Participation media is providing a fertile testing ground for financial services firms to test customer service, new forms of branding, and the building of communities.
Corporate Insight, which recently released the report To “Friend” is the Trend: Social Media and Financial Services, has been analyzing the changes, struggles and opportunities facing the financial industry. Here’s a video discussing the report’s findings:
Fee-only advisors, investment advisors who don’t charge commissions, are leading the way Americans are investing. Instead of buying mutual funds with sales loads, more and more investors are turning to pros selling low cost exchange traded funds (ETFs).
According to Bloomberg, ETFs are certainly benefiting from this shift away from the brokerage industry:
The advisers are the fastest-growing competitor to the four largest broker-dealers, or wire houses — Morgan Stanley Smith Barney LLC, Bank of America Corp.’s Merrill Lynch, Wells Fargo & Co. and UBS Financial Services Inc. Assets overseen by the brokers declined 17 percent to $4.75 trillion in the two years through 2009, according to Aite Group LLC in Boston.
“More than five years ago, RIAs were a niche piece at best,” said Scott Smith, associate director at Boston-based Cerulli.
Not paying commissions doesn’t necessarily mean that investors are going to get better performance but it does serve to better align incentives. And that’s important in a business that with all its focus on performance is still predicated on trust.
This move to what Robert Pozen and Theresa Hamacher call Open Architecture in their new book, The Fund Industry: How your Money is Being Managed. I plan on having Theresa on an upcoming Tradestreaming Radio episode (stay tuned). It’s a huge work detailing everything from the history of the mutual fund, to its corporate and tax structure, to career paths in the financial industry, to how portfolio managers buy stocks and bonds.
I like the concept of open architecture in the financial services industry.
With brokers less reliant on commissions, performance and cost became more important in determining what funds were sold. That created opportunities for firms with good track records that had refused to charge commissions and relied on direct sales to individual investors. No-load fund families such as Vanguard and Baltimore’s T. Rowe Price Inc. were well-positioned for the shift.
Vanguard topping Fidelity Highlights Power Shift to Independent Advisors (Bloomberg)
Looking for a way to make a quick buck? Well, TradeKing, a startup online broker is willing to pay you and a friend $100 each if you refer him on over to open an account.
TradeKing’s Refer a Friend is targeting current account holders and incentivizing them to bring in new account holders.
$200 is typically the number batted around as the cost to online brokers to bring in a newly funded account via advertising, affiliate agreements, etc. It’s still hard to make money for these brokers as DARTs (Daily Avg. Revenue Trades) have rebounded strongly from their lows but aren’t quite paying the BIG bills, if you know what I mean.
Other startup online brokers, like Zecco, are actually raising their commissions and trade fees (about 10%) and cutting back on free trading offers. Unable to scale bigger and still run a vibrant business off of cutthroat costs, the online brokers are looking for new ways to grow.
Social media and the marriage of financial content with trading execution hasn’t meaningfully changed the nature of the brokerage business. So, the firms are scrambling to determine other levers to grow.
In a move that takes the brokerage industry out of the 1980s (yeah, cool parachute pants), industry trade mag, Registered Rep announced a new push to aggregate some user-generated content on its flagship website, RegisteredRep.com.
I’m going to stop short and announce that this isn’t a direct threat to Seeking Alpha, the leading financial content aggregator. Like that site, Registered Rep plans to use human editors to filter out the good content from the shlock. It’s a shame that brokers won’t be able to promote their favorite little small caps but it’s probably a good thing for the investing public that the content bar will be set pretty high.
David A. Geracioti, Registered Rep’s editor-in-chief said:
we’d like to invite you to contribute to our website Registeredrep.com through a cool new tool called Rep. Readers Write, which is currently in the beta phase. Rep. Readers Write will allow readers to upload stories to a special section of Registeredrep.com with a byline and bio. Those stories will then be approved and published by editors, with little or no editing. You could call it a kind of social blogging micro-site, though we will only publish those submissions that are well-crafted and thoughtful pieces on subjects significant to the wealth management industry. We love blogs, but not all blogs, and we aren’t looking for the kinds of informal toss-offs or personal musings you sometimes see in the blogging format. The best of the columns submitted to Rep. Readers Write will ultimately run in other sections of our website, like Investing or Wealth Management or Advisorland, and some of these will also make it into the print magazine
Industry Voices: New User-Generated Content on RegisteredRep.com (RegisteredRep.com)
Michael Mauboussin, CIO at Legg Mason, is a thought leader and author of books like Think Twice: Harnessing the Power of Counterintuition and More than You Know: Finding Financial Wisdom in Unconventional Places.
Maubossin shared his views on the financial/investment advisor’s practice management at the IMCA’s Consultant Conference on Tuesday. He took the approach of focusing more on the investment process. His 3 tips?
According to an article at Financial Planning:
Mauboussin gave the example of a store that placed French wines and German wines next to each other on a display. On one day the manager played French music; the next he played German. On the day the French music was played 77% of buyers bought French wine. When German music was played 72% bought German wine. The customers felt the music didn’t impact their choices, but it clearly did. For those who run teams of employees, Mauboussin suggests thinking about the decision-making environment that exists in your office? “Think about: Am I creating a good environment for making decisions? For example, stress makes people make worse decisions,” he said.
Read IMCA: The Good, The Bad, and the Ugly of Practice Management (Financial Planning)
Post-2010 and launch of my book, Tradestream, I’m continuing to use Tradestreaming.com as the place where I discuss trading strategies and stuff that’s useful for retail and institutional investors. So, if you haven’t been there, head over here and sign up via email/RSS.
I’ll continue to use NewRules as a B2B site, where I discuss industry trends, investment/financial startups, and anything that might interest investment/financial industry participants, journalists, writers, etc.
Here’s what was interesting on Tradestreaming recently:
I don’t know about you but I’ve been bombarded with reports about just how slow a week this week between Xmas and New Years is. From abysmally low trading volume on the exchanges to rumors of Aretha’s demise, we’ve been pounded into thinking that this slow news, slow trading week is something bad.
As a fan of Nudge and the apparent success in using incentives to shape behavior, I’m in the opposing camp here — I actually am savoring this week. Let’s keep in mind that the people lamenting the lack of news (read, action) get paid to break, comment, analyze and/0r trade on the news. These folks make their livings on the incessant churning of investor sentiment, fear mongering, and skittishness.
The brokerage business (ie $AMTD, $ETFC) actually measures investor freak out and how it impacts the bottom line. The industry even created a metric to measure it: DARTs or Daily Avenue Revenue Trades. According to Investopedia, DARTs are “the number of trades from which a given broker can expect to generate revenue through commissions or fees on any given day.” Investors putting money into the online brokerage industry monitor DARTs like hawks as they tend to drive profits for these firms.
So, color me grumpy if I’m not sad that volumes are down as investors and pundits alike sit on their hands, planning their next moves. No one says you have to be invested in the stock market and certainly the research points to overtrading and overconfidence as the 2 main drivers of the retail investor’s historical underperformance in the stock market.
So, let’s enjoy the relative peace and quiet this week affords all of us to help us focus on why we invest and how we do that. Those voices– those same gremlin-mice Anne Lamott locks up into a glass jar to tune the volume and activity out — are not in our best interests. Here’s to the best in 2011!
photo courtesy of be_khe
Lots of interesting posts regarding recent insider buying and selling activity.
The latest edition of Tradestreaming radio is out and it’s a good one. You’re not going to want to miss
Of course, you can also subscribe to listen to our podcasts with your iPod/iPhone via iTunes here.
Check it out and let us know what you think.
Live from the internet, it’s Tradestreaming Radio, with your host,
Treadstreaming.com’s own, Zack Miller.
[music]
Miller: Hey! This is Zack Miller. I’m the author of TradeStream Your Way to Profits: Building a Killer Portfolio in the Age of Social Media.
This is Tradestreaming Radio. It’s our home in cyberspace. This is the place where we discuss everything about the convergence between technology and investing, hopefully helping you to make better, more informed investment decisions. You can find old, archived editions of our radio program at www.tradestreaming.com, and also on iTunes.
I’m glad you joined us. We’ve got a great show lined up today.
First up on today’s show is a conversation I had recently on a stop over in New York with Nikesh Desai. Nikesh is the CEO and founder of Investing Channel, it’s an ad network for financial sites. What that means for those of you who are uninitiated with ad networks, they’re basically a marketplace. They are representing publishers, people who publish content on the websites to help sell ad space on their websites, as well as representing advertisers who are looking to target financial customers. They’re buying traffic basically on websites as well. They’re the middle man, they’re the broker, and that’s what they get paid for.
