You have to feel sorry for average investors. After combined losses of more than $8 trillion in net worth during the credit crisis, the mortgage-backed securities debacle, and the downgrade of US debt, they still saw no alternative to paying the investing industry more than $376 billion in fees last year.
What if there was a better way?
I talk with individual investors every day, and, like them, I’m frustrated with the status quo. But I’m also inspired by the growing number of investors who have responded by reclaiming their fiscal futures, demanding transparency, and insisting on lower costs. I call them Citizen Investors.
Like their distant cousin the Citizen Journalist, Citizen Investors weren’t born out of revolution, but by evolution. They were created by evolving trends that combined a sense of empowerment with a set of powerful tools. As I see it, the Citizen Investor is shaped by three distinct desires: a) making the most of human intuition; b) a methodology that brings power and discipline to that intuition; and c) a platform that facilitates intuitive and rational investing.
You Know What You Know
Investing guru Peter Lynch first popularized the idea that great investments are all around us — we just have to open our eyes to see them. The story goes that Lynch would send his teenage daughter out shopping to learn what people were buying. Her report that denim jeans and white button-down shirts were selling like crazy led to his groundbreaking investment in Gap. It was this “invest in what you know” philosophy that helped lead to a remarkable track record at the helm of the Fidelity Magellan Fund.
Unfortunately, many of us ignored the lesson. We became seduced by more complicated financial products and their promises of better returns. And we all know how that turned out.
But Citizen Investors did learn from Lynch, and they approach things differently. They look at the world and see great investing ideas. They invest in what they understand, what they’ve learned, and what they like. It’s an inherently natural approach – almost instinctual – and one that’s free from over-complicated ideas or suggestions from overbearing advisers. You have the idea. You invest in that idea. If it works, you get rewarded. If it doesn’t, you don’t.
A Method to the Madness
Finding a great investing idea is one thing, making it happen is another. And unfortunately, we’re all inherently poor stock-pickers (even those who do it for a living).
Nobody has proved this more forcefully than Jack Bogle, who founded Vanguard, and unsurprisingly, the first index fund. He’s shown that over periods as short as five years, only a sliver of fund managers beat the index each year. . And of that sliver, most fund managers were just lucky. That’s why you see the same managers outperforming one year, and underperforming the next.
In fact, one study showed that if you use a totally random method, like a dartboard or a psychic chicken, you’d be more successful. That’s right – fund managers actually underperform randomness! Bogle has argued – and probably proved — that the fund industry serves itself, not its investors.
This insight led to the success of index investing, as well as exchange-traded funds –the index fund’s newer mutation and a Citizen Investor’s valuable alternative to stock picking.
But ETFs don’t necessarily correspond with those great investing ideas, like a looming world water shortage, or an upcoming election. That’s because ETFs were often built around the asset-allocation model, and were created primarily for institutional investors. Individual investors have little choice but to accept what the index or manager has to offer.
Yes, there are thematic ETFs out there, but I find that by the time they’re available – up to 18 months later — the unique idea is already mainstream.
Citizen Investors know they can’t beat the index, but they’re not satisfied with the two obvious choices: building their own portfolio of individual stocks or buying ETFs.
Raising the Platform
Financial deregulation gave rise to a new breed of brokerages that were able to compete on trading prices. With the advent of the Internet, the online brokerage pioneers – household names like E*TRADE and TD Ameritrade – had the ultimate cost advantage.
But that’s where most of the innovation seemed to end. Despite some improvements and a broader choice of investment vehicles, those early innovators have missed the paradigm shift that Citizen Investors are beginning to demand.
I don’t see a breadth of financial products offering a way to invest in ideas. For example, try to find an easy way to invest in the mobile Internet with a traditional online broker – not just the iPhone, or just mobile ad networks, but everything that feeds that growing industry. How do you do it?
Motif Investing for the Citizen Investor
When Tariq and I cofounded Motif Investing, we wanted to build a platform that would empower the Citizen Investor to turn those great ideas into real investments. Our platform puts the investor in control and is focused on ideas, transparency, and low cost. And, because we want to help investors help each other, it’s also a community.
We didn’t build Motif for the privileged or for the few — but for all of us striving to be Citizen Investors.
— Hardeep Walia, CEO, Motif Investing, Inc.