Newest investment strategy: Be a copycat of family, friends
CHRISTINA REXRODE,Associated Press
Sep 13, 2012 at 2:31 AM
NEW YORK (AP) — To the long list of investing strategies, add this: I'll have what she's having.That's the idea behind Ditto Trade, an online brokerage for anyone who has a lot of faith in the cousin, best friend or neighbor who's always bragging about their stock-trading skills.Attach your investment portfolio to theirs, and whenever they make a trade, so will you.Ditto Trade's CEO, Joe Fox, says his company will empower the stock-trading masses. What he's doing, he says, is tapping connections people already have with friends and family."We're not trying to reinvent the relationship," Fox says. "We're trying to automate it."There are reasons to be skeptical. Among the most obvious: Maybe your best friend isn't the stock-picking savant she makes herself out to be. Maybe it's better to follow a safe, boring index than try to beat the market.But people are skeptical of traditional investing, with Americans still pulling money out of stocks despite a three-year rally of historic proportion.Ditto went live this summer and business has been brisk. The company has about 25 employees. Fox declines to give specifics but says the website has thousands of lead traders, each with an average of three to five followers.Clayton Cohn, 25, is a satisfied customer. He has a couple dozen friends following his portfolio.He started trading a few years ago with money he'd saved from military deployments to Iraq, with no formal training but reading everything he could.Just before the market crashed in 2008, Cohn said, he invested his savings with a persuasive broker who told him he should leave the trading to the professionals. Within a month, two-thirds of his money was gone.Now, his portfolio has ups and downs, but he's doing well enough to trade full time and says he's up about 20 percent over the past year. The site allows people to charge friends a monthly fee to follow, but Cohn doesn't."It's no sweat off my back," Cohn says. "I'm trading anyway."Ditto isn't the only brokerage to tap the follow-the-leader sentiment. Covestor, for example, lets people comb through online profiles of "model managers," then set their portfolios to mirror the trades of their favorites.TradeKing, Zecco, Charles Schwab and others have websites where clients can post about what they're buying and selling, Facebook-like, with peers.Brokerage giant Vanguard is among the nonbelievers. It offers no such platform, saying it's safer to invest broadly across the market than to chase hot tips — even those from the collective wisdom of other traders."We advocate that buying the haystack is a better approach than looking for the needle," said spokesman John Woerth.Like anything on the Internet, there's also the risk that people aren't who they say they are. Some companies offer to authenticate, to varying degrees, the traders who list themselves on the companies' websites.Fox says fraud shouldn't be a problem at Ditto. The website's customers aren't searching for an interesting stranger to mimic, he said, but syncing up with people they already know.A sister website, Followable.com, does allow investor matchmaking between strangers. Fox pointed out that lead traders there can choose to have their results "validated," meaning the website will note that it has confirmed that person's trades.At Ditto, followers pay about $7 per trade, about what you'd pay at bigger online brokerages. Lead traders get a discount depending on how many people follow them, and trade for free if they have 18 or more.Ditto also attracts professional financial advisers who tie their accounts to their clients', and they sometimes charge the fee.Fox got the idea in December 2008. The financial world was crashing, and he and his brother and business partner, Avi, wanted to get in. They were driven, Fox said, by a desire to help small investors.Not everyone is convinced by their venture."Uncle Harry has probably only bragged around the dinner table about his big hits," said Erik Gordon, a professor in the business and law schools at the University of Michigan. "He probably hasn't come to dinner and told you about all the stuff that has moved sideways, or the stuff he lost his shirt on."Fox acknowledged that Ditto isn't for everyone."Not everybody," Fox said, "has an uncle who's very good."Copyright 2012 The Associated Press.