Friday, April 24, 2009

Mutual Funds Are So Yesterday

There is something big, very big, brewing in Silicon Valley. I believe it will change the face of money management forever. It is so new that few have heard about it and, among those that have, they don't all get it.

I was recently asked to guest blog at That's former internet research analyst guru Henry Blodgett's investment blogging empire that includes Silicon Alley Insider, Clusterstock, Green Sheet and The Biz. Hoping to get off on the right foot with the gang, I submitted what I considered a blockbuster post about this new big thing. It was rejected by editor Joe Weisenthal.

There's something ironic about a Blodgett operation, since Blodgett was stuck in internet stocks at the top of the internet bubble, rejecting a story about a company that I believe will revolutionize the investment industry via the internet.

Maybe Weisenthal just needs to sit down with Dan Carroll and Johnathan Galore of kaChing the way I did this week in New York City. But Carroll and Galore have me convinced. Here's what's going on.

There are some big money Silicon Valley VC's putting heavy money into kaChing. The way they see it, as explained to me by Carroll and Galore, the future of money management is going to be hundreds, make that thousands of traders, who will manage money by trading virtual accounts.

That's right, virtual accounts. According to the theory, the virtual world will eventually reach out and take a big bite out of  real world money management. I think it is going to happen.

kaChing is set up so that the best virtual traders will rise to the top, get noticed and catch the attention of real money investors. If the virtual traders have proven themselves over time, investors will want to put their real money in sync with those virtual traders, goes the theory. And kaChing is going to provide the platform that will allow this to be done.

Through kaChing, right now, you can follow various virtual traders. Later this year, kaChing is going to launch a platform that will allow investors to send real money to a brokerage firm that will become affiliated with kaChing. Once money is at the broker, an investor will be able to identify to the broker, through his kaChing account, the virtual traders whose trades he wants to mimic. As a virtual trader puts on a trade, a real trade will then be made simultaneously in the brokerage account of the investor.

Now get this. This is what is going to attract some of the best traders in the world into becoming virtual traders. Every virtual trader will receive a management fee for every dollar that a real world trader mimics with real money. The percentage size of the fee for money under management will be determined individually by each virtual trader.

Carroll and Galore argue that these virtual traders will be much more transparent than mutual funds. The virtual traders will not only identify their trading strategies but will discuss individual stocks they have added to their virtual accounts. They may even put out research reports on the stocks they have bought, explaning to kaChing traders why they are bullish on a particular stock. There will be real time discussions about a virtual traders portfolio, with the virtual trader having the ability to comment at any time.

When was the last time during a crisis in a stock that was held by a mutual fund you owned, did the money manager of the fund respond in real time to the situation? Huh.

The structure of kaChing is such that I believe, over time, it will force to the top traders that have the ability to be great traders and also have the communicative skills to hold individual investors in a stock during periods of growing pains. Some of the next Warren Buffett's and Peter Lynch's of the world will emerge out of kaChing. The difference will be that the kaChing platform will force these new great investors to be much more communicative to the average investor as to how they trade and why they may be putting on specific trades.

In my mind, the power of this idea is so strong that mutual funds will eventually turn into dinosaurs. They won't be able to compete with the creativity and information flow that kaChing will be able to generate. This is a very, very big concept.


  1. Wow... first, calling a bottom in the recession... now, picking the next big innovation in combining the internet with money management. Whoa, heady stuff.

    I'm not sure your recession bottom call will hold. BNP Paribas makes some compelling arguments against (

    I just see one tiny little flaw in the kaching virtual trading model. In the real world, moving significant amounts of money around the market creates a reaction in the market. Sort of a Newton's Law kind of thing. In the virtual world, there will be no such reaction; the results of the action taken will then be skewed. For instance, if in kaching land I decide to dump 500K share of MSFT, how can they possibly determine what the results would be? In the real world, there might be pent up demand for MSFT and my shares get greedily lapped up. Or, everybody else could be dumping MSFT too.

    I would have very little confidence that a virtually tested money manager would achieve the same results in the real market.

  2. I'm kind of blown away by this idea--it's just so good. Its brilliance should be immediately apparent to anyone who understands the distributed power of the World Wide Web.

