A new website called Kaching is featuring the possibility to invest in a novel way: Everyone can now automatically make the same investments that their favorite money managers make. This is assuming, of course, that their favorite money managers are part of Kaching.
We have mixed feelings about this site. It seems to work like this: the money managers must voluntarily sign up (you’re not following Peter Lynch here), and if they have performed very well (and have been members for at least one year) they attain the status of “Genius”. You find the same fine print here about how past performance is no indication of future returns.
This is obviously nice for people who would like a portfolio manager (some of the managers are even managers in real life, though by no means all the best ones), but don’t have the $1 million (or some large percentage) necessary to invest with a real manager. We at Dumbagent tend to be risk averse when it comes to stock investment, since we believe (yes, we still do) that all information is reflected in a stock’s price immediately and efficiently. We therefore like the fact that the big asset management opportunities are available to the broader public. However, we do not believe these asset managers are necessarily beneficial in the first place.
In fact, we’d find it interesting to pit these investors against the Motley Fool’s CAPS (already discussed here). It would be an interesting clash of theories.
In the meantime, Kudos to Kaching for the ‘de-elitization’ of money managers.
The Nov 14 issue of The Economist comments on a new report by Grant Thornton (accountants) concerning the structure of America’s stockmarkets.
High-frequency trading has come to dominate volume on American markets. High-frequency traders limit their activity to large-cap shares, where there is sufficient liquidity to assure split-second execution. The institutional investors prefer to swim in the same pools of liquidity.
At the same time, there is a lack of research on small- and medium-cap firms. All this results in a decline of new issues, and ever-greater concentration of trading among large caps. The major indices thus reflect the concensus valuation of an ever-smaller segment of the economy.
Efficient markets? Hmmm…
Well, theoretically this should entice arbitrageurs to seek the small and medium companies. Other investors too, if they know they can research a couple SME’s, be their major investors, talk them up in chat rooms, or wait for their products to become big, and sell them off after a while. As more people try this it will create tons of volatility, but after a while the market should fill up with investors doing this and liquidity should be restored.
In practice I think this will happen again. Unfortunately it might be only once the economy picks up a bit more. Then people will feel like being more risky and will start speculating again.
By the same token, low-frequency trading is never really in fashion. That might be why Berkshire Hathaway always has the last laugh.