribute this to one thing and one thing only: Facebook’s News Feed. There, I can see all the activity in my network and decide daily whether to participate in what’s going on around me. This has major privacy implications as I’ve written in another insight, but these will abate with time, much like In-Text Advertising has become (almost) entirely acceptable. Google’s Open Social platform will also publish such activity streams. As Dave McClure put it succinctly, “people who are going bananas over Beacon should understand that most people on Facebook are used to the default being opt-out (ie, lifestyle transparency), not opt-in (selective sharing).” This is exactly why we’ve signed up for Facebook.

Covestor and its brethren allow me to subscribe to others’ trading portfolios, allowing me a clear view into their decision making process and their performance. This works extremely well because there are large financial incentives involved.

Spock allows people to track what friends and colleagues are doing online. It’s what we care about. Effective social networking tools are not just about providing cool javascript tools, it’s about lifestyle transparency. An effective mobile version will need a way to address this.

Virality: Doing the heavy lifting for users
Marketers focus on how viral applications are the holy grail for their job function. The truth is for a social network to be accessible to most users, it needs to make my job of recruiting/connecting with my connections easy and palatable. Facebook is a no-brainer. There is critical mass to the user base and now, users outside the network are beginning to feel left out, compelling them to join. But what about smaller, more niche-oriented networks?

Meetup is an amazing network. I recently ran an investment seminar on hedging exposure to the US dollar for American expatriates living abroad. Within minutes of setting up on Meetup, I had over 15 people sign up for my group and RSVP! Meetup has essentially created a network of affinity groups that share nothing other than certain predilections and the desire to meet in person. Once I’ve joined a group, I’m introduced gently to 1) other groups in my geographic area that 2) share my interests. I didn’t need to ’spam’ my address book (although that functionality exists). Meetup worked for me because it allowed me to connect with people with whom I share interests immediately, without having to work at it. I’m hooked now.

Collective Wisdom: Harnessing the Wisdom of the Crowds
Social networks allows a user to tap into he collective brain of his/her network. Or as Tim Oreilly puts it, “If an essential part of Web 2.0 is harnessing collective intelligence, turning the web into a kind of global brain, the blogosphere is the equivalent of constant mental chatter in the forebrain, the voice we hear in all of our heads. It may not reflect the deep structure of the brain, which is often unconscious, but is instead the equivalent of conscious thought. And as a reflection of conscious thought and attention, the blogosphere has begun to have a powerful effect.”

Techdirt’s Insight Community is a great example of one of the ways for networks to tap into the collective experience/knowledge of its members. This is a pretty explicit example but social networks, if used and built effectively, make every node that much more intelligent and knowledgable. The collective intelligence acts as a type of filter and this overarching knowledge helps to make sense of all the noise in the world.

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So, let’s look at ways of translating/porting these salient features of a web-based social network to the hardware/usage limitations of the mobile device.

Voyeurism
The current generation of mobile devices, including Blackberry-type PDAs, are still used primarily for reading, not writing. So whatever level of voyeurism exists on mobile networks, it’s going to focus on phone activity, not publishing activity.

Call log activity: sharing my call list, when, how long I spoke to that person would be very interesting for my connections. Also, seeing a brief profile of the person on the other end of the call could be pretty engaging. SMS/email activity can be added to a sort of Facebook-esque News Feed. And clearly, any browsing or web activity can be shared out as well.

Geotracking: Wouldn’t it be interesting to know where my friends are at a certain time. If they’re using their phones, it could be possible to design a system to provide geographic fingerprinting to be shared with the network.

Convergent device usage: If I’m listening to 50 Cent’s new album, my network wants to know and I want them to know. Rudimentary tatings systems can be implemented and if licensing issues can be addressed (good luck), you could find a way to share music with the network.

Conferencing my people in with your people: A technological challenge, but why not work to find a way to conference people in (maybe by calling in to a specific #) so that different network members all hop on a shared line to chat spontaneously or with advanced planning. So, instead of learning about what my friends are up to via a news feed, I can speak to them directly.

Virality:
Creating soft sales: Spamming my friends doesn’t work. I’ve avoided joining new networks that will require me to send out (yet another) email inviting my whole address book in. I don’t want that and it’s getting harder and harder to convince my friends to join. Instead, on every SMS I send to my friends, a simple footer would suffice with some compelling reason for them to join my network: data could lure them in or perhaps, a part of my news feed.

Spontaneous get-togethers: Meetup (as mentioned above) has a great system for connecting people with the same affinities and giving them the tools to meet up. Functionality to get my friends to meet me at the local Burger King via a quick conference call or via an SMS round would be compelling. What about other people in my locality? Would they like to join? Do I want them to know about it?

Media can make it jiggy: A song or SMS that I’ve sent someone can certainly take flight and become viral. Music could be the key element in creating a compelling mobile social network. This is rife with legal issues but if solved, music is one of the most cohesive factors in putting together affinity groups. People who like the same music generally have other shared interests, tastes, backgrounds.

Collective Knowledge:
Share stats out to the network: Making me more informed about what my friends are up to helps me filter out the noise. Call logs play into this while so does music activity. Help me discover new things and new people.

Hierarchy settings: Help users figure out a way to define who are the connectors in my network, who are the idea generators, who are the leaders and who are the followers. Given where people fit in, their knowledge should influence friends differently. This should be accounted for in the network — it is in real life.

I haven’t focused on the concept of mobile network as extension of a web-based network. I think the device used in a mobile network is still so different from a PC that the interaction on a mobile network will require structural differences. Facebook will make a better mobile version but I think there is an opportunity to create a stand-alone mobile social network.

I’ve written before about expert communities like Vestopia and Covestor (as well as here) and their impact on investment decisions.  By creating an open community and applying performance and other measurements to the community, spectators and participants in the community can learn from so-called experts within the community.  Experts win with some type of rewards system and piggy-backers win given their access to these experts.  The Gerson Lehrman Group has been doing this for years in the hedge fund community providing investment analysts with access to top thought-leaders and on-the-ground participants in certain markets.

The NY Times has an interesting article out today entitled “If you have a problem, ask everyone“.  The article focuses on a firm called Innocentive, a spin-out from drug manufacturer Eli Lilly.  According to the article, the firm says that it “had solved 250 challenges, for prizes typically in the $10,000 to $25,000 range.”

By offering monetary prizes to a diverse network of experts in their fields, solutions are coming in from unexpected places.  One researcher found that “the further the problem was from the solver’s expertise, the more likely they were to solve it,” often by applying specialized knowledge or instruments developed for another purpose.

This is not so different from ex-Microsoft’s Nathan Myhrvold’s Intellectual Ventures, which maintains a superstar network of people tops in their fields and sits them together for massive brainstorming sessions.  The fim then patents a lot of the cross-pollinated ideas that emanate from the group and invests/sells/builds out the ideas if they are good.  Read Gladwell’s article in the New Yorker on how it works.

This idea is making its way slowly to the investment community.  It’s just a matter of time before more widespread adoption.  There is one caveat — a PhD in Molecular Biology doesn’t lose his edge in the same way that investors who outperform the mean typcially do.  It will be interesting to see how these communities deal with hot-hands who ultimately cool off.