It’s a really interesting space for me, because Nikesh sort of sees ongoing trends in financial content, where things are headed, how content is being monetized, new business models. He sort of has a front row seat into what’s occurring on the internet.
I interviewed Nikesh as part of an interview included in my book TradeStream. I recently had a chance to sit with him for about an hour to catch up. The majority of that conservation will be included here.
Desai: … come from investment banking, doing internet corporate finance, M & A, then kind of trying my hand at operations at a few internet companies like People PC.
Miller: Then you moved to The Street?
Desai: Yeah, after People PC I moved to The Street to run business development there.
Miller: What did that entail? Was that- deal making?
Desai: Yeah, it was basically deal-making.
Miller: Content syndication?
Desai: A lot of it was content syndication, distribution of their subscription product, how to enhance ad revenue beyond traffic, what are other different content we can bring into the site. In fact, some of the early discussions I had with their editors- I was one of the few people that had feet on The Street.
Miller: Right.
Desai: Everyone else was kind of internal, or ad sales.
Miller: Right.
Desai: But I was the only one kind of talking to other-
Miller: In a financial content company biz dev is a really core competency, because you are the only person who is sort of the in the real world.
Desai: Right. Right. You know that well. It was pretty evident that a lot of people wanted to just some notoriety, content-wise, that they were willing to give content to The Street for free. So, it was tough to get over the hump with our editors to kind of take any content that they didn’t vet out fully, which is understandable, the point being that they were paying, and still are paying, so are a lot of other editorial companies pay quite a bit of money. You know from Seeking Alpha that you don’t have to.
Miller: Right.
Desai: It was pretty clear. That was 2004, I think it was. There was an opportunity to kind of figure out something editorially, and with the free model, but I didn’t get the time- there was just a lot of “internal stuff” that was going on.
Miller: There’s always that editorial tension, right? Like if you’re a real editorial driven company content is seen as core. That’s hard to say, “We’re going to bring that in from outside sources,” really. Right?
Desai: Yeah, although it wasn’t too far from what they already do. They have plenty of contributors, not employee folks. I think the idea of a controlled environment of 50 contributors versus 1,000 contributors was daunting. It needed to be kind of streamlined obviously. That’s what I think Seeking Alpha did really well.
It was just interesting to see it kind of, at somewhat an early stage, but see that clash, like you said, of just editorial kind of- control, is maybe the word, versus the business kind of understanding. I feel like whereas, “Geez, if I just added 100 more articles a day with the distribution I created, that could double our traffic in 90 days,” right?
But, understandably you’ve got to be able to- The Street has a brand. Any media company has a brand, an editorial brand that they need to maintain. I don’t know if you’d say the same for Seeking Alpha, but I would say they don’t really need to maintain an editorial brand, per se, but more how they- they’ve got to control the content within limits. You know? And let the audience kind of pick and choose what they enjoy reading.
Miller: I mean truly any financial brand, part of their job is to point people to what they think is interesting. Right?
Desai: Yeah.
Miller: And high quality.
Desai: Yeah. I guess-
Miller: In some sense The Wall Street Journal does that.
Desai: Right.
Miller: And, that’s what they told us. I wrote about this in the book, they felt that was their mission in traditional journalism.
Desai: Right.
Miller: They saw Seeking Alpha as sort of taking that same role in the blogosphere.
Desai: Right. Yeah. Yeah.
Miller: I guess curating, filtering, whatever you want to call it.
Desai: Yeah. I guess what I mean is there’s less- look, if Seeking Alpha puts up a bunch of whatever-
Miller: Yeah. It doesn’t really harm them.
Desai: It doesn’t really harm Seeking Alpha’s brand. I mean The Street puts out a story on a public company that just was scathing or wrong, they’re in deep stuff.
Miller: That’s true.
Desai: I guess that’s kind of where I see that. But clearly I think, I’m biased in saying this to a certain extent, because I deal in the long tail, as much as Seeking Alpha does, in a very different way. But I feel in finance you might, and I’m a self-directed investor, maybe not a financial advisor, I might go to some of the larger media portals, or companies to do some topical research, but I’m really going to niche sites and individuals that I follow, because they’re well-known in real estate investing, or quant [assumed spelling] trading.
Miller: Right.
Desai: These are 50,000 page view blogs.
Miller: Right.
Desai: It may be at best 1 million or 2 million page view blogs.
Miller: Really long-tailed type stuff.
Desai: Yeah, but those are where a lot of the real investment decisions are being made I feel like. I think that kind of engagement is what Seeking Alpha has been able to get, like you said earlier, with dealing with that kind of niche content, and really valuable audiences. Not that the mom and pop retail one isn’t valuable, but these are more kind of high-net/financial professional folks that define a lot of what our network is.
Miller: Sure.
Desai: And I imagine Seeking Alpha, but slivers of the other larger media portals, not the majority of it.
Miller: So you left The Street in what year?
Desai: I left The Street like early ’03.
Miller: Then you started Giant Step?
Desai: Then I started Giant Step Strategies. It was basically kind of a revenue strategies advisory company, where we were helping FT, Investor Place, IBD, Schaeffer’s Research, a lot of financial media companies, as well as some non-financial media companies, looking at everything from what do you do from a biz dev point of view, how is your site laid out, how do you even commission your sales team, how do you optimize your ads? So depending on the project it was soup to nuts, in some cases it was just content distribution, biz dev.
What morphed out of that, in basically late ‘07/ early ’08, was Investing Channel; for two reasons. One a lot of those same consulting clients were asking us to help execute ad ops and ad sales; A.
And, B, with the ease of content creation there’s a lot more dispersion of users. They’re not converging to large portals in media companies, and it has made it that much more difficult then for advertisers to really find and target their niche audiences, I think because it’s more critical in finance than many other verticals. Probably health as well, and technology.
I’ve put those three as like sub-niche verticals that you really need find your audience. Like I said earlier with people in finance really kind of “transacting” in the long tail, versus just researching maybe in the short tail, it created an opportunity I think to go out and aggregate.
And, look, there’s been networks before, but aggregate things that are super niche level so that you can target a pension fund manager, versus a financial advisor, versus a hedge fund manger. You go to most places and the best they can do really is target a financial professional, generically speaking.
Miller: Or a business person, even more generic.
Desai: Right. Yeah. Right. Right.
So, that’s what we kind of aimed and set out to do, because we saw this kind of change in consumer consumption of these financial content, and had that demand from our consulting business, both of which I started with Bob Verrico, who was running The Street sales and marketing group, prior to that did a bunch of stuff, including running iVillage’s ad sales group through their IPO. Their founder is Jay Desai, who started-
Miller: Just happened to have the last same name as you?
Desai: It just happens that he’s my older brother.
Miller: [laughs]
Desai: Who started the internet M&A at H&Q, which was sold to J.P. Morgan. So, he comes form the whole financial services background. Had been doing a lot of kind of early start up strategy and venture capital, private equity rather, help with them. So, joined us, as we were potentially looking for capital and starting this business.
So, anyway. So, we started Investing Channel effectively about three years ago now.
Miller: OK.
Desai: And since then have gone from zero to about 10 million uniques.
Miller: Wow.
Desai: There’s a lot of things obviously that I would say we’re unique, but the reason I kind of compare us more to financial media companies than other networks is, A, we’re providing all types of ad products that any single site would do, from advertorial, to newsletter, to email, to display, to sponsorships, whatever it is, but also we’re exclusive to managing our publishers’ networks. So we’re rep firm/ network in a way.
You know if you think about someone like The Street- I don’t know where Seeking Alpha is, but I think they’re probably in the range of 5 million uniques, we’ve been able to get that in the long tail…
Miller: Right.
Desai: …pretty quickly. It’s a matter of ratcheting really. I mean I could probably double the network fairly quickly, although getting exclusive deals is not easy. But, it’s a matter of where the ad budgets are, how big are they to kind of then grow the network. So, we’ve been kind of slowing growing this from one million to three million, to five, to ten now, at the end of this year.
Miller: That’s great. I don’t know if you can name names, but like what’s a typical advertiser in the present environment?
Desai: Yeah, I mean it’s nothing too different than what you see on The Street, or some of those larger financial media companies.
Miller: So fund companies, or-?
Desai: But I would say- yeah. Fund companies are spending even more. I would say, like, five years ago options companies were spending a lot, right? OptionsExpress, etc.
Miller: Right. That was a fad.
Desai: Two and half years ago-
Miller: Forex.
