New Ways to Invest in Startups

It was a big day for democracy on Friday. Oh! and hello after almost two months! I've been busy plotting the takeover of the world, and the education of third graders. But let's return to democracy, because it just got easier.

Technically, the term I'm looking for isn't democracy, which is a political process, but participatory capitalism, which is an economic one. But journalists are calling the SEC's move to let unaccredited investors invest in startups and early stage companies the "democratization of capital" and I approve of the sentiment behind the statement. In a world where the middle class is disappearing, it is tempting to return to Bernie Sanders-style socialism or some vague hope that "good jobs" will return from the nether [hint: they aren't in China and you don't want Chinese working conditions to come here]. However, socialism has proven to be remarkably unwieldy lately - witness the strangeness happening in Europe at present, or the growing social insurance of the advanced economies.

Part of the problem seems to be a lack of participation. As a teacher, I have observed that lessons that involved participation are more easily accepted by students. Student misbehavior decreases, excitement builds, and arguably learning increases. I think a similar force is at work in capital markets as well. Hitherto, capital markets have been restricted to accredited investors (individuals with net worths above $1 million, incomes above $200,000, or institutions such as banks or universities). Once a company has been capitalized, shares can be sold on secondary markets (the "stock markets"). All of that changed on Friday, when the SEC released new regulations that allowed any individual to contribute a limited sum to early stage companies.

The power, now, lies with the people. Entrepreneurs and capitalists want to move to a crowdfunding venue because of the enormous wealth that can be tapped - by some estates as much as $85.7 trillion. This number is the size of the US household wealth, which theoretically can be tapped to provide capital either through direct investment with cash, or through the sale or mortgaging of assets such as gold or houses. 300 million people can now invest, instead of the 3 or 4 million who could before.

And with investment comes power. Investing in a company is a sign of ownership and wealth. 90% of startups fail, but of the 10% that succeed you have runaway successes like Facebook and Google. 5-100 times the investment is the average return. A startup investor, with a little due diligence and common sense, can become quite wealthy indeed.

But the true power of investment is not in wealth. It is in power itself. The global influence of Google is an extreme example of a general rule. Corporations are perhaps the most powerful entities in the world (with the possible exclusion of nuclear-armed states). And the power behind a corporation is the stockholders. The CEO, for instance, may seem all-powerful, but many have been forced from their position by the board of directors, composed of the largest stakeholders.

And here lies the potential for the people of the United States (and the world). The labor movement in the US is moribund. The power of those who walk out, who strike, seems at an all time low. But this is because the central relationship between union members and management is still that of employed and employer. Management can always justify the decision to hire scabs, or close plants and move to some distant part of the world where the people are more scared and the taxes more corruptible, by appealing to the return expected by shareholders.

But what if the unions WERE shareholders? The power of the purse would be in the hands of the employed. Of course, companies have been employee-owned before, but this is not a common model and often leads to strange decentralization effects. Now, however, union members can pay small, nominal fees to enter the ultimate elite of their corporate employer.

It has always been possible to purchase small bits of companies via the unionized workforce on secondary markets, of course. The scale and size of the mature corporation, however, prevents this from being the first attempt at such a union ownership force. Walmart has 2.1 million employees, worldwide. There are 3.21 billion shares of Walmart stock outstanding (meaning in the market at present, not held by insiders or funds). To buy every share outstanding would require each employee purchasing about 1500 shares, costing nearly $107,000. In reality, it would cost a lot more, since  such a massive buying spree would cause a surge in equity prices. This would still keep the unionized workers at a mere 2/3 ownership, dispersed among 2 million unorganized people. And union hierarchies are not, currently savory characters to deal with.

But an early stage company could be successfully bought up by the conscientious outsiders, the workers and the people of goodwill. They could form a sort of oversight organization, dedicated not only to financial oversight but also social and environmental oversight. The board of directors of a corporation is supposed to do this, but when it is primarily composed of relatives, school friends and professional associates of the CEO, or at least his fellow upper class stakeholders, the groupthink becomes ant-like. With a young company, this pattern of control and responsibility can be set up right away, as the company grows.

