Every social investing site wants to turn the insights of its trading members into financial products that people can actually link to their brokerage accounts. Finding the few brilliant stock pickers in the crowd and then letting everyone else follow their portfolios while taking a cut of the management fees is the business model. KaChing, which is the most popular investing application on Facebook (previously called FSX), just took a major step in that direction by becoming a registered investment adviser with the SEC. Sometime in the second half of next year, it will allow its members to link their brokerage accounts to the portfolios of the elite managers on the site and automatically follow their trades.
The company has raised an angel round from some heavy hitters in Silicon Valley, including Marc Andreessen, OpenTable CEO Jeff Jordan, Benchmark Capital partner Andy Rachleff, and Kleiner Perkins partner Kevin Compton. Bruce Dunlevie of Benchmark, Doug Mackenzie of Kleiner, and former Opsware CEO Ben Horowitz are also investors. (All the VCs invested individually). The size of the round was not disclosed.
Competing social investing sites such as Cake Financial (which launched at TechCrunch 40), Covestor, and PersonalRIA (which launched at TechCrunch 50) all have the same plan. All of these sites want to disrupt the current mutual fund industry by broadening the spectrum of potential money managers. PersonalRIA sticks with professional investment advisers, whereas Cake, Covestor, and kaChing each provide a platform for talented individual investors to attract a following.
In some respects, kaChing is the most extreme example of pure social investing. Cake and Covestor both track real trades in real portfolios, whereas anyone can create a fantasy portfolio on kaChing. There are absolutely no barriers to entry. CEO Dan Carroll argues this is a good thing because you could be a brilliant investor but not have the money to actually trade. KaChing levels the playing field.
The counter-argument is that following people who are investing real money is less risky because at least they have something at stake. It’s not just play money. The recent returns of most professional money managers, however, doesn’t necessarily bear that out.
Carroll says that risk is taken away by forcing everybody to be open about their investment strategies and showing their entire holdings and each trade as it happens. In other words, the data doesn’t lie. Carroll says:
A lot of the problem is there is no transparency. We are offering complete transparency.
Well, not complete transparency. He won’t say how much he raised from his angel investors, after all. But he does demand transparency from the investors who use his site. I guess that is what he meant. Carroll himself, by the way, has a pretty impressive stock-picking record. His portfolio is up 25 percent in the past six months, during a time when the S&P dropped 36 percent.
Some other members on the site have done even better. Richard Jones has an eye-popping 372 percent six-month return, while Nick Kwok has a 97.8 percent six-month return.
Who are these people? I have no idea. Richard Jones appears to be from the UK and uses a dog picture as his avatar. On the Internet everyone’s a dog, but would you invest your money with someone who actually presents himself as a dog? Carroll thinks it doesn’t matter. You can see his holdings and you can see his risk-adjusted returns. And the site gives you tools to evaluate whether or not Jones is good or just lucky.
Carroll has some ex-Google engineers (who doesn’t these days?) cranking out algorithms like the SuperCruncher, which comes up with a skill score for each investor by comparing the source of their returns with their stated investment strategy. If your strategy is to invest in large cap value stocks, but all of your returns are in small cap growth stocks, you might just be lucky. As it turns out Richard Jones’ skill score is 0%. Maybe he lets his dog pick his stocks.
Nick Kwok, in contrast, has a skill score of 100%. So at least he is accomplishing what he has set out to do, which is to make money by investing in financials and large caps. But his research score is low. (Each investor is encouraged to write out the reasons for each trade, and the research score is determined by how many other members indicting that they agree, disagree or think it is worthless).
Of the 350,000 portfolios on kaChing, 20,000 (1,500 of which are diversified portfolios) have actually generated positive returns over the past seven months, which is no mean feat. The idea that a tiny percentage of kaChing’s members can beat the market is really appealing, and I hope that Carroll is right. But we need more data. How many of those 20,000 can stay in positive territory, or even just beat the market?
It is quite possible the leaders will keep switching out, making it very difficult to invest in a winner over the long run. The iron law of investing is that, over time, everyone’s performance returns to the mean, or worse. Why should a bunch of investors on Facebook prove any different?
The last thing an average investor needs right now is more options on where to invest/who to invest with.
“it will allow its members to link their brokerage accounts to the portfolios of the elite managers on the site and automatically follow their trades”
“elite” as defined by who? An average person picks their own “elite” based on the pictures the manager provide, the sales pitch they provide, and a short term track record? (I hope I’m oversimplifying)
Scary. Mostly scary because it will probably work, and lure dollars in from uneducated investors.
Best of luck to them, I guess.
it has been tried many times before (collective2, auto-newsletters, etc) – and never scaled beyond “yet another” profitable company at best.
To break into U.S. mainstream they will need MULTIMILLION DOLLAR INVESTMENTS, I’m talking tens of millions of dollars (Series A) just to get some attention, then hundreds of millions of dollars to scale. Not to mention a total shift in of the economy (this won’t work in a down market no matter what).
But looking at the Angel Investors list, some VCs might put in the dollars
Sweetness!