Desai: It was Forex, right? And they’re still spending, and so are the options guys. But now I feel like there’s a third way in the ETF side, and that’s dictated by, again, where investments are coming from. Schwab buys an ETF company and now is issuing their own stuff. You see that a lot more where not only there’s a bunch of new small ETF sites popping up and growing from zero to a couple of hundred thousands pages quickly. But there’s, again, that demand from- whether it be self-directed investors, or financial advisors, to maybe have less risk on an individual stock and spread it across a fund, but still have pretty decent upside with it.
We foresee, and have seen a lot of fund, generically speaking, spending. But, so are still the retail brokers.
Miller: But do they end up saying- like at least with a retail broker, and I know from personal experience that they are looking at like the conversion, because they can follow that entire usage through to funding an account. A fund company doesn’t really- it’s really just straight ahead advertising.
Desai: Yeah, it’s hard to say-
Miller: like lead gen?
Desai: Yeah. I mean wouldn’t say it’s- in some cases it’s branding. In other cases they might want someone to download a white paper just to learn more. In finance in general, other than a few products, you’re not buying a $30 or $50 product where you click and buy.
Miller: Right.
Desai: Right? You’ve got to have some user education of why to buy a fund, or why- open up an online brokerage account, that’s a little bit more just one to one, I guess transactional in some way. But most other things it requires some kind of education. I think that’s a big shift I see also in working with our advertisers and agencies. It’s not just straight banner stuff.
Miller: Right.
Desai: They want more integrated stuff. They want to push their content down to our audiences. I think that’s the way to go. You’ve got to educate your audience about whatever financial product that you have. It’s not 30 day window to sell often times.
But, a lot of these guys are just looking for awareness in some way. I kind of differentiate that from just pure branding.
Miller: Right.
Desai: They’re still looking for downloads, or people to kind of learn more about fund, or whatever it might be. But it’s not necessarily, like you pointed out, online retail brokers looking not only, “OK, did someone open a brokerage account. How much did they fund it? How much are they actually trading?”
Miller: Right.
Desai: That’s great. They have that funnel to kind of analytically figure out what’s working for them from a marketing point of view, but it’s less of that type of analysis for the issuers of funds.
Miller: So how much time and energy do you as Investing Channel put into like sort of personifying your users? Like, are you getting to the point where you can say, “This guy is in the market for-” “He’s moved beyond mutual funds and now he’s looking into ETFs.” Has it gotten that granular yet?
Desai: It’s moving towards that. So I’ll kind of speak generally, and then specifically Investing Channel. So, there’s a lot “data targeting” that’s happening in the ad marketplace. In the last year and half it’s been a big shift in buying. That coupled with exchanges, coupled with DSPs, right?
Miller: What’s a DSP?
Desai: Demand Side Platforms where agencies are building their own networks. In all cases it’s about in some ways commoditizing the banner a bit, because you can buy a banner for $10, $3, or $0.25 in today’s market.
Miller: Right.
Desai: But it’s about creating a more fluid marketplace like there is for buying keywords.
Miller: Right.
Desai: And I think that shift has tried to push itself years ago, but is really coming into more fruition today, where this concept of audience targeting and actually finding a cookie profile, not just an impression.
Miller: You’re talking more like behavioral?
Desai: Well behavioral, depending on how- many people may define it one way or the other. You visit options content then you leave it, I can behaviorally find that person.
What I’m talking about is you can buy data from search engines about the search terms that were looked up. You can buy data from an offline financial advisor directory that has that person’s postal information, email address, all that stuff. So there’s all this third party data, I’ll put in that general bucket, that you can go out and buy. Then using technology tie that email address, for example, based on that profile of someone being a financial advisor in Atlanta, and tie that profile anonymously to a cookie, and then distribute a banner to that profile that you’ve just defined, whether at eBay, Yahoo mail, or contextually relevant on my network for Seeking Alpha, or whoever.
That data targeting is becoming more and more prevalent, which goes along the lines of your question, however a lot of it is still like in travel and auto, and like more personal finance- credit card, insurance type stuff. Where you can find that information about someone who may have been on Orbitz and actually typed in a trip to Honolulu and that data is being sold anonymously to then target a banner, which is very relevant, obviously.
But I think there are some privacy concerns that Obama’s administration literally now is kind of looking at, and is going to shape positively or negatively a lot of this data targeting. I think there is kind of an in between that needs to be thought through, but I’m not a politician here.
Anyway, due to what we’re doing I think this data targeting is a lot more relevant for mass networks, where you’ve got a ton of inventory that’s not that super defined and you need that level of targeting. When you’re a vertical, whether you’re a media company or a network, when you’re super kind of verticalized, and when 75% of your revenue- in most vertical companies’ cases comes from the vertical.
Miller: Right.
Desai: Right? There’s not a lot of need for a ton more targeting, because you know if they’re in a fund section versus an options section, versus whatever, what that first ad you should be showing them, and that ad is going to be a higher CPM than anything else.
Now, you could layer in what you’re talking about knowing that person opened up an online brokerage account and we found out some information that they’re really trading ETFs, to then target an ETF in a non-ETF content area. But there’s a couple of things that’s wrong with that scenario. One, that data costs a lot of money to then finally target that ETF that it might not be as valuable just to put up another financial relevant ad that’s contextually relevant.
Miller: Right.
Desai: Or hit that ETF ad in that ETF category, where again, it’s going to be worth in a CPM basis.
So your comment about someone is a mutual fund section and then following them out- yeah. That’s behavioral. That’s being done by us quite a bit. But part of what I took your question about is relevant to this whole buying of data on and offline outside of our network. And we’re doing that for example AARP. They want to target a certain age group.
Miller: Right.
Desai: So, yeah. I’ll go out and buy that data, attach it to my network, and find that 55+ crowd. So, I find for a vertical company buying that kind of intent or demo type data is more relevant for mom-endemic, non-financial advertisers than we have found for financial advertisers.
This whole data market is still being kind of sussed out, what’s valuable, what’s not, what’s legitimate, all of that kind of stuff, but we are starting to work a lot more with more finitely defining those cookies, and those unique users versus just contextual targeting, which still I think king. I think that’s still the most relevant time to hit someone with the highest CPM versus a lot of this data.
Miller: A few years back there was this talk that video was the next battleground. Do you see as an ad unit video being used more and more, or was that more hype back then?
Desai: I definitely think it is something that people are spending a lot of time on, and from an advertiser’s point of view want to get in front of more, but I think even mobile has surpassed that in some ways. I actually don’t know if it’s quite there in finance. It’s definitely there in many other consumer verticals.
But in terms of video, I just look at some of my network, and these are long tail sites, some of them that just put up some You Tube stuff, or use some other player to kind of get people into the video, and it’s growing pretty quickly. It has been for a while in a lot of other verticals.
I think in finance for some reason it’s just taking a little bit longer, and people who are trading, or busy, or whatever it is, don’t want to read a two page article. There’s just been a shift where people are actually consuming a lot more video than before. That’s obviously just led to advertisers and agencies wanting to use that medium to get in front of their audience.
It’s in some cases been nice because some of these more traditional advertisers are so used to kind of a TV commercial environment.
Miller: Right. Right.
Desai: This is a better way of getting more of their budget, because we all know there is a disproportionate amount of ad span in the offline print TV, etc. world versus the online, when the online world is much more measurable, as we know.
So, yeah, there’s been, I feel- I wouldn’t say it’s anything significantly different than a year ago, but definitely a big demand for video kind of advertising generally, just putting a video in a ad unit and having it auto play- no. Right? It’s still got to have the in context of someone kind of listening and watching an actual video.
But I feel like when I go to like J. Fam or a lot of these financial conferences, two things that come up a lot outside of the traditional marketing conversation are, one, like I mentioned earlier, content. How do we get our content out there? How do we get our content out there to kind of educate people to get them to buy our product, is one big discussion.
And, now obviously with iPad and all of this tablet stuff going on, mobile is a big discussion. I think part of it- it’s not necessarily a fad by any means, but it’s the thing to talk about right now. I personally don’t think- it’s kind of like video was maybe three, four, five years- maybe five plus years ago.
Miller: Right.
Desai: It’s still going to, at least in finance again I think is very different for gaining and things of that nature that are very consumer, but in finance these guys are still on their desks, they’re still trading, they’ve still got a big computer browser in front of them. They might be running to lunch and have to do something along it, but that’s a short term thing.
I think tablets and mobile is a big thing, and we see huge demand from our advertisers and agencies to figure out how to get in front of that. “How do I get in front of social- facebook, Tweet stuff?”
So, a lot of this is a little bit more media hype, and it hasn’t quite hit finance, but I think it will in some shape or form, but I think it’s probably a couple of years away.
Miller: From a lot of the people I’ve been speaking to, particularly on the asset manager side, and I don’t know if those are direct advertisers on your network or not, but those are certainly people paying and spending the time and the money to try to bring in new assets. That’s the game there.
