Social networking has reshaped the Internet and is now part of American culture. Facebook, the Internet's most popular social networking site, has 400 million members worldwide and more than 130 million unique visitors monthly. Twitter, the micro-blogging site, lures 22 million unique visitors a month, while LinkedIn, the social media site for professionals, registers 15 million unique visitors monthly. The vast majority of users registered in the last three years. Google, the world's dominant Internet company, just integrated social networking capabilities into Gmail because it fears losing its grip on Web traffic to other sites.
And now a newer phenomenon has emerged that uses social media technology to make investment decisions. I call it social network investing. The trend is just now in its infancy, but it could mean a sudden, radical shift in the way most investors behave, and its popularity is almost sure to grow over the next decade, just as online brokers revolutionized the way Americans invested in the 1990s.
I made up the term "social network investing" to describe a new Web site called Covestor. The site enables individuals to shadow trades of professional investors. When a pro makes a trade, Covestor can automatically and immediately duplicate the trades in the portfolios of those subscribing to the professional's advice. It ensures that the securities are listed on U.S. exchanges and that they meet capitalization and liquidity requirements. If you subscribe to a model, it purchases the security for you to reflect the same weighting that's in the model.
Covestor gets paid an advisory fee for allowing subscribers to follow the professional investor, and it splits the fee evenly with the professional. The more people who follow the professional, the higher the fee he can charge.
There are a handful of other Web sites that allow users to track professional investors (and wannabe professionals), but Covestor is the only one I could find that has built a platform to support the automated execution of shadow trades. The site is sure to be the first of many that will enable the instant replication of a portfolio.
This is the way the world is headed because people love social media. It empowers anyone to become a star or a famous expert (like Obama Girl), it taps the collective wisdom of the crowd (as Amazon's ratings do) and it instills a trust born of transparency (as eBay does). Social network investing plays on all these strengths.
Covestor has smart money and people behind it. Union Square Ventures, one of the venture capital firms providing it with funding, has backed some of the hottest properties on the Web, including Twitter, Foursquare and Clickable. Covestor's three co-founders have all experienced success previously: Perry Blacher headed business development for Microsoft MSN in Europe, and later was a principal with Chase Capital Partners, a private equity unit of the big bank. Richard Tahta previously held senior roles at several startups, including ARK Information (which was acquired by Thomson Financial), WebTrack (acquired by Jupiter Communications), Steelhead Systems (acquired by Merrill Lynch) and Bookpages (acquired by Amazon.com). Simon Veingard spent six years managing Goldman Sachs' Investment Banking information services across Europe and Asia before joining Ernst & Young as a management consultant.
Among the other social networking sites is Stockpickr, owned by TheStreet.com, which allows its community members to see the stock picks of other members as well as those of professional investors. Zecco is an online brokerage that offers free stock trades and access to a community of investors who can choose to make their portfolios and track record public. The site Marketocracy, meanwhile, displays the track records of "analysts" and offers some related investment products based on their recommendations, though the analyst's portfolios are only models and do not show real trades executed with real money.
Covestor is different from these because its traders can use real money and its followers can copy all their trades as soon as they are made.
Covestor.com, the public site that is free to join, lets members create and track a portfolio like these other social network investing sites. Your positions and trades allow you to create a track record. One major difference is that Covestor.com tracks an actual portfolio using real money. You can create a profile that includes information about your investment style, your risk profile and your personal information. You can also import posts from your blog and create a fact sheet about yourself, and your holdings and track are displayed. Any member of Covestor can click on your profile and see all this information. Members can also post questions to you and your answers are displayed.
After creating a one-year track record on Covestor.com, you qualify to move on to the company's next service: Covestor Investment Management (CVIM). This is a separate secure Web site where your portfolio can be replicated for investors and you can make money by charging a fee. CVIM is a registered investment advisor and the actual manager of the portfolio you run. You can be a sub-advisor on CVIM, splitting the fees with it evenly. Even if you are not an IA representative, CVIM's contract still allows you to be paid for running your portfolio. You set your fee and indeed some CVIM sub-advisors levy hefty fees of 2%. But if you have a good track record, people will theoretically be willing to pay it and subscribe to your portfolio.
Your portfolio performance is tracked by Advent Software Inc., and your results comply with global investment performance standards administered by the CFA Institute.