Who is your favorite investor? Warren Buffet, Peter Lynch? Do you wish you had their insights? What if you could link your brokerage account to theirs? That exact concept is brought up in an article from the New York Times hosted on Yahoo! Finance: for a fee, your brokerage account can mirror that of an expert investor.
KaChing!
Daniel Carrol started the company KaChing last year, but just yesterday this new mirroring feature started. KaChing lets investors manage a virtual portfolio; trades are strictly for pride and education, and not for money. However, the ‘expert’ investors are certified based upon their own linked brokerage account (according to the NYT article).
Why is it important the investors have real money on the line? Simple: virtual portfolios don’t accurately capture the investing style of investors. When there is no money on the line, there is no risk; only upside. If there is a virtual portfolio contest, the ideal strategy is to go for broke and take the riskiest trades possible. Not so in real life investing; risk has to be considered since there is downside potential in risky trades.
Potential Problems
The experts sign all sorts of regulatory documents I’m sure, including as the article states, documents on front running. However, insider trading cases are rare in general, and the ones that are prosecuted tend to be on the larger side. It’s true; for any significant insider trading profits, an investor would have to have a very significant following. Experts frontrunning stocks with other brokerage accounts would probably be too obvious, but that wouldn’t prevent information from being passed to cohorts who could profit.
Again, problems with this style of investing are largely theoretical. Large followings for certain experts will change things, but if experts have only a few followers, there won’t be too much price distortion. If the concept catches on, expect expert following to go the way of mutual funds: avoidance of smaller capitalization stocks due to insufficient daily volume. Obviously that’s a long way off, but it’s worth stating now.
Worth It?
That’s a personal decision. Personally, I may want to follow the insights of a certain elite crew, but I wouldn’t put my money in their hands. I enjoy the thrill of investing my own money, and I can only blame myself if a trade turns on me. This program will shift blame to the expert, even though you chose to ‘invest’ in their investing intelligence. I feel like, yes, this may have some value. If fees are low and performance is there (a huge if!), this could even undercut mutual funds at some point (but then again, ETFs were supposed to do that- and haven’t yet).
Remember, I’m not a financial adviser, so make your own choices. My choice? I’m sticking with my gut and doing my investing on my own. You?
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