Content is obviously, beyond the ad unit, content marketing is one of the best and most cost effective ways of creating a pipeline for these guys. Does that conflict or accentuate some of the work that you’re doing with people? Meaning maybe that free submitted article, Seeking Alpha, maybe- and again Seeking Alpha has not provided this level of detail, but maybe that converts better, or we don’t even know how well that converts. But that’s one way of bringing in new customers.
Desai: Right. Yeah. But, like you said, it’s just one way.
Miller: Right.
Desai: Right? I mean you could, if you’ve got no budget that’s the only way to do it. Right?
Miller: Right.
Desai: And that’s what you should go after, but if you’re looking to really build a business and figure out other means- I think looking at all ways you can market yourself, whether it’s PR by writing this content, whether it’s search engine marketing, whether it’s this banner stuff, whether it’s buying legion from different places. I think there is a full mix of media that can bring in a lot more customers.
But, yeah, at a base level-
Miller: I’m mean from that level an ad unit really is just another form of content, right?
Desai: Yeah, absolutely. I’ve always felt that even if a blogger or a site is writing whatever content they’re writing about, their ad that’s next to it, it’s content. It’s on the page. What the advertiser does with it we can’t always control. I wish I had a little bit more control, because I think we could help advertisers maybe get more out of the banners that they do, since we know our network best and nature of sites.
But, yeah, I totally agree. It’s another form of content. Frankly, they can put their article content within a banner, because it provides a much bigger distribution vehicle than it is trying to get your content published through ten different mediums.
It’s not actually an easy thing to push out your content to a lot of distribution outlets. It is a much easier scenario with much more scale to do that if you wanted just to push content in a banner type unit, but make it look in an integrated way. There are ways that we’ve done that with a lot of our advertisers.
Miller: When I look back at- from what I know as successful advertisers, I guess, in the investment advisor arena I immediately think of Ken Fisher, Fisher Investments. He’s pioneered direct mail in the financial industry. I know what he was doing online was a lot of the same, which was, “Download this free report.”
Desai: Right.
Miller: And then they get somebody on the phone to call you and follow up afterwards.
I’ve heard just in an ad hoc way that I guess the conversion on that stuff has dropped way off recently. Well, at least vis-à-vis still direct mail offline.
Have you heard similar trends to that?
Desai: Nothing relevant to Fisher’s particularly, but… and I agree he has a created a marketing machine there. I think more often than not, as a side note, I feel like a lot of advertisers who don’t work out for us, and for other sites, it’s not necessarily a product issue. It’s more of their marketing funnel. “What do I do when I capture that person?”
Miller: Right.
Desai: And I think there’s a big opportunity in terms of providing marketing services for financial companies on the backend.
Miller: Right.
Desai: Not the front end ad, to get better conversion.
Miller: Is this what you were talking about before in terms of helping them develop their campaigns and things like that?
Do you see your firm migrating to that arena?
Desai: Yeah, I mean we are doing that already in some ways with advertisers that we feel need it. Because, look, I don’t want to take someone’s money and already feel like going into it that it’s not going to perform. So, in some ways we do it, but we don’t provide marketing services and charge for it, and have a design firm.
That’s something that we’re open to and considering, but I think it probably wouldn’t be an internal thing. I might work with a couple of vendors to provide those services as necessary, and just pass the cost on. I think that’s an expertise that we could hire for, and that we have to a certain extent endemically, just because we’ve been in industry so long.
Miller: Right.
Desai: But there is certain expertise that I would want to bring a firm-
Miller: I guess for you the question is whether your advertisers really valued that enough to pay for it, right?
Right now they’re paying you for distribution, right?
So, all of a sudden then you’re sort of saying, “Well, I’m going to help you with distribution, but I’m going to make it more effective.”
Desai: Right, and I think…
Miller: And that’s where there’s always like this push back about-
Desai: Well, so there’s- we have two clients. Right? There’s direct advertiser, or the agency who has the advertiser client.
Miller: The agency probably doesn’t care at all. Right? They’re just doing their job.
Desai: They’re just doing their job, and that is their job. It’s hard for me to say, “Well, this is what you should do.” It adds another layer, so even if the client is dealing with some of the backend funnel stuff, it’s just tough to go around, and so it doesn’t happen quite often in those cases.
But if you’re working direct advertiser, which is 50% of the time for us, they’re definitely much more receptive, and open to a lot of what we may suggest for their campaign. It’s just a matter of sometimes resources on their end to make changes and whether we can provide those resources, and how do you then account for that cost? And often times we just build it in to this CPM if we can, or pass that cost on in some shape or form.
But going back to your questions about Fisher and direct mail- we are more of a digital sales company. We actually do sell direct mail surprisingly, and that’s because we have a handful of postal files that folks like Fisher and Ameritrade and things of that nature are still buying it, with success. But, anecdotally, I don’t know a lot about that space. Anecdotally, I have heard the conversion rates are dropping off quite a bit, because it’s just partially a dying advertising medium, but it’s also just an older demographic that keeps getting older. And so the conversion is just-
Miller: Right. But people are still trying to get to them, though?
Desai: Oh yeah, and they’re still valuable.
Miller: Right. Right.
Desai: I agree though with what you said, the conversions just aren’t there as much as it used to. And I think that those companies who spent a lot of time in direct mail- you look at the old school AOL ISP disks. Right? They spent a crap load of money via direct mail, and it worked for a certain amount of time. But then broadband came in and-
Miller: And killed that.
Desai: And killed it.
So I think in some ways the online medium is not killing it per se, but direct mail- I put that into the print category as it is. Newspapers, and magazines, and all that stuff, clearly, are hurting right now. Things that used to be 40 page magazines are 20 page magazines.
So there’s no doubt that people are spending less, and the conversions are less, because there’s just more mediums that are more measurable, whether online or elsewhere, that their spending their time and efforts on.
Miller: Just to sort of take a detour, a lot of my readers and listeners either contribute or run their own financial sites. Many are not necessarily in the business as a business. It’s sort of as a hobby, or they do it late at night, or something like that.
Do you have advice- and I’m hitting you up. I’ll give you a second to think about it. Do you have advice for somebody looking to get into the business, from where you sit in the industry, how to best monetize their content?
Because a lot of people are struggling. “Do I create a subscription model?” “Maybe free is good because there are no barriers to entry. Everybody can read my stuff.” But then using an ad network isn’t always- it doesn’t feel like the most cost effective way, because a blogger is not going to have the big page view numbers.
Desai: Right. Right.
Miller: How do you think about things like that?
Desai: When you say ‘get in the business’ I am assuming you’re meaning how do I become a big or small player in the financial media?
Miller: Is it feasible for them to get into the business?
Desai: Right. I mean it depends on what their goals are. If they are looking to just-
Miller: Can you build a cheap ad view supported website?
Desai: Yeah. Absolutely, I have a ton of case studies just in my network of 250 sites that are hedge fund managers on the side, yet have built a pretty nice business on their blog between ad revenue and subscription revenue. So I think the short answer is it’s somewhat of a science to build-
Miller: Can you quantify that, what do you mean by a ‘nice business’. Clearly they’re a hedge fund manager, they don’t really need the revenue from the blog.
Desai: Look, they might be generating anywhere from as little as a few thousand to $25,000 a month.
Miller: Wow.
Desai: Between ad revenue and subscription revenue.
Miller: How big a site would a site like that be, that you are defining?
Desai: Between 300,000 pages to 1,500,000 is the range. Again, it totally depends on the content, right? We are generalizing right now, but it’s got to be niche content that’s valuable, that high net, or financial professionals are willing to pay for.
Miller: Typically it’s actionable content, content somebody can read and go make investment decisions on?
Desai: Not necessarily, some of it is industry pieces. Like one writes about the real estate investment market, and it’s not really actionable. It’s just a lot of in-depth research that hedge fund managers and financial professionals would potentially want to buy, or are buying.
That is why I say that it is very, very content dependent, but like I said it’s a bit of a science. You look at any financial media company, it’s free registration/ paid registration, right? There’s a model to get people from reading free content to signing up for a free newsletter, because building up a database is critical, to getting them onto a pay product, to them hitting them with a pay product over time.
You can learn a lot with analytics these days to see where your traffic is. What are people reading? What do they see as valuable to them? Say, “OK, let me turn that into a newsletter now. If that newsletter has three contributors, and I can see one of them is getting the majority of the reading, maybe that guy should be the pay product.”
It’s very much a science, that of Motley Fool, Agora, Investor Place, The Street, all of these guys do very, very well. I think at a much smaller scale, an individual blogger that has an expertise in a subject matter can actually do really well.