I’ve been a sell-side european equity trader for 13 years and for the first time I am at an agency only firm; I use kerChing as a surrogate prop book. It keeps me in closer touch with the mkt; it also gives me a better understanding of the US stocks which I hardly ever have traded, save the ADRs. As for the skill score, as I’ve said before… you try keeping fully invested in this mkt for 6 months, only trading it for the first two hours of opening (i go home at 16.30 when europe closes) and then come back and tell me if my returns are a fluke.
“it will allow its members to link their brokerage accounts to the portfolios of the elite managers on the site and automatically follow their trades”
When?
Interesting idea, but you need to aggregate several years of data to identify the real stock pickers. Based on probability theory, there will always be winners in a given population. Unfortunately, today’s best stock pickers usually turn out to be tomorrow’s losers, as investment strategies successful in one year tend to underperform over time. In other words, if you decided to let your portfolio track the most successful investors over the past 6 months, you’d be asking for a disappointing return.
On the other hand, this site has a better design than Cake or Covestor and might do a better job over time of attracting young investors.
Actually, it doesn’t matter how much historical data you have, it’s all in the past and what counts is the future. But I guess something is better than nothing.
I’m wondering how this is different from Zecco.
The investors.
It’s no surprise that JJ and the Benchmark guys are involved, as this is the eBay of capital management. The vision behind Kaching seems increadibly disruptive, and hitters involved are repeat winners…
Couple of points:
Like Cake and Covestor, the rise of the expert community layers in a level of competition and visibility into the asset management community that would have prevented something like Madoff from happening.
Not sure I’d want somebody who’s never managed money professionally managing my funds. Managing virtual dollars in a trading account is a lot different than the risk management entailed with managing real OPM.
What a buncha crappa.
FSX was / is a terrible application.
Looks like they sold a promise and put some lipstick on the piggy.
Whether they can execute is anyone’s guess.
Their app sort of stinks…the FSX facebook app.
Been using and following this app since the debut on Facebook and it’s really come a long way. This type of development is not easy due to the amount of data and QA involved. Seems like they pull in a new heavy hitter VC every other week. I think the idea has legs.
‘Of the 350,000 portfolios on kaChing, 1,500 have actually generated positive returns’
The problem with ranking is, that it does not contain positive information value. When you rank, you always get winners – question is whether this is luck or skill. Not the performance but the risk adjusted performance of a portfolio is relevant. All these ‘winner portfolios’ have huge Beta’s.
Another problem with ranking fantasy portfolios: What if a user generates two portfolios, one bullish another bearish. One of the strategies will win but this does not mean that the owner of the portfolio is a good stock picker.
Having said that, I believe social investments and taking on Mutual Funds is very interesting. But there are problems attached on how to identify long term winning strategies.
One correction: Of the 350,000 portfolios on kaChing, 1,500 have actually generated positive returns
That 1500 number is DIVERSIFIED portfolios with positive returns. If we are just talking about positive return portfolios, then the number is 20,000.
dan
kaching
this seems like the perfect vehicle for encouraging people to buy-in at the top and ride their investments down to the bottom by following some random person’s random short-lived lucky streak.
-mathew
…and what’s wrong with that?
Matthew.. if you’re thinking this is the top, then you clearly should be staying away from anything vaguely finance related
Matthew, keep in mind, we have status as a registered investment advisor, and all our managers that earn fees will have to sign a contract with us as if they were employees of mutual funds.
I want to stress that we will not allow anyone to earn fees as managers. The managers who qualify will have at least a year’s track record, high risk-adjusted returns, high research rating for all their holdings, high skill score meaning the manager made money according to their strategy, etc.
this application has taught me so much about investing, trends and the financial world in general. way to go KaChing!
cathy
This sounds very promising. They have quite an army of talent. I also heard that their VP of Product Management is a Stanford MBA.
dan,
One of the blogs in the trackback section says your SEC application lied. You said you weren’t taking management fees and that your advisory services were publishing virtual portfolios not actually autoentering the trades for clients. Basically the blgo says you lied to the SEC. Looks bad to me. Care to answer about this?
Pete
Blog-o-vich,
Great name…I am from Chicago
Regarding the blog’s assumptions, it is a misunderstanding by that blog. Rest assured we are counseled by the top securities attorneys in Silicon Valley.
You actually think we would try to pull a fast one on the SEC? Are you crazy?
if you’re interested in kaChing and social investing sites, you may be interested in Piqqem, which is doing what no other social investing site does – namely, applying the wisdom of crowds (vs. individuals) to stock market picks. instead of looking for the best individual stock pickers and weighting votes based on investment ability, as does kaChing and others, Piqqem looks at aggregate opinion and allows everyone to vote as much as they want, because outliers are just as important as experts in enabling crowd wisdom to emerge.
sure I have a conflict of interest, but I’d recommend checking it out regardless: Piqqem.com.
I think KaChing can add value to community members by providing a forum to showcase their investment performance. The challenge that I see is basing decisions on a trading history that, more often than not, is measured in months because survivor bias and short time frames can lead to spurious conclusions. Take a look at Marketocracy. It has a very similar business model and the fund that launched in 2001 is underperforming 88% of funds on 5-year returns.
