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.

Session 2: Video Game Investing: Motif Investing

     If Investopedia is stodgy and old-school, Motif Investing is new establishment, Silicon Valley change-the-worldism. It opened to great fanfare in 2010, with Hardeep Walia (formerly of Microsoft) as CEO. This is a bona-fide broker that allows you to place orders to purchase "Motifs" of stocks based on a hodgepodge of strategies and beliefs. There are a lot of great things going on with Motif, as the press is never weary of reminding us. It has also been widely panned. Much of the controversy is based on the Silicon Valley notion of "disrupting" in the way that smartphones, personal PCs and the transistor have disrupted our lives. There are, however, things to both admire and critique about Motif outside of this debate.
     My favorite feature of Motif is its most iconic. You can bundle together a set of 30 stocks using some investment strategy and then invest $250 into it. Motif has the entire process in-house - screening, bundling and so forth. This essentially turns every investor into a mutual fund manager. You can buy Motifs developed by Motif (see what they did there?) or you can develop your own or you can purchase in-house some from the 100,000 amateur mutual fund managers in the community. You can weight stocks according to your preferred strategy, including in "custom" versions of professionally built Motifs.
     You can build a Motif around any traditional or non-traditional investing strategy. Do you think corporations headed by women make more money? (They do.) You can invest in a Motif that only includes corporations with a female CEO called "No Glass Ceiling." Do you want to invest in environmentally friendly corporations? There is an entire section of the catalog called "green investing" with such Motifs as Fossil Free and Climate Change. Want to retire in 2035? There's a Motif for that.
     Another feature that I, personally, love is the Creator Royalty program. Say you go through the effort of building a brand-new Motif based on a certain strategy (how about the number of women on the executive board?). You can post it online for others to peruse. If they like it enough to want to invest, they can purchase it for $1. You receive this as a royalty for your hard labor. I imagine that a fantastically successful Motif-creator could make a small sum at this, as you also make $1 every time you "rebalance" your Motif. People are allowed to trade out if your rebalance too often, however. As a buyer, you don't have to pay a royalty if you "customize" the Motif, allowing you to set up a Motif for essentially Motif's commission and nothing more. And if you can't find a Motif, build it.
     All of which brings me to the two major negatives behind Motif Investing. The first is also its greatest strength: the community. The primary forum, called the dashboard, is being hijacked by interested parties constantly hawking their Motif. It's natural to brag about a nicely performing Motif (I've done it myself), but there is a serious danger that some of these people are manipulating Motif's strange method of reporting "returns". There are Motifs that are supposedly returning 100% in the past year, something Warren Buffett is struggling to do. I recently saw a Motif with a dividend yield of 16%. This is almost impossible unless a share price is collapsing versus a small dividend, i.e. you're trading penny stocks. There are a lot of posts by "newbies" to the tune of, "I'm a little confused by all the people hawking outrageous rates of return, can someone help me?" I fear that this aspect of the community will eventually kill the open source, 21st nature of the project.
      The second flaw is the Motif tax strategy. You can't reinvest dividends (a fantastic long-term investment strategy), which means dividends will be taxed. Similarly, "rebalancing" a Motif will result in capital gains tax, since you are often selling and buying stock. Despite the language of disruption, you could end up with the same high fees that has led many investors away from mutual funds, but owe them to the IRS instead of an investment management company.
      For these reasons, I think Motif is a long-term investment company, not a short term trading company. It is also a fantastic way to paper trade with baskets of stocks and experiment, and if you are incredibly good you might make a little money from royalties.
     