I’ll just name a couple that are in the network, that started out free and now have a pay product, maybe just in the last year, and are doing pretty well. Mad Hedge Fund Trader, who, as a business runs money for high net worth folks. Market Folly, who is a hedge fund manager and now just started a pay product, has grown that pretty quickly in just a few months.
So the concept of making, without a lot of work, because these guys have a full time job, of making $5,000-20,000 between an ad model and a subscription model is very much there. I think paid content is something that we are looking to get into more, even though we are an ad business right now, because finance I only see that growing and growing versus a lot of other spaces are diminishing.
Miller: That was going to be my next question.
Desai: I think it’s going to be tough to just pay for the New York Times, quite frankly.
Because, while it’s great content, it’s not super-niche, highly valued, needed content.
Miller: You see the emergence of really, as you said before, everything splintering into these pockets of expertise, and sort of the broad based news sites are becoming less relevant I guess to people. In finance specifically.
Desai: For investors, I think I use ‘finance’ too loosely sometimes, because there’s personal finance- world of home loan, credit card, insurance.
Miller: And that will always sort of be a great broad base.
Desai: Exactly, I agree.
Miller: It’s more generic content in that sense.
Desai: Exactly, and that audience is not as high net worth. They’re not paying for content. The investing audience, their high net worth financial professionals have money to spend to make investment decisions on. In that space, paid content becomes… and will continue to grow, I feel.
Miller: I can’t believe that what I think of as the traditional investment newsletter, a paid product, I don’t want to name names, but some of these ones that have been around for 20 years. I can’t imagine they are doing as well today as they were ten years ago.
I guess my question to you was has that revenue just gone away? Or has that been replaced by the next generation premium site? Which either could be a newsletter- I see sort of the emergence of these stock communities, something like the Kirk Report.
Desai: Right.
Miller: There are a variety of these sites, where people pay a subscription. They are for very active, very communicative type sites, where you’re not just being pushed out content, you are participating in something.
How do you see that playing out? I mean just to put up a newsletter and say I want to charge $397 a year for it, obviously if you work out the numbers it has the potential of being a great business. But I know a number of people who have done that, and it just doesn’t work for them.
Desai: Yeah, and this might sound like a little bit of a cheesy response, but I think, again, it’s the content. A lot of products that have done well and have now flailed, it’s in my mind because it was a marketing product, it wasn’t a financial product. It was buy stocks under $10.
That, in my opinion, has no merit, a stock that’s under ten dollars, or a penny stock versus something that’s $100, you’re still basing however you judge investing in that stock on some level of fundamentals, or whatever your research is. Not based on just on it being a dollar price.
But it’s a marketing spin that works with the psychology of retail investors. And that stuff in years past has really done well. I think, again with the ease of creation of content a lot of that stuff that was paid is free, and in some ways maybe uncovered as not the best product.
And the things that are now succeeding, I think there is marketing spin to it. I’m not going to lie. But the things that are succeeding, and will continue to succeed, are things that actually provide true value to the end user.
Miller: Because there’s a level of transparency, and this is what you were alluding to, that’s crept online. Either through these experts like Covestor or kaChing.
Desai: Exactly, and I think that’s a great point.
Miller: People know how all of these things are performing now. And most of the time it’s not as advertised.
Desai: Right. Someone else mentioned this, but the analogy is, in terms of transparency, when you used to go to a doctor 15 years ago you kind of had to trust whatever the heck he said.
Miller: You looked at the diploma on the wall, and that was it.
Desai: Right. Now, there’s so much content online where you can do you’re research on the little wart that you have on your hand, or whatever the heck it is, to go in and say, “Doc, these are the fours things, you didn’t mention two of them.” So there’s so much more transparency out there in the marketplace that the end business person has to really step up and provide true value because of that transparency, and know what the heck they’re talking about.
Miller: Thanks to Nikesh Desai for participating in this podcast. You can check out Nikesh and his firm Investing Channel at www.investingchannel.com .
Next up, we’ve got Dirk Quail, who is the CEO of a company called LikeAssets.com . We’ve profiled LikeAssets on the blog previously. Like Assets provides customized benchmarking solutions for individual and professional investors.
If I have a portfolio of securities, and I want to see how well I am doing vis-à-vis a benchmark most platforms allow me to see how well I’m doing against the S&P 500. That may or may not be the appropriate benchmark for my portfolio. So LikeAssets actually looks at the securities in an individual portfolio, and customizes a tailor made benchmark for the specific portfolio. So here’s my conversation with Dirk.
Dirk, tell us about LikeAssets, what are you guys doing?
Dirk: Well, LikeAssets, we think is the only site that let’s investors find out if they are beating the market, and also research firms, and columnists, and bloggers’ ideas are making them money.
You can think of it as the Nielsen for investment ideas. Nielsen monitors and rates the effectiveness of TV shows. And LikeAssets can be the Nielsen kind of taking all sorts of investment ideas, monitoring them, rating them in a consistent way, and that can include an investor’s own ideas, other ideas from the web, from research firms, advisors.
We think ultimately armed with that knowledge of how things are performing it allows an investor to the take action to either change their strategies, or essentially even outsource it and say, “Hey, I can’t do this very well. I should have somebody else help me out.” Or, “I should be in passive ETF’s”.
Miller: Who else are you competing against? How is benchmarking done today?
Dirk: I think if you go out and you kind of canvas the portfolio trackers, and brokerages out there, there’s I think a pretty laissez faire way of benchmarking. Typically it’s the S&P 500, or the Dow. Some of the sites might actually pick your benchmark and lay it across your portfolio, or compare it.
The problem with that is that there’s a lot of different types of investments out there; stocks, mutual funds, ETF’s. Just picking one benchmark invariably fails against the portfolio. It’s not going to match up correctly.
We do all that work for the investor. We take every single stock, mutual fund, and ETF, we analyze them and classify them, and then we store that. When an investor creates a portfolio we identify for each security what the appropriate benchmark is, and we blend that together.
Miller: LikeAssets is sort of assuming a lost out of investors, that they at least have an asset allocation strategy. It’s been my experience that many investors don’t even know what that is. How do you help there?
Dirk: Yeah. I think the first step is actually if they look at those ten securities in the site they’ll be able to say, “Hey, what is my asset allocation?” So that’s kind of the first step. Then from there they can take a view on what their asset allocation should be and monitor towards that.
We can help them out with that, we can provide models that are appropriate, or they can do it on their own. And some people just don’t care, they’re just going to trade, but it still is helpful to know if your picks are meeting the appropriate benchmark. So, it can be used across the investor spectrum from people who have asset allocation strategies to people who don’t.
Miller: I then asked Dirk about benchmarking in general. It seems to be that a lot of institutional investors sort of just game the whole benchmarking thing anyway using whatever benchmark, regardless of its appropriateness, that makes them look better. I asked Dirk to address that, and how investors value performance vis-à-vis certain core baselines.
Dirk: I think so. Higher is important, but I think consistency is also really important. I think you hit upon that, which is if you sat down with five different advisors, or five different institutional players, they would use different benchmarks. They might use different asset classification systems for the same exact portfolio of stocks. They might just show different benchmarks for their picks because it might make them look better.
So, it’s hard to track what’s appropriate, and that’s what we’re trying to do because really it’s about consistency I think first and foremost. Of course, we think the quality is very high and there, but that in and of itself- each institutional say they have a high quality way of classifying assets. But I think it needs to be that consistent across the investing world for investors to get help, and better understand these things.
Miller: How proactive do you plan on being with the service in terms of alerting investors about how far they have drifted from a particular benchmark or style, investment style?
Dirk: Yes, absolutely. We want to let the investors set targets so we can do their monitoring and we alert them. If they are tracking an allocation and their performance in a certain asset class is not doing well, so they can take a look and decide if they need to make a change.
If they’ve identified an asset allocation strategy, and a couple of their asset classes aren’t performing, we want the site to help them find other ideas for that asset class that might perform better for them. Ultimately, you can search by asset class and find very specific investors’ advisors, investors’ research that can help you out.
Now if you don’t want to do all that, we also want to create models for people that can allow them to just pick those and still of course monitor them and ensure that the performance is there, and that the performance is tracked relative to the benchmark.
Miller: Many investors struggle with benchmarking their own performance because they have securities and portfolios scattered across different accounts. I asked Dirk if Like Assets was getting into the account aggregation game.
Dirk: Right now that functionality is actually available at the Seeking Alpha app store, there’s a LikeAssets app there. We’re actually bringing that functionality back into the site in the near future.