One final cautionary note: people used to be able to invest in startups anyway. Until the Great Depression, anyone could help capitalize a new company. The only problem was that most people were barely above subsistence level and did not have sufficient capital for a spare set of boots, let alone a share of a company. When the US population became richer, in the 1920s especially, it flocked to the capital markets for a quick gain, much as the Chinese middle class has been doing recently. This all crashed down during the Depression, and the government squashed non-accredited investors investing in the highly risky startup market. The power that has just been handed to the people can lead to a lot of vanity and stupidity. Use it well, humanity.

Should Christians Be Capitalists?

     Capitalism is falling on hard times. Although Communism theoretically has disappeared (but there are those who argue that the USSR wasn't even Communist anyway), Capitalism has its detractors. Unregulated capitalism, after all, created the 2007 collapse. It is seriously implicated in the environmental crisis. A culture of short-term speculation in New York and San Francisco, especially the "disruption" types of Silicon Valley and the "innovative products" types in the investment banks, has made Capitalism seem like gambling with other people's money. Many, many people question the effectiveness of Capitalism, and even its morality.
     Furthermore, there are those who declare it as the end-all, be-all solution to life's problem. "The Market" is praised as a endless source of innovation that will, in some hitherto undiscovered way, create a panacea of affluent utopia. By overhyping Capitalism, its supporters have harmed it even more than the thoughtful critic (or the ridiculous banner-wavers).
     So let's lay a few ground rules here. Capitalism is not the salvation of the human race. If unregulated by some disciplined force (the government, a religious or ethical organization, social consciousness or other extraneous factors) it tends toward exploitative, short-sighted policies that destroy the very society it is supposedly benefiting. This post will keep away from uncritical praise of Capitalism.
      Capitalism is also not the source of all evil, or even most modern evil. The first human who picked up a rock and smashed in his neighbor's head was not a Capitalist, he was a human. The first human to steal her neighbor's yucca roots (I'm really stretching for a paleo food here, any help?) was not a Capitalist, but a human. Capitalism does not have to be an exploitative force, even if it often is.
      What, then, is a Capitalist? What is Capitalism? Capitalism uses the gathered surplus of society (defined by Patricia Crone in Pre-Industrial Societies as anything left over after basic needs such as food, shelter and security have been met) to begin new ventures. It began when aristocratic landowners began handing out charters for cities on their land. In return for a yearly payment, the city could engage in trade on ships or by land while being supplied with food from nearby farms. Some humans no longer had to struggle every day just to eat. Now, they could launch business ventures. When those new ventures earned money, a small portion went to the original holders of the land's surplus. This early porto-capitalism became Capitalism when the surplus was used to create machine-powered ventures that returned enormous profits versus the human labor and skill required during the Industrial Revolution.
       Capitalism, then, does not require corporations, CEOs, monopolies, or many of the other modern embellishments that are so often railed against. All it is is a method of utilizing money (surplus) to create more money (more surplus). This post is not asking whether Christians should be CEOs, or own corporations, or lobby for monopolies. It is asking whether Christians should place money in the hands of a business venture and then utilize the profit.
       A final ground rule: I am referencing Christians since this is my own personal religious tradition. Jews may find similar ideas in the rabbinic tradition (my primary argument, after all, comes from a heretical Jewish rabbi). I believe there are some similar ideas in Buddhism, but I am not versed in that tradition or in several others. While I hope some of these principles can be applied outside of the Christian world, it remains to others to adopt them to other specific contexts.
       Christians fall into one of two categories on the subject of Capitalism. They are either Christian Communists (the apostles, after all, shared all earthly positions in a common lottery) or they are Christian Capitalists so gung-ho on the power of the Market that they confuse it with the Resurrection. Neither, in my opinion, is correct. The Gung-ho Group, if you will, is easy to refute. Jesus, like most people with a conscience, called for the sacrificial feeding of the poor. There is no merit system that entitles you entrance into Heaven, and if there were it would not be based on the size of investment portfolios. The poor do not get what they deserve due to moral laxness (is there a bigger crook than Wall Street?) and if you doubt the Biblical derivation of this, read the entire book of Nahum and Hosea.
       But a more upper-class Christianity is actually more likely to critique Capitalism, stating that since God does not see class or income differences, these should not feature as part of Christianity. The atrocities committed by capitalists (see: Banana Republics, the Cold War, arguably the Second World War, the way the recent Ebola crisis was handled, Donald Trump's presidency, etc) are taken as proof of Capitalism's moral shortcomings. "By their fruit shall ye know them," after all, and thus we are satisfied in condemning Capitalism.
