Kyle Harrison
article

Software is Eating the Markets

Packy McCormick October 2020 View original ↗

Software is Eating the Markets

Packy McCormick’s argument that technology’s effect on finance will empower consumers rather than entrench incumbents — retail participation as a structural shift, not a COVID blip.

As Kyle filed it: Software is Eating the Markets - Not Boring by Packy McCormick Commonstock

Kyle’s highlights

  • Today’s essay is about what happens when those things start to blur, when technology alters finance and **consumers play a larger role in shaping the markets. **Democratization of Investing
  • But if recent tech history is a guide, technology’s ultimate impact on finance will be less about further entrenching incumbents; **it will empower consumers. **
  • Consumers are participating directly in the market in greater numbers than ever before, but every analysis I’ve read treats increased retail participation as a temporary COVID-induced blip, and retail traders as irresponsible and irrational gamblers just looking to have a good time. Soon, serious people argue, things will go back to the way they were.
  • And yet, the stock market hovers near all-time highs. People are spending less on services and luxury items, and investing more.
  • Some reasons?
    • Low Rates + Fiscal Stimulus: Interest rates are at all-time lows, so anyone looking for yield needs to invest in stocks. Plus, the Fed has provided a backstop that makes risky assets less risky.
    • Tech Strength: Tech companies make up a bigger piece of the major indices than ever, and they are actually benefiting from COVID. Plus, normal people are familiar with those companies — we use their products every day — so they are more likely to invest in them.
    • Boredom Markets: Investors are bored at home — Bloomberg’s Matt Levine calls it the “boredom markets hypothesis” — and not spending as much discretionary income on fun experiences and luxury goods, so they’re investing instead.
  • Flush with cash and empowered by new tech platforms that blur the lines between investment, experience, entertainment, and digital assets, a segment of consumer investors are shifting money from consumption to investment. Consumer investors expect different things from their investments than professionals do and value assets differently as a result.
  • As a result, retail investors have more money to spend. Disposable personal income is up 5% year-over-year (YoY) and the personal savings rate doubled from 7.3% last year to 14.1% this year!  **Retail investors, regular people investing their personal money, now make up 25% of trades versus 10% in 2019. **
  • They’re not doing the type of deep analysis traders would do, choosing to invest with the herd instead of uncovering their own hidden value gems.
  • But if retail participation persists, 25% is still a large enough share to impact the market, and retail investors care about different things than professionals do.
  • During COVID, if some retail investors have come off as irresponsible gamblers, I’d argue that that has more to do with the software they’re using than their investing preference. Robinhood encourages gambling; it feels like a game. But new products designed with the investor-as-consumer in mind are changing that.
  • That new technology brought more people into the market and encouraged new behavior. Unwatched by the professionals, retail investors could make risky gambles that they would be too embarrassed to tell their broker to put in for them.
  • That has major implications on the prices that people will pay and the returns they’ll accept. Because the expected long-term return on many goods and experiences is zero — you don’t expect to get $120 back after going to a concert for which you paid $100 — treating investments partially as a consumption good and partially as an experience should mean that consumer investors are willing to pay higher prices, or conversely, to get lower returns.
  • When more investors are consumers, specs matter less than UX. Out are heavy stock-screening tools, in is one-click mobile buying.
  • Stocks
    • Relelvant Names Around Stocks:
      • Robinhood
      • Alpaca
      • Composer
      • Commonstock
      • Public.com
      • TIKR
    • On the other side of the coin, another 2010s investing darling, Wealthfront, has been eerily quiet during COVID, not releasing a new Assets Under Management (AUM) number since they reported having $20 billion AUM last September.
    • That said, as I’ve written before, I think Robinhood is like Napster. It reshaped how consumer investors trade and forced legacy players to adapt, but it will face issues with regulators and new companies that learn from Robinhood, take its advancements for granted, and build new and better user experiences will ultimately win.