But it’s very easy that investor can just log in the way they would normally to their broker, and we’ll go ahead and get the data. We use the FX technology, which is the same thing Quicken uses to get that data. We’ll bring that data into Like Assets, and we’ll calculate the performance of their investments; Mutual funds, stocks, ETF’s. We’ll include the dividends, of course. We’ll look at closed positions and allow them to see the total performance for the account, but we’ll also allow them to see performance by individual position. We’ll create a blended benchmark based on the positions that they have.
So investors can see the performance of each position both if it is benchmarked, as well as the portfolio’s performance, and the overall portfolio benchmark. So, you’ll get an asset allocation too. An investor can start going, “Ah hah.” “I can see what my asset allocation is across accounts.” So you could have an E-Trade account, a Schwab account, a Fidelity account, and we’ll put it all in the same asset classification system, combined with performance, and then combine the benchmark.
But you can of course break it out by account and look at the performance. You might have a retirement account versus a taxable. You can also look at it by stock, mutual fund, and ETF. And I think that’s a really cool feature, because I think to being able to say, “I’ve got stocks at Fidelity, stocks at Schwab,” and see how your stock picks are doing relative to mutual funds. I think that will be very eye opening to investors, because of course many investors do much worse stock investing than they think they do. They just don’t have a really good way to get a handle on that.
Miller: I would think with all the technology and research put into managing customers at the online brokers, that they would be better at benchmarking. Is it just that they don’t care?
Dirk: I don’t know. Part of this is born out of some of that frustration into really being able to understand what my performance is, and get an appropriate benchmarking. The online brokerages do fantastic things in other areas, their screens, their execution. Maybe it’s just, and I’m just speculating, it might be just a matter of priorities for them. But I think it’s sounds to be really critical, and I think we have quite a bit of validation that investors do need to understand this. It’s really hard to make changes and invest properly if you can’t monitor how you are doing.
Miller: Like Assets was one of the first third party data vendors to participate in Seeking Alpha’s app store. Seeking Alpha launched the equivalent of the investing app store, like Apple’s iTunes store. I asked Dirk about participating in that type of community and selling their content, their tool through such an environment.
Dirk: Yeah. I think we’re really excited about that as well. I think especially with this ongoing trend for more specialized information out across the internet there’s going to be investment ideas all over the place. Long term I think it’s going to be very useful to have a very consistent way to monitor and score those different specialists. Because that’s ultimately where a lot of this will go.
There was just an article in Barron’s over the weekend about a real estate research house out in California and their picks. It’s just very interesting, because I would love to be able to say, “We have their picks for the last five years, and here’s how they’ve performed relative to the couple of different RE indexes. If you want RE exposure, these guys are doing a great job.”
And that’s what we think should be going on ultimately for investors When you have a portfolio and you find an asset class that you need, you can go here and find the ideas and the sources that are going to make the money. And that can’t happen if everybody is presenting their performance differently.
I mean people are starting to put it out there, like Motley Fool just in the past year has put out, “Here’s how some of our newsletters are doing.” But they even acknowledge that their performance is different for some of their own different newsletters and advisors, and they are having to make consistent. It’s not even consistent within that one website, let alone from Motley Fool to The Street, and other places.
So, investors are going to have a heck of a time if everybody start fires up their own performance measurement and their own benchmarks. So we think there’s definitely a place for someone who’s going to be kind of a grand central station for all of that type of analysis.
Miller: Hey Dirk, can you tell us a little bit about yourself, your own professional background and a little bit about your parent company?
Dirk: Sure. I worked in banking, before I was at Deutsche Bank. I started working with John Patterson, he was the CEO, and John Hagen, who was the CTO, about 12 years ago. We actually started working more in the defined contributions space, and worked on advice and managed account solutions together with a company called Infosys which was eventually bought by Morningstar.
Through that process of developing institutional solutions we came up with a lot of the things we’re putting out there in LikeAssets right now, like asset classification, style analysis, the performance. We also have wealth forecasting and advice that is going to be added ultimately to LikeAssets as well.
Miller: You mentioned Seeking Alpha before as sort of an expert investment community. How do you size up that new kind of second generation financial website. I know you’re obviously selling your products through that, so obviously you’re biased, but tell me what you think about Seeking Alpha.
Dirk: Well, I think Seeking Alpha has done a fantastic job of putting together an incredible wealth of investment information, investment ideas. The great thing about it is that it goes the full range from passive, passive allocation advice you can find great columnists and bloggers there like Roger Nusbaum he’s kind of an ETF guru. He has a lot of great ideas too. Very active, specific stock picks.
So, having that full range of investors there is a great place to offer Like Assets because all those people are active and taking time to really look at their investments, and they therefore should really benefit from looking at their performance, and understanding the benchmarking concept better.
Miller: I told Dirk I could imagine a time where Like Assets tools were sort of distributed out into the blogosphere and individual bloggers with portfolios, journalists talking about stocks, could use some of those tools to proclaim to their audiences how well they’ve performed vis-à-vis a benchmark. I asked Dirk if that was sort of the direction the company was taking.
Dirk: Absolutely. I think that makes a lot of sense. It goes back to the concept of being this kind of independent, objective rating, where you know it’s consistent. Somebody who’s proud of their performance can point to that and say, “Hey, I have this independence here, there’s consistence, analysis, and scoring going on over here at this site. Here’s how my portfolio has done. Here’s how their doing.”
We want to have people with the ability to track different providers of research and ideas and have grades on their portfolios every week. That is going to be a feature, so you can get email updates on portfolios you’re tracking. So, it’s going to be a great way.
We have a couple of the sites already doing research, who are doing well, that are very interested in developing a stronger connection, so they’ll have more of a regular reference to see how their portfolios are doing linked from their sites, because they like the idea of having those links to show how their research is performing in this third party picture.
Miller: Dirk has analyzed Morningstar’s role recently as sort of arbiter of benchmarking truth in the investing world with a couple of blog posts and some analysis recently. So, I asked him a little bit about that.
Dirk: Yeah. That’s absolutely right. Morningstar itself needs to be rated. I did a blog post on their mutual fund picks, and their stocks picks, and it’s very telling to me, basically they have over a year and a half, they have provided a 0% return over their appropriate benchmarks, their mutual fund picks and their stock picks on their website. I think it was a very interesting analysis, some thing you are obviously not going to see on the Morningstar website, but it just point out the need for this type of service.
Miller: Thank you very much, Dirk, for participating in this week’s Tradestreaming Radio. You can check out Dirk, and Dirk’s firm Like Assets at www.likeassets.com There’s a link to it on my blog at www.tradestreaming.com Once again, I’m Zack Miller, the author of TradeStream Your Way to Profits: Building a Killer Portfolio in the Age of Social Media. Thanks for checking us out. I look forward to talking to you again in a couple of weeks.
[music]
This week’s episode of Tradestreaming Radio is up and ready for listen. Let me know what you think and if you have ideas for future shows. You can listen below, find the transcript below or download directly to you iPod/iPhone via iTunes — search for Tradestream or go here.
This episode includes
Miller: Hey! This is Zack Miller at Tradestreaming Radio. You can find us at www.tradestreaming.com That’s where we blog, and a lot of the information that goes into this podcast is housed. You can subscribe to this podcast on iTunes, look for Tradestream.
I’m Zack Miller. I’m your host. This is the week of November 29th. We’ve got a great show lined up today. We’re talking a lot about research capabilities and how this may be impacted by the insider trading scandal that rocked the investment world this past week. We’ve got a great interview lined up with the CEO and founder of AlphaClone, which is a great research platform that helps investors piggyback on top of the best picks of hedge funds internationally. And, just a great show lined up. I hope you enjoy it, and check us out.
Always you can contact me at zack.miller@gmail.com I’d love to hear from you, any future suggestions you have for the show. Let’s get right into it.
Unless you’ve been living in a cave you’ve probably read something about a large insider trading inquiry that’s been building over the past three years. Last week The Wall Street Journal broke a story that numerous US hedge funds had been raided by the FBI, looking for evidence of large-scale insider trading. This is the largest inquiry of its kind, and has blazoned across newspapers across the world.
Beyond the merits of the case, and I don’t want to focus on that, we may do that in a future podcast, I wanted to focus more on the fascination surrounding hedge funds. Why are people so interested in it? Why do people care what Warren Buffet says? Why do thousands of people flock to Omaha every year to listen to what an aging octogenarian has to say about stocks?
I think people are really interested in hedge funds, as they’ve become the new celebrities. Many of them grace the pages of Forbes, and are some of the richest people in America. Hedge funds themselves have become the new benchmark. There’s a level of voyeurism here that investors are just completely in awe of these types of portfolio managers.