      This was my (educated, upper-middle-class, "liberal") opinion until a little while ago. Then I read Matthew 25:13-40. In the parable of the talents, three "servants" or slaves or employees or whatever you wish to call them are handed varying amounts of money by an absentee landowner/employer. Two of them go out and invest it with the "money changers," an ancient equivalent to a bank. They double their money by the time their owner returns. A third employee (see what I did there?) buries the money in a field. He has achieved precisely a 0% return (inflation was rather static at the time).
      The villain of the parable is the third employee. And God is clearly the absentee employer. I would have expected the Bible to make some pseudo-liberal point about everyone getting different amounts of money and then equalizing them. Instead, God gives the third employee's money to the first and most successful employee. Jesus ends the parable with the chilling line, "For whoever has will be given more, and they will have an abundance. Whoever does not have, even what they have will be taken from them." Donald Trump could not make a more blatantly cold-blooded statement.
     And yet, before the Christian Gung-ho Capitalists begin rejoicing, the same crazy rabbi says, "‘Depart from me, you who are cursed, into the eternal fire prepared for the devil and his angels. 42 For I was hungry and you gave me nothing to eat, I was thirsty and you gave me nothing to drink, 43 I was a stranger and you did not invite me in, I needed clothes and you did not clothe me, I was sick and in prison and you did not look after me.’ This is precisely the opposite idea, namely that those who have nothing (to eat, drink, shelter in, etc) should be given to, voluntarily, sacrificially and without expecting a return or a reward. And these two ideas are placed together in the same long monologue (the end of the world also makes an appearance).
      And before the somewhat educated start screaming about multiple sources, the historical Jesus and composite authorship of the Bible, let me remind you that I did not ask whether Jesus would be a Capitalist. I asked whether Christians should be, and Christians read these two passages together and believe both should instruct you about life. They have equal merit.
     So which one will Jesus hate you for more? Refusing to earn a return or not feeding the poor? To further complicate things, Jesus also advises people to lose the world to save their souls. Oh, and he also says to"be in the world, but not of it," a confusing statement that has spawned everything from monasticism to colonialism to Mother Theresa. Or does he? The closest reference to that concept is in John 17, where Jesus states his disciples are not of the world as he is not of the world.
     I propose a solution to Jesus' view on money. Jesus was clearly opposed to exploitation and profiting from evil (see: Jesus' wild temper tantrum in the Temple). Jesus was also opposed to keeping money under the mattress. Jesus has no notion of modern banking (despite alleged divinity, he was also 100% Hebrew peasant). Jesus was a skilled craftsman, an outlaw, a deity.
    That, some will answer, is not a solution.  But I think it is. Jesus was situated in a particular time and place, and he was not commenting on modern capitalism at all in any of his remarks, ever. He was not being prescient and he could not imagine the automobile, the iPhone or the internet. He was laying down some simple ground rules for life - no killing, no cheating, no stealing, be honest, have integrity, etc. Finding out how to do that is our responsibility, as disciples in the 21st Century.
    Also, Jesus was a walking contradiction according to Christian theology. Is it possible to feed the poor with a sacrificial attitude, earn a decent return on investments and avoid exploiting the environment or other people? Absolutely, even if it is hard and requires a maximum of discipline. Is it also possible to feed the poor, abandon the modern monetary system and still wind up exploiting people in the form of disaster porn or feel good stories? Yes. So before we run around condemning Capitalism, or swearing by its beneficent effects, let us remember that morality, like politics, is local. Jesus could care less about what Nike is doing in Indonesia; He cares a lot more about what you are doing in Palo Alto to avoid exploiting people down the street. Conversely, if you happen to be a foreman in charge of a Nike plant in Indonesia, Jesus doesn't care about your opinions on undocumented labor in Palo Alto, he cares about exploited wage slaves at your plant.
      I believe there is a place for the Christian investor to buy shares of a company and demand morality. I do not mean a specific stance on sexuality (since when did sexuality and morality mean the same thing?) I do not mean the culture wars or voting patterns or campaign donations. I mean demanding that a corporation ensure the fair treatment of its workers and the safety of its products before it hands back a return to you, the shareholder. I mean using the ultimate power of being a shareholder, directing the most powerful institutions on earth as a part-owner, to be a force for good. If you don't like how McDonald's treats its workers, buy of McDonald's stock and force it to change. Band together with other shareholders until you have a controlling interest, and then march into a board room and force your employees, the CEO and the other C-suite executives, to change the place. Fire them if you have to. You own the place, after all. Make the oil companies clean up after themselves. Force the power companies to stop polluting the air. Order the defense contractor to stop producing napalm bombs and full-body scanners. Stand up and demand that the Christian respect for life, encapsulated in the very Resurrection of Jesus Christ, be the hallmark of Christian-owned companies. Find some Jewish or Muslim or atheist or Buddhist people with similar values (the number of people who are appalled at violence approaches infinity, the number of sociopaths is less than 1%). Rise up, consciences of the world, and own a company. Change the world.