    • Public.com is multi-player, facilitating conversations among users around particular companies and themes in the app.
    • A stock bought on Robinhood feels like a gamble or an investment. The same stock on Public feels like ownership of a company, with the digital and physical assets to prove it.
    • Another startup, Commonstock](https://commonstock.com/v2/), adds a community element and competition layer on top of any brokerage account by creating a global leaderboard based on actual portfolio performance. CommonStock landed a massive $9.7 million seed round in August. **CommonStock allows the best consumer investors to build followings, and less experienced investors to learn from them. **
    • One idea would be to create a digital equivalent of AmEx’s “Member Since ‘00” card for stock ownership. I would love to show off the fact that I’ve owned Shopify since $89 and SNAP since $20 without screenshotting my position sizes.
  • Alternative Assets
    • Many of these companies take advantage of Reg A+, which was passed as part of the 2012 JOBS Act and lets companies raise up to $50 million per year from non-accredited investors.
    • Reg A+ companies often let people invest in fractional shares of an asset, like a classic car or an Andy Warhol painting, that would otherwise have been too expensive for all but the ultra-wealthy. Fractional Ownership
    • Relevant Names
      • Rally
      • Otis
      • Fundrise
      • Masterworks
      • Pipe
  • Venture Capital
    • Relevant Names:
      • Rolling Funds
      • AngelList
      • EquityZen
      • Forge Global
      • Sharespost
      • Assure
      • Stripe
    • Venture investments don’t trade publicly, so to invest in the best companies, you needed to know someone or know someone who knows someone.
    • AngelList](https://angel.co/today) is the leader in both syndicates and rolling funds. The company makes it simple to set up a fund, take investments from LPs, and deploy capital into startups. In exchange, AngelList takes a fee and keeps a piece of the upside, or “carry.” As of 2019, AngelList had $1.8 billion in AUM, and 1,657 startups were funded on the platform last year.
    • Already, there are 47 unicorns in the portfolio — AngelList, via its carry and investments it makes in deals, sneakily has one of the most impressive startup portfolios in the world.
    • Carta](https://carta.com/) is using its position as the system-of-record for startup equity to launch CartaX, the “first vertically integrated market ecosystem for private equity.”
    • Just last week, Stripe announced that it’s entering the fray by leading a $10 million dollar round for Carta competitor, Pulley. While neither Pulley nor Stripe has mentioned plans to build a secondary shares marketplace, I think it’s only a matter of time.
    • In the 1930s, investor John Templeton said, “The four most dangerous words in investing are: this time it’s different.” Investing 101 2.0
    • Michael Batnick amended that claim in 2017 when he said, “The twelve most dangerous words in investing are ‘the four most dangerous words in investing are: it’s different this time.’” Investing 101 2.0
    • Software will eat financial markets, cut out middle men, and turn investing into an experience from which consumers get more than a financial return.

How it connects

  • Packy McCormick: author of the Not Boring essay; the argument is that consumers, not incumbents, are the main beneficiaries of technology’s effect on finance.
  • Democratization of Investing: the thesis. Retail traders made up 25% of trades versus 10% in 2019, and the essay treats that as a structural shift rather than a COVID blip.
  • Robinhood: the foil. The essay says it “encourages gambling” and compares it to Napster: it reshaped consumer trading but is likely to be overtaken by companies that learn from it.
  • Stocks: Public.com (multi-player, conversation around companies), Commonstock (community and a leaderboard on top of any brokerage account), TIKR, Alpaca, Composer and Wealthfront.
  • Fractional Ownership: Reg A+ companies such as Rally, Otis, Fundrise and Masterworks sell fractions of assets like classic cars or a Warhol, with Pipe on the same list of relevant names.
  • Venture Capital: Rolling Funds and AngelList open fund formation and syndicates; EquityZen, Forge Global and Sharespost offer access to private shares; Carta and Pulley (with Stripe leading Pulley’s round) sit on the cap-table data a secondary market would need.
  • John Templeton and Michael Batnick: the essay closes on the “four most dangerous words in investing” line and Batnick’s twelve-word amendment.