How do they get to be so wealthy? How do these guys come to manage so much money? I think the answer, and this is what I wrote in the book, comes in two forms; one is that they do better research. These are well-oiled research machines, whether it’s through technology, or through employing really smart analysts. These guys are looking under every rock, every stone, for the next investment opportunity.
The second is that they’re looking at companies that others aren’t looking at. This is their edge. Many firms, like SAC, focus on small cap companies that no one’s every heard of. There’s no research on these companies. They’re spending the time, and the energy, and money it requires to do good research on these companies.
According to a paper by Joseph Stiglitz, and this was a paper he published in 1980, the paper is called On the Impossibility of Informational Efficient Markets, Stiglitz writes, “Skilled investors are rewarded for the cost of information production; acquiring better information and/or better processing of available information that keeps markets efficient. Such ability would enable the skilled investors, efficiency insurers, to identify mispriced stocks and earn positive risk-adjusted returns as compensation for information production.”
Right? So, there’s an opportunity here for people to exploit, and hedge funds are doing it. But more than that we’ve actually seen a new strategy arise, and that’s piggybacking investors. I spend a whole chapter in my book talking about this. Part of the effort behind successful piggybacking of hedge fund investors comes from sort of discrediting the efficient market hypothesis.
I got my undergraduate degree from Harvard in Economics. Rammed down our throats was this idea that mutual funds could never beat the indices over the long-term. Some guys could do it in the short-term, but that was part of the statistical pattern, but very few, in fact almost none could show sort of this persistence of returns.
That changed in a paper that came out in 2005 called Imitation is the Sincerest Form of Flattery: Warren Buffett and Berkshire Hathaway, written by Martin and Puthenpurackal. One quote there is “Warren Buffet’s investment record suggests he is one of the most successful investors of all time.”
What they did was basically follow Berkshire Hathaway’s portfolio performance, and they stripped out some of the non-equity positions so they could follow just the stock positions within Berkshire Hathaway as a holding company. Then they created what was called the mimicking portfolio. A mimicking portfolio basically would be constructed of following Berkshire Hathaway’s monthly submissions to the SCC of their holdings, and changes in their holdings. The portfolio then would buy or sell those changes in the portfolio.
What they found was that there was significant alpha derived just by mimicking Berkshire Hathaway’s portfolio, above and beyond just having just given your money to Buffet to manage on his own. That was a huge move, not only moving towards sort of crediting hedge funds with sort of a skill level that we hadn’t been able to prove before, but also gave credence to this whole idea that, wow, by mirroring some of these guys’ activities you could actually build a back-tested smart portfolio, and that is where AlphaClone comes in.
AlphaClone is a research platform at that its backbone uses the regulatory filings of thousands of hedge funds and mutual funds around the US, and then creates a toolset on top to allow investors to devise and create back-tested investment strategies. For example, certain funds’ performances can be replicated by just picking the most concentrated holding of those funds.
There was research done to this effect by Cohen, Polk, and Silli called Best Ideas in 2009. They said, and I quote, “What if each mutual fund manager had to pick a few stocks, their best ideas, could they outperform under these circumstances? We document strong evidence that they could, as the best ideas of active managers generate up to an order of magnitude more alpha than their portfolio as a whole depending upon the performance benchmark.” Other funds, though, can be better replicated by picking the top two or three holdings.
Regardless of whether the fund could do that or not, AlphaClone provides a toolset to be able to test for that. It’s not enough just to say, “Well, Stevie Cohen is buying this stock. I want to buy this stock.” We’re talking about a full-blown investment strategy, a replication strategy, and AlphaClone provides a really robust tool to do that.
Actually I’m an AlphaClone user. So, I’m speaking from experience, just FYI.
I had the opportunity to ask AlphaClone’s founder and CEO, Maz Jadallah, what the platform is all about.
So, Maz, there are numerous products out there that track hedge fund holdings. What’s AlphaClone’s premise?
Mazin Jadallah, AlphaClone founder/CEO: Step one you should recognize that you’re probably not going to beat the market. Step two, having recognized that you should probably give your money to the world’s best minds to invest. If you can’t do that directly AlphaClone is a great way to do it.
I was curious about usages trends on AlphaClone, whether investors really knew how to craft an entire portfolio on the platform, or whether they were using it just for single stock ideas, so I asked Jadallah.
Jadallah: Both, and both to a very high degree. I’ve had conversations with managers where they combine their own insight and research on our site, and execute it, a trade that turned out to be successful. Then I also have just as many conversations with people who are waiting for the Tiger Cubs clone, or the value master’s clone, or the international clone. They like our core strategies and they apply those core strategies in client accounts.
I asked AlphaClone’s founder how fast the company was growing.
Jadallah: Well, we have thousands of registered users, hundreds of paying members. We have grown revenue by a 1,000% year over year. We continue to accelerate our revenue growth. We’re lean, but it doesn’t mean that we’re virtual. We’re real people here, me being one of them. I think the world having not ended in 2008, gave people the opportunity to see that the approach that we take is really transparent. It really does bring the best minds in stock picking, use them to derive investment strategies. There’s really no fraud risk, right? There’s no Madoff risk, I guess, in kind of what we do.
I think a lot of people were looking for a fresher approach to investing. I think the fact that we brought that to the table helped us. We think the future is bright.
Underneath the covers AlphaClone is really a content play. I was curious to ask Jadallah exactly how content plays into their recent foray into actual asset management. Clients can come in and actually have AlphaClone manage their money for them.
Jadallah: That’s really what we do. I mean our research platform is just a, it’s a technology platform and what it does is it generates all of these portfolios. Those portfolios are content. Really the better job we do at telling each clone’s story I think the interest that we’ll be able to get from our customer base and from investors, and really that’s about the content that’s on our platform.
You know we’ve got to a point now where I can’t do that all the time, and so we need a really good writer, online editor who can take our core strategies, who can take our thousands of clones and begin to tell stories around those clones that investors can understand and that are compelling, and then syndicate that content through, you know, the blogsphere and the internet, or to get the message out around what we’re doing.
That’s a really important element of success that I no longer can kind of do that all by myself, as you can imagine.
Maz, what about going forward? What keeps you up at night?
Jadallah: Our challenge will continue to be finding the right wrappers to put our research in, in order to maximize value for our clients and for us. So, we’ve got a research business. We’ve got an investment account business that applies that same research. We’ll introducing a proprietary strategy that is only available in investment accounts, or on a sub-advisory basis. I think that’s an important evolution for us.
Then that proprietary strategy may also be the basis for a pooled vehicle, whether it’s a mutual fund, or a closed-end fund, that will make it even easier for both institutional investors, professional advisors, and individual investors, because you go to the different share classes, for example, in the mutual funds, and make it that much easier for them to access our strategies. I think that’s kind of what the future looks like for us, at least over the next kind of 24 months.
Maz, do you have any recommendations for our podcast listeners as to resources you’ve found particularly useful, books, online, whatever?
Jadallah: I think there are maybe a few places to go. Obviously our help center on our site, www.alphaclone.com is a great place to start. There’s a lot of information there about what we do. The FAQs are a great place to start there.
Your book Tradestreaming (affiliate link) is an outstanding place to learn about piggyback investing, especially with the examples that you used. You make it very applicable for people to follow those examples in your book, so I would definitely point people there.
You know, Mebane Faber, who is associated with AlphaClone wrote a book about a year ago called the Ivy Portfolio (ditto), there’s a chapter in there about investing, piggyback investing, that I think is also very helpful.
I would say beyond just piggyback investing if people want to learn more I think about what it takes to be a successful stock broker, instead of reading books about hedge funds, I’d point them to a book that hedge fund managers love to read. It’s kind of a fun read too. It’s called Reminiscences of a Stock Operator, it’s a famous book. I’m sure you’ve heard of it. But I think that book really brings home what it really takes in order to be successful in stock picking, and why a vast majority of both individual and professional investors under-perform at that task.
As I’ve spoken about before, creating a portfolio in AlphaClone may be easy, the harder part that I find myself and from watching other investors use such platforms is getting people to stick to a strategy. We all think that we can outsmart the markets. We all want to do our own research.
Joel Greenblatt had a very interesting point when interviewed about the Magic Formula. Joel Greenblatt had 40% documented investment returns over a 20 year period. He created a modern day value investing formula based just upon two basic principles. He produces all of his information, puts his research online for free, for everybody to have access to. He even wrote a book how to do it.
In the interview they asked Joel, they asked him, they said, by putting this stuff out there and making it freely available, don’t you think that the Magic Formula over the future will lose its potency? Since everybody can do it, won’t that opportunity be arbitraged away? And he gave a very insightful answer. The answer he gave was that he didn’t think people could stick to a strategy like this, one that requires turning your brain off and following a rules based model.
