Untapped Alpha: People.
I received a number of overwhelmingly positive emails and calls from CIOs in response to my dangerous idea (presented at CIO's Summit of Dangerous Ideas) of asset management without asset managers. They agreed that if we are to improve our current approach to investing, we need to explore such ideas. But their responses made it clear that turning theory into praxis will take some time.
I'm not discouraged by this conclusion. On the contrary, I'm encouraged because it further confirms the integrity of the ideas and forces me to rethink the medium of disruption. Facebook, Yelp, and Twitter were all embraced first by small groups of individuals before they were broadly institutionalized. Individuals, not institutions, were the driving force of disruption.
In the case of investing, I think I may take one of my dangerous ideas directly to the people, via an innovative CIO: democratizing investing by creating a social network that crowdsources investing ideas from individual investors.
After all, individual investors, like CIOs, struggle to achieve investment success. They face the same structural barriers-a monopolistic, entrenched financial services industry with little incentive to innovate. But, unlike CIOs, individuals typically lack the knowledge and resources to make informed investment decisions and, because they are not burdened with groupthink and fiduciary duty, are more likely to adopt a new idea such as crowdsourcing.
My idea is to build an investment-based social network. Members of the network share their live, funded trades in a broad array of exchange-traded instruments-and maybe even cryptocurrencies. The entire network sees every investor's performance in real time, via a mobile application or a popular social network, as well as that person's historical performance measured against a passive buy-and-hold benchmark and ranked according to his or her risk- and skill-adjusted performance. This will help followers differentiate between investors with a hot hand and those with a truly robust investment process.
Here's the twist: All investors are also ranked according to their number of followers, and the combination of these two factors expresses the wisdom of the crowd. With this information, community members could choose which expert investors to follow-and by "follow" I do not mean simply monitor but simultaneously and mechanically execute the trades of these experts, thus preventing front running.
Several social investment networks have been created and have achieved only modest successes, primarily because they are geographically limited, offer esoteric instruments, and provide no insight into an investor's strategy and skill.
Preliminary research shows that crowdsourcing investment ideas on social networks works reasonably well. An MIT Media Lab study of such networks found that "social trading provides much better opportunities for profit than individual trading."
As with other technologies, first movers often are not the long-term winners. (Think Walkman and iPod or SPDR and iShares.) I expect more sophisticated challengers to emerge because crowdsourcing investment ideas via social networks represents the confluence of major trends: acceptance of peers and the crowd as trustworthy sources of knowledge and advice; continued distrust among individuals of Wall Street and authority figures in general; growth of social media; growth of shared economy services; growth of a wealthy, technologically savvy population; continued interest in socially-based gaming; declining costs of, and increasing access to and use of, mobile technology; increased availability of the internet; and spread of a do-it-yourself attitude.
Let me also add three investment-related trends: the increase in online investing/trading (especially via mobile apps); the decline of defined benefit (DB) plans; and the increase of self-directed retirement plans and savings.
Which takes me to the next iteration of this idea. We all know, but are loathe to admit, that self-directed retirement plans place an enormous burden on the individual participants.
In the case of 401(k) plans, why not give defined contribution (DC) participants another arrow in their quiver and let them crowdsource possible retirement investment ideas by joining a well-structured, properly regulated, and cost-effective social investment network, composed either of their fellow DC participants or the community at large?
I shared this idea with a CIO and was surprised to learn that he occasionally monitors the trading activities of his DC participants-and that a number of them actively and successfully trade the plan's investment options.
My response: Share the community's investing activities, allow participants to rank, follow, and mimic their self-selected experts, and provide all participants with a valuable resource-a resource that could directly benefit a CIO, as well. The wisdom of this crowd is untapped alpha that could help any who need to make DB plan investment decisions.