Is It 1999 All Over Again?

The New York Times’ Bits blog has a post on Trefis, a Web 2.0 startup that apparently makes it easy for you to create your own valuation model for public companies. They give you starter models using public information, and you can then tweak the assumptions to come up with your own valuation. The pitch is that this puts the tools used by research analysts and professional investors in the hands of the retail investor. “Perhaps these new tools will put some added pressure on the sell-side professionals – many of whom are notorious for creating overly optimistic takes on the companies they follow.”

Or maybe they will make retail investors think they have an advantage that they really don’t. Advantages in stock valuation have to be based on superior information, which you can get by doing lots of market research (like some old-fashioned hedge funds do) or by having privileged access to company insiders. Superior information can include superior forecasting ability, so if you have some ability to predict the market size for routers better than anyone else, you can make money from it. But neither of these are things you get from models; they are things you plug into models. I’m sure the founders of Trefis don’t see it this way, but this feels to me like a great way to lure people into individual stock-picking, and thereby a boon to stock brokers everywhere.

Update: The post also links to an article about KaChing, which makes even less sense to me (except as a smart business idea that preys on people’s willingness to believe in the existence of stock-picking genius). According to the article, hundreds of thousands of investors manage virtual portfolios in KaChing, which effectively grades them according to risk-adjusted return and other criteria. Then you can subscribe to someone else’s portfolio, so that you make the same trades that she does (there is a monitoring mechanism to make sure that people are putting their money where their mouth is, according to the article), for which you pay an investment management fee to KaChing and presumably a brokerage fee to KaChing’s partner.

This is what confused me. Marc Andreesen, an investor in KaChing, said, “The concept is great — the ability to tap into not just the wisdom of the crowd, but to be able to identify and invest with the particular geniuses in the crowd that stand out.”

Market prices already reflect the wisdom of the crowd. If you create a small crowd and it doesn’t agree with the market, which crowd do you go with? As for particular geniuses, isn’t this just a clever way of marketing the coin-flipping phenomenon?

This is clearly why I will never make money investing in stocks.

About James Kwak 133 Articles

James Kwak is a former McKinsey consultant, a co-founder of Guidewire Software, and currently a student at the Yale Law School. He is a co-founder of The Baseline Scenario.

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