    And isn't it funny how it's only after we hear about an idea like this, that we're like, "Well, yeah, obviously..."?

  3. @ StevenInOhio

    I thought about the "Tiny little flaw" myself. But I think the kaChing market adjusts for that. If both of us have thought about it, then obviously it will be all over the boards at kaChing and no trader will have a strong track record if he buries people in thinly traded stocks. The beauty of this is transparency and knowledge all converging.

  4. If you think about it, the things that are missing will be the ingredients that will seed the next big thing. Transparency and accountability are only two of such things that do not exist even today, and even with the intervention taking place to "save the markets."

    These two factors exist not only in a system (kaChing's architecture and business model) but also need to be rooted in the very traders that might be quite possibly the next Peter Lynch.

  5. This sounds like a real world step in the direction of the ideas explored by David Friedman in his recent book.

  6. The only problem with this is that most investors have no idea what they are trading (really novice investors who read internet stories to make stock picks) and the fact that virtual trading will result in goverment regulation of the internet which means fees. To add to that, you will pay fees to places like KaChing for the service (of course). This is just another idea that is "neat", will get some play, but won't be a bread and butter service. Not for at least another 20 years. Remember, over 80% of the countries wealth is tied up with the baby boomers and most of them don't like or even know how to use the internet. Time will tell.

  7. Anonymous,

    I really doubt kaChing will allow users to invest with investors who don't meet a certain criteria. They are the first in the space to become a registered investment advisor which is impressive in itself.

    I would think the investor publishing research would satisfy your worry that the "investor has no idea what they are trading" You have to be smart to enter thoughtful research

  8. Prediction of first massive abuse of kaChing:

    Trader gets noticed, gets people to piggyback his trades, then when he hits critical mass (in terms of piggybacked investors), he begins selling into the furious piggybacked buying of his investor-followers.

    Result? A classic ponzi-scheme, where the trader "takes the money and runs" and all his piggybacked investors get whiplashed on their trades, buying in high only to almost immediately sell back low automatically in response to the lead trader's moves.

    Corollary problem to this is the fact that many traders who are actually talented will not want to work with kaChing because it is people's ignorance of their trades (which are generally contrarian in nature in terms of buy and sell points) that makes them profitable in the first place. If they have tons of people wise to what they're doing and piggybacking along, they'll be "making the market" they're trying to trade against and they'll have no signals to go off of.

    Another potential concern is that this will lead to even SHORTER time horizons for "investors." After all, to really be able to trust a TRADER that he'll be a good steward of your INVESTMENTS, you'd need to observe his trades over a number of years.

    Hmmm, but it certainly does seem intuitive and if it isn't abused in these ways (or others) definitely could be revolutionary. It could also die the sad, pathetic death of poor timing. By the time they get this service going, so many people are going to be so much more burnt by the world of the stock market than have been already (oh yeah, we're goin' down from here!) that their disgust will be too overwhelming to consider a service like kaChing.

    Happy to be a "naysayer" that the future billionaire kaChing creators can point to when they reference people who didn't believe in them. :)

  9. Response to TAYLOR:
    The site already restricts trades to be no more than 30% of average daily volume. This will mean trades will not be for illiquid stocks.

    If kaChing gets big enough to affect stock prices, that would be quite an achievement. But until then, it doesn't have to be dealt with until they "cross that bridge first."

    Remember stock pumpers who used message boards back in the day? That, too, was dealt/resolved one way or another.

  10. Fabulous idea! ( works on similar principles)

    - My biggest concern would be that the people at the top of the rankings would be the 'luckiest' traders not the most skilled (see Taleb - Fooled by Randomness). A trader who puts 95% of his funds into some obscure biotech stock that hits the jackpot could become a star, when in fact, he just is just a lucky fool. Now, to a certain extent this exists now in the fund management world but kaching would exagerrate this. The system would need some method of filtering this effect out, although I am sure it could be resolved.

    (- re the ponzi-scheme problem, I don't think it would actually play out because if a trader gets a big following he could make far more money, assuming that's his motivation, continuing to manage investor's money than he could exploiting them once).