It’s nice to see someone poking at the ‘passive’ investing phenomenon.
In the New Yorker this weekend, James Ledbetter asked ‘Is Passive Investing Actively Hurting the Economy?‘
I have felt for a while that ‘passive’ investing has gone to the extreme.
I believe strongly in dollar cost averaging into stocks, but I also believe that Nike, Google, Apple and 6 or 7 other 8-80 brands will do better for investors over time than a basket of 500 stocks (that is what I do with my stock portfolio). I believe more people will invest if they can easily and for free buy shares of the companies they spend all their money on every day.
The financial web and ‘active’ investing and trading has not been that good an investing strategy since the internet bubble burst in 2001. I started Wallstrip in 2006 which was a quick success for investors and Stocktwits in 2008. When I started Stocktwits in 2008, I expected a Robinhood to exist much sooner than 2015. I expected the e-brokers to integrate Stocktwits much quicker. When we invested in Robinhood in 2013, the product was just a roadmap and the SEC had not even approved it. Talk about being early to a trend… Now though, Robinhood is becoming a phenomenon (relative to the growth in the industry). I can’t share Robinhood numbers but I do know from Stocktwits growth (API connections) and my spidery sense (asking every freaking person I meet) that people are loving and using the app.
Don’t just take my word for it though…here is Google Trends on the subject of Robinhood and Stocktwits.
Fred Wilson notes that as we move to the ‘Second Smartphone Revolution‘ new business models will be more disruptive than new technologies. I could not agree more. I am starting to see these new models as I run Stocktwits and see Robinhood growth. I like to use the term ‘trade gen’ though nobody else is listening. I will be patient and keep pounding the pavement.
The portal way of learning finance is in serious decline. As for making decisions it may already be dead.
I am hearing of many ‘robo’ advisors struggling (not the big venture funded ones like Wealthfront or Betterment), but they too are very small in the scope of the big passive boom we have seen.
Goldman Sachs and JP Morgan will not go quietly into the night. Here is Goldman Sachs on the subject (from the article):
Timothy O’Neill, the global co-head of Goldman Sachs’ investment-management division, told me that essentially every new indexed dollar goes to the same places as previous dollars did. This “guarantees that the most valuable company stays the most valuable, and gets more valuable and keeps going up. There’s no valuation or other parameters around that decision,” he said. O’Neill fears that the result will be a “bubble machine”—a winner-take-all system that inflates already large companies, blind to whether they’re actually selling more widgets or generating bigger profits. Such effects already exist today, of course, but the market is able to rely on active investors to counteract them. The fewer active investors there are, however, the harder counteraction will be. (As an investment bank, Goldman Sachs profits from management fees, though it also sells E.T.F.s.)
But, Goldman Sachs’s arch enemy Bloomberg has doubts about Goldman surviving in an era of ETF’s. I have called ‘peak’ Goldman Sachs on this blog when the stock was at $200.
I sense a shift.