Strateer Blog

The vision of Strateer is to empower the individual investor with better, easy-to-use institution grade tools. This will help the individual investor to become a better investor and generate better returns.

However, in a recent discussion the question was raised, whether the individual investor should invest in individual stocks at all. The best strategy for an individual investor is supposedly a well diversified portfolio with a long term investment horizon and with few trades. But that is not what individual investors do. Recent economic literature actually identified that contrary to the normative prescriptions retail investors hold concentrated portfolios with only a handful of stocks and they trade actively those stocks.

So why do individual investors buy individual stocks (there are 34M retail brokerage accounts in the US)? Are individual investors stupid? Why do individual investors deviate from what standard portfolio theory prescribes?

First of all it is important to us that individual investors trade individual stocks. However we believe that you can only build a long term business on  providing value to your customer and not by benefiting from the fact that there are stupid people in this world.  Therefore, given that we agree that the standard portfolio theory has merit, it is important that those investors who do invest in individual stocks are not stupid.

Some famous professional investors state that the individual investor can be successful in the market: Peter Lynch said “The amateur investor has numerous build-in advantages that if exploited should lead to a better performance than the markets.” Warren Buffet said “The average investor with only average intelligence can consistently outperform the market”. Hopefully these two gentlemen did not say that to sell more of their books.

An interesting article by Korniotis/Kumar analyzes the cognitive abilities of individual investors that invest in individual stock. Economic literature so far indicated that investors do not build a diversified portfolio either because of informational advantages or due to psychological biases (familiarity of the stock suggesting information advantage, over-confidence, wrong risk assessment).  In other words, they either know something or they are victim to misjudgments. In their article the authors group the investors by cognitive abilities and show that the group that is smarter is consistently outperforming the other group. This is quite intuitive: There are smart investors and dumb investors. The first group is able to generate market or above market returns, the other group consistently under performs.

The important take away for us is: Not every investor that buys individual stocks is stupid (intuitive, no?). In fact there are smart investors, that know how they should invest (broad portfolio allocation, value investing, long-term systematic). The only problem is, that they have no way to implement what they know they should do. They cannot manually analyze a broad portfolio because they do not have the time, mutual funds are not the solution (expensive and under performing the markets on average) and index certificates are no sure thing in side way moving markets (which we believe is what we will see over the next decade).

This is where Strateer offers help: We will provide the tools that allow investors to build the right system for them. Such systems might be broadly diversified or just based on a hand full of stocks. The system might be value orientated, momentum orientated or a combination of both. The system might have a short term horizon and trade actively or it might just trade a couple of times a year. But they will be a better alternative to manual and time consuming excel spread sheets, expensive and underperforming mutual funds and buy-and-hold index certificate investments.

It has become a bit quiet on this blog during the last month. Reading our last blog entry one could have thought that the meltdown took us down as well.

Quite the opposite. We are working on multiple fronts at the same time. We are preparing the public launch of our first product, Alerts4all. At the same time we are continuously in the process of raising money and working on our next product to be launched next year. Working quietly, making progress and keep trucking is the best way for us especially when the world seems to be coming to an end around us. I am not talking so much about the stock market where people have been calling out ‘bottoms’ during the last 3 weeks, but more about the credit freeze hitting the consumer and corporations - the real economy. The markets acted surprised on the latest earning disappointments. The effects on the real economy is very difficult to foresee but we brace for more ’surprises’.

Luckily our burn is minimal, potential competitors are distracted by survival mode and therefore our field is left open for innovation. Of course it would have been even better if all our cash requirements had been fulfilled by now, but you cannot have everything.

We faced a lot of negative sentiment in the last few weeks and it would be crazy not be concerned. But we feel that we are in a good position to either hibernate and build quietly our service or in case we get the funding at terms that make sense to us, use the current recession to invest into employees at reasonable prices.