This is how most people save for old age: They visit a broker who sells them a policy linked to a large financial institution. They deposit their savings every month – and hope that the analysts at this institution invest their money safe and secure in the stock market. These investors know what they’re doing, so the thinking goes, buying low and selling – and are happy to receive a small fee for this knowledge.
But it is this fee that also takes a big bite out of their savings. Think about it this way: Assume a 25-year old student with a $25 000 retirement fund contribute $10 000 every year. The fund earns 7% per year and the student plans to retire in 40 years. If the management fee is just 1%, the student will earn 25% less – $1.8 million versus the $2.3 million, a substantial amount.
The reason why most people have been willing to pay such fees is because it has been difficult access stock markets directly. A lot of homework was required to choose the best stocks, either through technical analysis – which uses statistical tools to analyse price and volume movements – or fundamental analysis – which rely on the careful assessment of company records. It was simply too much time, effort and money for the man on the street – a reason why big asset management firms were often a welcome relief.
But things are changing. New online platforms now give everyone with a little bit of savings access to stock markets. In South Africa, for example, EasyEquities allow users to purchase locals and international shares, or fractions of shares, from the comfort of their living room; suddenly, South Africans across the income distribution can invest in innovative companies like Tesla or Amazon or Google. In late November, the Purple Group, owner of EasyEquipties, released their annual financial statements: EasyEquities’ profits increased by 136% and the assets on their platform by 141%.
These platforms not only allow direct access to the world’s most innovative companies, but they also anyone to become a fund manager. Consider Heloïse Greeff, originally from Cape Town but currently a research associate at Oxford University, where she also graduated with an MBA. Heloïse is a machine learning guru who uses these tools to monitor large-scale water infrastructure projects in Kenya and Bangladesh. But it is another persona that you discover when you visit the online trading platform eToro.
Just like EasyEquities, eToro is an online platform that allows users to invest in global stocks. What makes eToro unique, however, is that you can copy other users’ investment decisions. This is how Heloïse made a name for herself: haar investment portfolio that she opened in June 2016 has been so successful that she now has almost 3000 copiers – with almost $5 million invested in her decisions. And there is good reason why these users copy her: her portfolio increased by more than 20% in 2019 and by almost 40% in 2020.
In August, the news agency Bloomberg asked her about her success. On her eToro page – she goes by the name @rubymza – she summarises it best: ‘Data and research’, she explains, ‘has served me well over the years and continues to be a key part of my strategy. Patience is the key to long-term success. And don’t obsessively check your portfolio or stop copying when you see a bit of red – especially in the current bull market. Invest for the long term.’
Platforms like eToro expose more people to stock markets than traditional financial institutions. I ask Heloïse about the reasons for her success. ‘Being a successful popular investor is about letting people exercise their freedom of choice. People now have the ability to choose within seconds to copy and uncopy me. It is this uncopy option which is really important. There is no contractual agreement for copying and no penalty for uncopying thus their loyalty is simply based on the performance metrics of my portfolio. And this is the second key distinction… “my portfolio”. I have skin in the game. My portfolio is my own money which I manage for myself and so if my copiers lose money – I am probably losing too.’
‘And that brings us to the third and probably most important factor – transparency. Everything about the copy trade is transparent – potential copiers can see my history down to every single trade I have ever made on the platform and they can see my equity commitment as an Elite Popular Investor, including number of copiers and AUM. Armed with this information, people choose to copy me. I have never encouraged anyone to copy me – if anything I have told people not to copy me if my portfolio goals do not align with their own. And so people really buy into my philosophy and track record as an individual first and a PI second. Of course, it also helps that they have direct access to me – I don’t know many (if any) other funds where you can directly question the fund manager about their investment choices and future plans? I’d be surprised how many people actually know the name of their fund manager (not broker, of course)!’
Don’t make a mistake, there is still risk involved. eToro warns new users that more than 70% of existing users lose money on the platform – certainly better than gambling, but not by much. The reason, as Heloïse suggests, is that most users follow a get-rich-quick approach, taking huge risks, leveraging and speculating. This often gives these kinds of platforms a bad reputation. But as a new study by UCLA economics professor Ivo Welch shows, the idea that these platforms encourage riskier behaviour than conventional stock trading. He investigates investment behaviour on Robinhood, an American platform. He wants to know how retail investors, as users on these platforms have become known, differ from the stock traders as big financial firms. The answer? Not a lot. Robinhood investors also tend to invest in large, safe companies and do not have a greater preference for smaller, more volatile shares. (Interestingly, they do seem to have a slightly greater preference for cannabis-shares…) The point is: Robinhood investors typically do not underperform standard investment models.
Heloïse agrees: ‘Experts (in any field – not only finance) keep the layman out by using complex jargon – and the finance/insurance sector in South Africa has been particularly good at this. Like the democratisation of knowledge through the internet, the “social” element of these platforms empowers the “hive mind” to utilise their collective intelligence to the make complex decisions with greater ease. As with any innovation – timing is paramount and we have really seen these platforms take off during the C-19 pandemic as people were stuck at home, with more time and traditional betting sites closed (at least in the UK). Bloomberg Intelligence reported a 97% increase in retail equity volumes after March – in the UK that was about £10bn.’
Platforms like eToro is leading a revolution in investing. ‘The rise of the retail investor is challenging the role of traditional institutional investors because they don’t play by the conventional rules. Retails are often criticised for their lack of training and sophisticated models but their bullish approach and increasing numbers have in large been driving the stock market run since March. Those leading the retail revolution have lost trust in the opaqueness of conventional investment vehicles – not to mention the barrier to entry (and exit!) and the middleman who takes their cut. The copy trading functionality on these platforms further reduces the barrier to entry for followers who want the advantage of lower fees with the benefit of a managed portfolio. Technology is blurring geographical borders and easing the movement of money – I have copiers from every corner of the globe and I can invest in almost any stock exchange, on one platform, within seconds – without waiting for layers of people or paperwork.’
Capitalism for all, indeed.
*A shortened version of this article was originally published in Rapport (in Afrikaans) on 13 December 2020.