Blood is in the Streets: Value Investing

      I got home today from my real job and my newsfeed exploded. Stock markets are down, as the news will tell you, in their worst plunge in 5 years. The Dow Jones has plunge 1000 points in a week.  The NASDAQ is down 3.5%. "Investors" (aka day-to-day speculators) are worried about the devaluation of the yuan, the EU remains bleeding red, oil has plunged below $40 a barrel. There is blood in the street.
      Do you know what I'm doing? I've sat back after a long first day in the school year, and am having a cool drink. I own the stock of a major oil company making about 5% dividends a year. I want to purchase more stock in that company, since oil will eventually rebound. That's a guaranteed 5% return every year, made even more secure by the oil industry's reputation for never lowering a dividend. Even if this corporation should lower their dividend this year, I will still be making a 3-4% return. Plus appreciation, since I am in fact buying in a slump.
      I own the stock of a major pharmaceutical company responsible for many prescription strength drugs. Currently, they are also yielding a 5% dividend yield. Even if asthmatics and STD bearers completely died out, there will still be enough sick people to keep the pharmaceutical industry afloat. This company is heavily weighted towards Europe, hence the price decrease. I want more of this stock and to cash in on the almost inevitable appreciation.
      I own the stock of a major European telecommunications firm currently buying up international market share. The dividend yield is massive, mostly due to capital expenditures, but even the more typical dividend yield seems attractive. If current dividend yield continues, I'll be receiving a 6% return.
      I own a few other stocks and mutual funds and Motifs and similar investment vehicles. Some are doing well. Some are not. I am unconcerned.
      Long-term stock strategies do not worry about such market movements. 500 points on the Dow Jones in one day does not affect the long-term viability of a good company. Any company destroyed by such movement is, by definition, not a good company. Buy and hold is criticized because it leaves investors exposed to these types of movements, but that is precisely the point of a market correction. The market economy is continually growing. The stock market will, in the long haul, grow.
      If I had more liquidity, I'd be buying like crazy right now. I'm a public school teacher, however, so I'm simply buying in as my paycheck comes in. Hopefully, things will stay this cheap in a few weeks...