Session 1: Video Game Investing: Investopedia

      I believe the investment world is changing. Whether it is the influx of Millennials, the crash of 2007 or the increasingly automated world of professional trading, the "stock market" as it has been traditionally understood is changing. Millennials are earning less than previous generations and are delaying buying a house and investing in real estate. Many, many commentators have observed this. A few have, perhaps condescendingly, concluded that Millennials will be more comfortable with a video game format over, say, a traditional brokerage format. They propose allowing Millennials to treat paper trading, and live trading, as a game that can be manipulated in the icon-heavy world of Millennial tech culture. I have been dabbling in these "video game" sites for a few months. Today, I will review Investopedia, the first I ever tried.
      Investopedia is easily the most traditional of all the paper trading sites I've used. It allows, first of all, for the trading of stocks, bonds and options. Stocks can be held long (i.e. held while gaining value) or be sold short (betting a stock will go down and borrowing from a broker to capitalize on this). This is a very convenient way to start an investing career, since it allows you to dabble in several different types of trading and investment without having to face real losses. Investopedia has no live brokerage attached to it but you can compete in investment games against other traders.
     Further helping Investopedia's "starter" reputation is the fact that there is an extensive, almost exhaustive, encyclopedia of every investment and trading strategy, term and process used throughout the entire investment world. In fact, I have seen reputable investment firms and funds reference Investopedia articles, making this a sort of clearinghouse for definitions and processes. When I first started investing, I went to Investopedia constantly to figure out how things work. I still reference it whenever I run across a concept I am unfamiliar with.
      There are a few annoying quirks to Investopedia's trading platform. The first is the way it places market orders. Market orders are orders to buy a stock at the market value, i.e. if ABC Manufacturing is selling at $57.13 a share, a market order buys at $57.13. A limit order or a stop order, on the other hand, would buy a share once it hits a certain limit either going up (buy ABC Manufacturing at $58) or going down (buy ABC Manufacturing at $57). You can mix and match these orders in any form you want (buy ABC Manufacturing if the price reaches $57 but not if it fall below $56, etc). Investopedia, unfortunately, allows you to place orders into the system without checking to make sure you have enough cash on hand. In other words, you could place a market order for 1000 shares of ABC Manufacturing at $57.13 at a cost of $57,130. If, however, you only had $56,000 on hand in the portfolio Investopedia simply cancels your order without notice. This is only an issue if you are trading after hours, but I once missed a 24% jump in Chicago Bridge and Iron Company stock due to setting a market order slightly above my cash limit and walking off to work.
      After the market order quirk, the only major quirk is the way Investopedia automatically assigns you margin. Margin is cash lent by your broker to you so that you can purchase more of a hot stock. It can be extremely useful if you pick a winner. If XYZ Chemical leaps from $20 to $30 and you own 100 shares, you have gained $1000 (20*100=2000, 30*100=3000, 3000-2000=1000 profit). However, if you can borrow from your broker, there is a chance you could purchase 200 shares. Your profit is now $2000, minus whatever commissions and fees your broker charges for using margin. Theoretically, you could double or triple your return.
      The opposite is also true, however. XYZ Chemical could go from $20 to $10 a share. If you only paid cash, you would lose $1000 (20*100 still equals $2000, 10*100 =$1000, 20-10=10). If you were buying on margin, however, you might lose $2000. Your broker does not like losing money like that, especially since you lost the entire $1000 he/she/ze (there should be a pronoun unique to "indifferent corporate moneymaker") lent you. The broker might demand to be paid back the $1000, and since you only have $1000 worth of securities left (100 shares times the current price of $10=$1000) you will have to pay over everything you have. Your loss is 100% and you are now signing up for Mechanical Turk projects to pay your rent.
      Obviously, margin is a two-edged sword (I don't like it and don't plan on using it). The federal government has restricted use of margin to investment accounts with 6 months trading experience so that you don't accidentally delete all of your retirement savings in your first trade on the stock market (for why the federal government should care, see Herbert Hoover circa 1929). Investopedia, however, assumes some degree of market competence and assigns you a 100% margin account. You automatically have twice as much cash as the "game" gives you. Which, when you are trading well, is fantastic (I have an account supposedly giving me 50% returns despite, you know, Greece...and China...and the almost complete disaster that is Saudi Arabia and the USA squabbling over oil). When your trading goes poorly, however, you end up with triple digit losses and theoretically owing more than the entire value of your account. I mean, this is paper trading so no one has to pay that bill, but it can be depressing when you're just learning the markets and you can't get out of the negative returns.
      My final complaint with Investopedia is its stock screener, or lack thereof. You have to know what stocks you want to purchase before coming to Investopedia's stock simulator. In my case, I ended up using a fusion of Yahoo! finance, my broker's screener, and market watch.com. However, this required a lot of tinkering before I figured out what I was doing and kept my learning curve much longer than necessary.
      All in all, Investopedia is a great place to start. You can learn a lot, fast, if you're willing to do that 20th century BC thing called reading. However, as I will mention in later posts, there are faster, more intuitive ways to screen stocks and paper trade. Investopedia is best kept at what its name implies: an encyclopedia dedicated to investing.

Hello and Welcome

       Allow me to introduce myself. I am a public school teacher interested in learning about and profiting from investment ideas around the world. I am not an investment professional and have no professional training or ties to the investment management world. I am a young (mid-twenties), precociously middle-class investor who simply wants to maximize his income stream.
       My goals for income maximization are simple. Wages are stagnant (especially in education). The cost of living ticks upward at an average of 2% a year. There is proportionally less money being handed out in the great job lottery, so I need to make each nickel and dime sing as they lay golden eggs. It's really the only way I personally to both work a job I love (teaching) while also having a prosperous future. Also, being rich would be a nice thing.
       I think investment blogs and information sources suffer from a bad reputation. There are hordes of smooth-talking "entrepreneurs" seeking to "make your best now" and lead you to the Promised Land of Easy Money and Sweet Living. That is not what I'm doing here. I'm not selling an investment strategy, a book, a "financial freedom" seminar or anything of the sort. I'm genuinely trying to figure out how to best invest my money in the 21st century to fund my retirement account, to build lifetime opportunities for myself, and because I am simply interested in investment and the stock market.
        I named this blog "21st Midas" because I would love to become the 21st century's King Midas. According to legend or history, Midas was the King of an ancient Greek kingdom. Everything he touched turned to gold. Unfortunately, he had an unfortunate run-in with his beloved daughter, who was instantly turned to gold as well. I'm hoping to learn how to make money like Midas without the family troubles. This blog is my saying to sharing anything I find with the wider public. I do not receive any financial remuneration except Adsense traffic (if and when I enable that).
       Also, call me paranoid but I want to make a final disclaimer that nothing on this blog is a recommendation to buy, sell, manipulate or otherwise interact with any investment strategy, equity, contract or financial vehicle. I am not an investment advisor and should not be treated like one. I will be reviewing investment strategies, investment websites, investment techniques, even individual stocks. I do not condone or support anything I talk about in this blog. I am trying to be as neutral as possible, but even when I am not it is the buyer's due diligence that wins the day. After all, I am a newbie at this.
        I am starting first with the very basics. When I started almost ten months ago, I had no clue how to even open a brokerage account. I am going to review the types of accounts currently available, proceed to some investment strategies and then generally update the world on my investment success (or lack thereof). Come and go as you please. This will probably be a multi-year project and I hope to create a discussion forum on investment topics.
        If you have a thought, suggestion, comment or question, feel free to leave it in the comments section. I do ask that any hateful speech be kept out and please, please keep politics out of the comments. Ordinary people are not able to influence the operations of governments and presidents and financial executives. I do not look for a magic genie from any of them, so please don't get mad when they inevitably let us down. Democrat, Republican, libertarian, communist or whatever you call yourself, let's be civil and not blame others for our own lack of options.