AlphaClone provides that type of model. I asked Jadallah about that.
Jadallah: That’s right. It’s fascinating. There are a lot of behavioral techs I think that are also good kind of to read out there. But it’s fascinating that the behavior that you just described is the behavior that is easiest and most people do, and it’s exactly the opposite of what you should be doing, and there in is the challenge, right? As a human investor, right? You need to go a little bit against your own nature in order to succeed.
Miller: AlphaClone is the best and probably a myriad of different ways to mimic hedge fund performance. There some new EFT products out there, I think less than five, that use some type of hedge fund modeling. Typically they’re not looking at individual portfolio positions like AlphaClone is, and then constructing a portfolio around them. They’re just using merger-arb, long/short. They’re using basically hedge fund strategies to recreate sort of a fund that should somehow track hedge fund performance. There are a lot of sites that I call sort of Screening 1.0, they’re just combing through EDGAR, which is the SEC’s repository for all this type of information, and then listing holdings.
Market Folly is a great blog that takes that maybe a step further. So, not only is that blog going through, and the blog is run by Jay, who is a hedge fund analyst himself, not only is that blog sort of going through the filings, but because he’s an investor and he understands sort of what may be going on, Jay is trying to provide some type of running commentary behind some of those changes.
Jay also just launched a premium newsletter that comes out quarterly. It’s excellent work. Check that out as well.
Let me know if you have any ways, your own ways that you devised to track hedge fund performance.
In the next part of the show I want to drill down a little bit into the insider trading/expert network issue that’s captivating investors around the world. A very interesting poll done on CNBC, and it was quoted by Henry Blodget at the Business Insider, and in this poll some 60% of viewers reported the idea of checking with industry insiders to get real time insights into business trends seems unfair. So, we’d like to talk about the investment playing field being level, right?
We have Reg FD data came in around 2000 that prohibited preferential disclosure within the investment industry and within corporate America. Essentially that meant that was the end of the old boys network. So, what has happened though in the vacuum that’s been left by Reg FD is that the expert network has really become the new old boys network. If we think of exclusive information, or the type of information that is harder for individual investors to get, it’s very easy for hedge fund investors to actually find an edge, and that’s what they get paid for, and that’s where the outsize profits are. According to that Stiglitz paper I quoted earlier in the show, that’s what hedge funds get paid for, is that informational inefficiency. They’re the efficiency insurers.
Back when I was at the hedge fund we used Gerson Lehrman Group, which was and is the largest, the 800lb gorilla in the expert network field. I write about this in Tradestream Your Way to Profits. We paid something like $8-12,000 per month to get three different industry, basically research coverage in three different industries.
I would basically call up with an information request, saying, “I’d like to research how well…” an example I brought in the book was how well a Gateway computer is now selling on the floor of Best Buy. Actually Gateway wasn’t selling at Best Buy, they had actually merged with a company called eMachines.
In turn I was put in touch with- typically they weren’t actually current Best Buy employees, but they were store managers, or the electronics department managers who had recently left the company and were doing some consulting on the side. I didn’t get any inside information. But the type of caller that I could get by knowing sort of what trends are on the floor, what customers were looking for, what was selling well when they left, and what wasn’t, was extremely invaluable.
Now, that’s not to say that an individual investor couldn’t do the same thing. I have friends that when they were investing in Apple, you know, 1000% ago, would go to Best Buys around the US and talk to store managers and get this same type of information. This is not exclusive information. An expert network just makes it a lot easier to obtain for an investor, so there is an advantage.
Henry Blodget in tongue and cheek form really sort of drills down into like why 60% of investors think that this is unfair. What do they think that Wall Street does all day? To quote, Blodget says, “Wall Street spends tens of billions of dollars a year checking with industry insiders in one way or another. It also spends tens of billions of dollars a year analyzing financial statements that are often inscrutable to folks who don’t work in the industry. And it spends tens of billions of dollars building real time trading systems, locating its computers close to the stock exchange for faster execution and so on.”
“Why does Wall Street spend all this money and go to all this effort? Because it has to. It’s the only way it even has a tiny hope of gaining an edge over other investors. As we’ve often noted the only way to win in the trading game is to beat other investors. You can get the market return by investing in an index fund. The only reason to trade therefore is to try to do better than the market return, and again, the only way to win the trading game is to win while other investors lose.”
A somewhat simplified view of trading. It’s not as zero sum gain, when a hedge fund gets, you know, outsized returns it doesn’t mean someone else is losing in an outside manner. Everybody can theoretically win.
But, obviously, you know, hedge funds get paid a premium. They typically take 2% on assets, plus a 20% performance fee on their profits. And, they can charge those fees, which are quite hefty if you compare it to an average mutual fund, or exchange traded fund, and ETF. They get paid because they can produce, and if they don’t produce the money is not sticky, and the money finds a home that can produce at that level. Put that in your pipe and smoke it.
Expert networks I think are here to stay. I can make a case, and I did on the blog that they are a good thing, even though compliance issues are sticky around these things. They do help the flow of information.
James Altucher was on CNBC the other day. He was pitted against a industry lawyer who was actually pushing for more regulations, as lawyers should. That’s sort of their incentive. Altucher took the whole side that we should completely relax our insider trading laws. You know, it made good conversation.
And there are cases, and you know, I point to some of these papers on my blog where it may make sense to relax some of the insider trading laws. Typically having some type of structure protects your individual investor from stocks being manipulated by insiders, and from insiders sort of raiding the corporate cookie jar. But, ultimately experts networks are an efficient way to transfer information among people. They’re not exclusive in the sense that they’re capturing information that is inaccessible to other people. It just makes it easier. We’ll see how this plays out.
Next up in Tradestreaming Radio we have the Ivory Tower report. In this section of the podcast we like to highlight a recent academic finding into the world of investing and economics. This week’s Ivory Tower report focuses on an article in The Wall Street Journal that summarizes a Caplan Miller piece on the correlation between IQ and economic beliefs.
I quote The Wall Street Journal, the authors found that intelligence supplanted education as the primary predictor of whether one took an economist’s typical point of view, education moved into second place, followed by party identification, Republican, and recent growth in income. The correlation between the views of intelligent people and professional economists offer “another reason to accept the economists are right, the public is wrong interpretation of differences in opinion,” these economists argue.
We can argue forever whether it’s valuable to have an economist’s point of view. Typically most economists are not accurate when it comes to short to mid-term forecasts. But, this is very interesting that intelligence, not education sort of correlates with a professional view of the markets. I will link to this paper and The Wall Street Journal article on the blog. And, you know, I hope this was valuable in terms of some food for thought.
Next up is Tradestreaming Trend Following. This is the part of the podcast where we look at and analyze current trends. I’d like to look at Seeking Alpha today. In full disclosure I used to work at Seeking Alpha. I’m still a minor shareholder. I used to run business development for them. What I wanted to discuss today was some of the trends coming out of that firm in particular.
They did launch a mobile site, a little late to the game, but they do have a mobile site so that you can access Seeking Alpha content via a phone, typically the iPhone. I don’t know if they launched an Android model, but they did launch- yes, they did. It’s compatible with all of them.
More interestingly they launched an app store. I wrote about this in the last chapter of my book about the future of investing, about the emergence of an app store for investors. I sort of prognosticated that this would come fourth from the online brokers, right? So brokers provide a platform and gateway into the end investor and can provide an ecosystem for third party applications to reach those investors. They’ve created APIs that enable third parties to link into their platforms.
It’s been very slow. E*Trade and Ameritrade both had made announcements about their APIs in this partner program. Look to see more of that in the future.
Seeking Alpha has been more aggressive about it. On October 10th they launched a platform for web-based investing tools on the site called investing apps. Those apps let users track, analyze, and manage their investments on Seeking Alpha. So, they’re taking third party companies like Validea which basically is a screen mechanism according to guru strategies. They’ve incorporated that content into the Seeking Alpha platform. So, somebody who is a Seeking Alpha user can download these things. They were free originally. They charge now on a monthly basis for these things. You can interact with third party content within the Seeking Alpha environment.
Seeking Alpha claims they’ve had 20,000 installs, and they’ve seen all-time traffic at a high. They quoted in a recent post by David Jackson, the CEO and founder, that during the week of November 7th Seeking Alpha had the strongest traffic in the history of the site, 7% more traffic than the second strongest week in the history, and 40% more than they saw in the same week year over year from 2009.
So, it looks like they’re hitting their stride. Community is growing. They’re trying a new monetization platform, which is this investment apps. Seeking Alpha looks to be one of the firms to beat going forward.
That concludes this week’s version of Tradestreaming Radio. Thank you for listening, and I hope you check in again next week.