Session 5: Video Game Investing: Wealthfront

    This review is actually a cheat. Wealthfront does not try to create a video game mentality in traders. It is, however, aimed entirely at Millennials. As with Motif, there has been a lot of hype. The usual "tech disruption" theme has been playing. Supposedly, Wealthfront is the agile new competitor putting companies like Charles Schwab and T. Rowe Price out of business. I remain firmly in the skeptical camp.
     Wealthfront looks glitzy. And the investment strategy it proposed for me was sound. It recommended, based on a questionnaire, that I allocate 20% of my portfolio to an aggressive domestic index fund, 11% to an aggressive international index fund, 10% to a slightly less aggressive domestic index fund, and a smattering of bonds, targeted funds and municipals for the remainder. That's practically textbook for my age group.
     In fact, it's a formula devised by the traditional brokerages such as Charles Schwab and T. Rowe Price. It safely bets the risks of aggressive stocks against the stability of conservative stocks and bonds. It is the closest thing to a guaranteed return in stock market investing, especially when adhered to with fidelity.
     I fail to see how something with a long track record is "disruptive." The wheel was disruptive 5,000 years ago, but by now a person selling a "disruptive" wheel is probably a con man. The gun was disruptive 500 years ago (ask the Aztecs), but today "disruptive" weapons are things like rail guns. Portfolio theory is one of the few stable factors in the entire investing world. How is a new algorithm that plans my portfolio precisely the way every reasonably competent advisor would advise anything close to disruptive? True, software charges less than a human advisor, but index funds were already practically free anyway (no, 0.1% fees do not really count).
     So go ahead and invest in Wealthfront. Or Charles Schwab. Or T. Rowe Price. Or E-trade. Or Scottrade. Or USAA. Or...actually, bag it. Scrape together $200,000, buy yourself a seat on the NYSE, and start your own "disruptive" portfolio advisory service. Just don't invest in anything fancy and glitzy thinking it will give you a superior return because it is more visual stimulating and has some fancy buzzwords.

Ain't Nobody Got Money For That!

      It took 4 hours before I had someone doubt the ability of Millennials to invest. It came from a Millennial, on Facebook (that now old-school, quintessentially Millennial social network) in public. Millennials don't have money for investing. We simply don't. Wages are depressed, loans are sky-high, cost of living is only increasing. I understand. We don't have money.
      Follow me for a moment, however.
      You can open a TradeKing discount broker account for $500. That's approximately 100 hours of work on a minimum wage job minus taxes ($7.50*100=$750. $750/.30=$250. $750-$250=$500.) I understand that's a lot of money when working a minimum wage job, but possible.
      Now let's invest it in an index fund. An index fund tracks the movement of a major index such as the Dow Jones Industrial or the S&P 500. A standard S&P 500 index fund will average approximately 10% over the long haul (30+ years). Which is fortunate, because we are going to plop that $500 into the index fund and just simply leave it for 40 years, from age 25 to age 65.
      Guess what? That $500 is now $22,630. Compound interest is a powerful weapon, at least over the long run.
      Now let's add a small amount of cash a month. Let's say...$50. Suddenly, your amount at 65 years old is $315,000. The massive difference is due to the addition of extra principal at a mere $600 a year.
      But I'm actually a greedy 25 year old. I decide to give up my coffee habit, which is costing me $4.25 a day (Starbucks, you are the worst thing to happen to wallet since adulthood). That's $128 a month. That little addition (a mere $4 a day) makes your final return $1,062,000. You can play around with these numbers all day long, with greater or lesser returns.
      The point is that you don't need a lot of money. I suppose you do if you want to be richer than Buffett or you need a million dollars tomorrow to pay a very massive electric bill. But money has diminishing returns above a certain limit, so what is a normal person to do with more than a couple of millions?
      Aha! say some. But inflation is eating into that number at all times. This is very true. The 10% figure stated above is actually a pre-inflation figure. Inflation is a measure of the growing devaluation of currency, and it averages about 2.0% a year. The post-tax, post-inflation figure is 8.5%. If you plug this rate of return into a good investment calculator, it will give you a rough equivalency of what your money will feel like in 2055, evaluated in today's dollars. So you will technically have $1,062,000, but it will feel like...$698,000 of today's dollars. That should be enough to keep you happy, healthy and fed for a long time into retirement. Even if you had to live on the interest every year, it would feel  like $54,000.
       So no matter how old and creaky we are in 2055, a mere $500 today and $178 a month from then on out should take care of retirement. The rest is all gravy. I could be wrong, of course. The global economic system could entirely disintegrate, or aliens could invade, or environmental collapse could destroy the entire known economic system. But this is incredibly unlikely.
       What is far, far more likely is that the stock market will increase between 7.5 and 8.5% after inflation. And anyone putting $178 a month away will have a comfortable retirement. This isn't a get-rich-quick scheme or a risky investment strategy. This is probability and compound interest and simple math.

