The Wall Street Journal today mentions Covestor, a new service that enables investors to share their trades. I invested in the company, which was founded by the sonorously monikered Rikki Tahta, a fellow former board member on Moreover.
Here’s the idea, from various of the company’s self-descriptions: “Covestor.com aims to de-institutionalize money management. They provide a real-trade sharing service that offers self-directed investors the opportunity to compete with, and be rewarded like, professionals. By sharing the work they already do for themselves Covestor enables them to build their reputations, and eventually earn fees based on proof of their investment record.” And from the home page: “The smartest investors aren’t all professional money managers. Every day, adept unsalaried players around the world are matching, or beating, results of the pros. We think it’s high time for these unsung investment talents to get more recognition, more resources, more of the rewards.”
So it’s not a wisdom-of-the-crowds play. It’s a wisdom-of-the-wise play. Those who have demonstrated track records of success — and prove that by revealing their actual trades — can benefit as others see their value. How? When other investors watch what works for a successful investor and follow his or her lead. Now we can see who is succeeding — and why — instead of relying on the advice of brokers and analysts whose track records are not so clear and whose money is not where their mouths are.
At another level, part of what’s fascinating about this is, as the Journal begins to point out, people today have a different sense of privacy — or better put, a different sense of the value of openness. My parents and grandparents would not reveal such facts, even anonymously. But the key to social linkage on the internet is that you have to give up something to get something: You won’t meet other skiiers unless you reveal that you are one. This is true of social services: Facebook, MySpace, dating services. But it is also true of other arenas that want to benefit from social intelligence: You can’t call yourself an expert investor unless you show your stuff. And now you can benefit from that, thanks to Covestor. It’s also true that the more you reveal, the more value you get back.
Covestor verifies your trades (by your allowing it to take your data in directly from a broker or by Covestor manually confirming your status). You get to control your identity: you can keep it within the Covestor community or you can export your identity to, say, your blog with a widget that reports and certifies your track record.
Now I’m a dolt at investing — except, of course, for my very wise investment in Covestor and Rikki; after all, I still own Time Warner stock and I never bought Apple stock. But I will benefit from Covestor by following the leaders. Because I’m a dolt, though, I won’t do the best job actually describing the service. Om Malik, who’s much wiser and probably thus richer, does a better job:
You sign-up for the service, and plug-in your online brokerage account information and your portfolio shows up on the site, and the system creates its relative performance to the broader indices, sector indices and also creates a risk profile. It’s not a fantasy game; instead it is your real portfolio, where real money is at work.
The site, while no-frills has all the elements you would see on say Morningstar fund screen. You can see a person’s holdings as percentage of their portfolio, with relevant charts and other relevant data. Lets say, you are good at picking broadband stocks; others on Covestor can track your investments. There are shades of social networking, with a built-in reputation system. There are other features that help you gauge the quality of investment information you are getting from a person.
If the “covestors” agree with your investment style, then these covestors can allocate say a small portion of their own investment dollars to mimic your investment style. The more successful you are, the more followers you get. Think of yourself as their virtual money manager – an attractive proposition for those who take (very vocal) pride in their investing prowess. It is not that different from a blog, where unique voice or view points lead to a ‘following.’
See also Seeking Alpha’s report.