We founded AlphaClone for similar reasons: to let investors leverage collective intelligence. The difference in our case is that we help investors find and test the stock ideas of the professionals: the world’s top hedge fund managers and institutional funds. I’m looking forward to seeing how the wisdom of crowds plays out against the track records of the pros.
When Cake Financial launched at TechCrunch40 in September of 2007, we were one of the first companies to introduce the idea of complete transparency in retail investing. Our mission is to help the 30MM investors in the U.S. maximize their returns by giving them personalized insights they can’t get anywhere else. Cake is not a “social investing” site- a term meant to convey the application of the communication capabilities of social networking sites to investing- but rather a personal service to help people make better investing decisions. Cake is incredibly powerful even without the community component.
Over the past few months, a variety of new companies have been compared to Cake, collectively calling us “social investing” websites. I thought it would be helpful to categorize these newer sites so that investors can be assured of getting the kind of help they need.
Cake is a service for the people who want to minimize the time and expense of managing their investments, while increasing the likelihood that they will have enough money when they retire.
Only Cake provides both an immediate and detailed analysis of an individual’s investments AND of the aggregated data of individual investors. Cake places unprecedented power in the hands of everyday people by providing insights about their own performance they can’t get anywhere else as well as from other Cake users.
Cake delivers value in three unique ways:
1. Cake is about you: We enable investors to add an unlimited number of retirement and brokerage accounts and to instantly and easily see their risk, asset allocation, and returns for up to 10 years;
2. Cake gives you context: We provide context for your investment performance by showing how your returns and metrics compare to common benchmarks and, for the first time ever, other investors; and,
3. Cake gives you personalized ideas: We assess your investments and give personalized ideas for improving your investment scenario.
Here are the three types of “social investing” websites, none of which are based on real investment data nor do what we do at Cake.
1. Fantasy Stock Sites:
These are websites that give users $1MM or $10MM in play money and allow them to build a portfolio. These sites enable users to keep track of and display their “returns” to the community. The hope is that some users will pick stocks that significantly beat the markets and that they will develop a large following that will want to mimic their moves in the real investment markets.
The biggest challenge for these sites is that they use “fantasy portfolios” that provide no incentive to create valid investment strategies with real money at stake. These sites also only track a limited time period, so they may have difficulty giving enough people the confidence required for them to put down real money to follow these “outperforming” portfolios.
2. Model Professional Portfolio Sites:
These are websites that take the opposite approach to #1; rather than trying to identify great everyday investors, they seek to decipher what the pros are doing and mirror the performance of top funds. These sites take the regulatory filings that all mutual funds and some hedge funds are required to make on a quarterly basis and develop model portfolios for investors to emulate.
The challenge for these sites is three-fold. First, the reason these managers do not mind the filings is that there is a 3 month lag between their moves and when they disclose their positions. By the time they report something, the funds have most likely changed significantly. Second, a majority of top hedge funds are exempt from such reporting requirements and therefore provide no insights into their holdings. Last, there is no evidence that shows that professionals outperform individuals.
3. Market Predictor Sites
These are websites that allow users to “predict” whether the market or individual stocks will go “up” or “down.” Similar to #1, users develop a track record of predictions and then their votes are weighted more heavily than others on the site. The idea is that this aggregated data will give insights into where markets or stocks are headed and that you can capitalize on this “collective sentiment” by buying or shorting those stocks. The biggest challenge for these sites is to provide an incentive for people to want to come back and continually make predictions.
With the current economy and market situation at the worst most of us have seen in our lifetime, we need all the help we can get. The Cake service offers the best way for investors to navigate through these difficult times.
The “SEC Gives Green Light” headline here is totally misleading and dangerous (Erick, what’s up?). I can’t understand how kaChing and CoVestor can dupe both reporters and investors, at least any who have heard of the term due diligence.
The fact is that no legitimate broker dealer in the world will risk its license or the inevitable litigation which will arise from unhappy investors just so kaChing or CoVestor can pay Joe-The-Plumber types a few bucks for a hot hand (no matter what they call the payment). Nor will you find a clearing firm to clear the transactions. It is simply in violation of the 1940 Investment Advisors Act.
Dan Carroll likes to post so let’s see if he will actually tell us what formal assurance he has received from either the SEC or FINRA.
Go to http://www.advi..._OrgSearch.aspx and type in “kaching” and click the resulting name link. Then look at Schedules A and B. You will see that Andy Rachleff invested in and became CEO of kaChing more than two years ago. The only news this year is the merger with FSX (Dan Carroll) in January and some angel money from Rachleff’s friends in June (I doubt any of them know how to spell FINRA). So this is just a fluff announcement to appear to have something fresh. It will only mislead the truly uninformed.
Nice transparency!
I have had a long history with this type of online application. This would include iExchange.com and marketocracy. KaChing’s edge is that it fully embraces open source community and it embraces the social networking framework. This will be important for KaChing’s maturation and evolution.
C hris L au
You really need to update this article
http://www.nyti.../19kaching.html