Session 4: Video Game Investing: Quantopian

    So far, I have concentrated almost entirely on user-facing investment platforms. But what if you have some coding skills and some inkling of a market strategy? Then, you may be ready for Quantopian. Quantopian is the World's First Open Source Hedge Fund. In other words, you are allowed to program your own trading algorithms and, shocker, keep the profits. There are really only two requirements: you must be willing to learn Python and you need to have a lot of patience.
    Quantopian opens up several new avenues in investing. Historically, the most expensive part of algorithmic trading has been the data for backtesting. Having good minute-to-minute data is expensive and this is how algo firms like Renaissance have kept an edge over everyone else. Well, that and hiring the best talent money can buy. Somewhat mysteriously, Quantopian has obtained fantastic minute-to-minute data back to 2002. They offer this, for free, to the Quantopian community as well as a nice Python platform and a link to Interactive Brokers.
    The Quantopian Community is, in fact, the best part of Quantopian. It is full of experts in programming, business, algo-trading, computer science, math, statistics and similar subjects. You can learn from their posts, their weird attempts at high-powered algorithms (6000% returns with 36,000 times leverage anyone?), and especially their interesting research articles that they based their strategies on. A relative beginner, such as myself, can learn a lot just by following along.
    Furthermore, you can "clone" an algorithm from someone else, tweak it a bit, and enter it in a Quantopian contest to manage $100,000 of their money. All profits, if any, go to you if you win the contest. Supposedly, this helps Quantopian find managers for million dollar portfolios, but this is a plan for the future. While knowledge of Python helps, you can go in with only some basic common sense and a willingness to learn and find yourself an algorithmic trader.
    There are, however, some downsides to Quantopian. The first is whether you believe algorithmic trading is the "disruptive" force some claim it is. High frequency trading (the practice of slicing a few cents off of each trade based on an algorithmic model predicting market swings) is almost entirely unprofitable for the small time investor, requiring super computers and fiber optic cables beyond the budget of the average small country. Low frequency trading, on the other hand, is only as good as the system it executes. Either way, this requires technical knowledge of the markets and of algorithms. If you don't have both, you might as well kiss your money goodbye.
     The second downside is the fact that no one currently knows the Quantopian business model. Quantopian is not a broker and does not charge commissions. It has plenty of venture capital funding, but no known way to capitalize on the broad open source base of its community. The algorithms legally belong to the user, as per Quantopian's own contracts. How, precisely, will this open source hedge fund make money? Or is it simply a platform project drawing like minds together? The jury remains out on this one, as well as algorithmic trading. I'm not entirely sure this one is video game investing, per se. It is more like developer investing, but that's part of the fun, isn't it? 

Session 3: Video Game Investing: Kapitall

    In this post we finally get to my favorite stock screener of all time. Kapitall is the most explicit about the connection between video games and investing. It's blatant motto is "Investing for the Rest of Us." There is an in-game reward system built around Koins, which allow you to purchase virtual portfolios and various "boosts" for your trading performance. You can level up, which earns you more Koins, and so forth. The setup is very intuitive and gamer-friendly.
    Which brings me to that stock screener. The stock screener is extremely intuitive. You simply open it up and begin manipulating sliding bars. There are technical indicators (rolling averages, highs, lows) that are not confusingly labeled (a Bollinger bond is what, precisely?). There are also valuation and fundamental indicators such as PoP, P/E, book value per share, etc. Each one is accompanied by a simple explanation is layman's terms, but without an attempt at influencing a trading decision. If a stock makes it through your screen (I am a fundamentals investor, so I set up at a minimum a P/E screen, a book value per share, a dividend yield, an earnings growth screen, and a price screen), you simply send it to your "playground," from which you can put it in a practice portfolio or enter it in a monthly contest.
     I have not used Kapitall for living trading, so I do not know if there are any issues on that end. The intuitive ease of the screener, however, combined with the simple layout makes Kapitall a lot of fun to work with. If I wasn't getting a fantastic rate from my broker (USAA, thanks to a military family), I would probably use Kapitall as my primary broker. If you are a particularly arcane trader and like obscure technical indicators, this is probably not your thing. Since day trading, at least, is historically not profitable for the average person, I would recommend dropping day trading and most forms of technical analysis before dropping Kapitall's fantastic screener. But, as they say, history will bear out if I am right.