Negroponte’s digital world is here

In "Being Digital," Nicholas Negroponte predicted and advocated for a future in which traditional analog forms of media, communication, and commerce are replaced by digital counterparts. Negroponte suggested that the transition to a digital world will have far-reaching consequences, including the potential to democratize access to information, increase efficiency in industries such as finance and healthcare, and facilitate new forms of commerce. We are living in Negroponte’s world, almost. The only world that has refused to adapt is the world of asset management. 

"Negroponte suggested that the transition to a digital world will have far-reaching consequences, including the potential to democratize access to information, increase efficiency in industries such as finance and healthcare, and facilitate new forms of commerce."

The industry still controls your assets as funds, charges upfront fees, has large entry barriers, and is straitjacketed with compliance. And despite all the regulation, controls, and expertise, it fails to be better than what investors can do themselves. Zero fees, and fractional investing, give the power back to the investor, freeing him from the restrictions of the conventional world and transporting him [her] to Negroponte’s paradigm. And the digital technology that has got him here, can even take him further onto a wealth-generation path. Before I lay down the steps, let’s go back in time and understand this micro-market innovation in a holistic context.

Fractional trading vs. investing

Fractional trading is different from fractional investing. The former refers to a trading system that allows investors to purchase a fraction of a full share of a stock, instead of having to buy a whole share at its current market price. Fractional investing refers to a type of investing where individuals can purchase fractional shares of publicly traded companies, allowing them to invest in high-priced stocks with smaller amounts of capital. Fractional investing increases the number of individual investors and potentially alters the overall landscape of the investment management industry, making it better.

Mutual Funds and ETFs are fractional

If you look closer, fractional investing is not a new concept in the investment management industry. The use of mutual funds, index funds, and exchange-traded funds (ETFs) has long allowed individual investors to invest in a diversified portfolio of assets with a relatively small amount of capital. These investment vehicles pool capital from a large number of investors to purchase a diversified portfolio of underlying assets, providing individual investors with exposure to a broad range of assets, including stocks, bonds, and other securities. By investing in these types of funds, individual investors are effectively participating in fractional investing.

"If you look closer, fractional investing is not a new concept in the investment management industry. The use of mutual funds, index funds, and exchange-traded funds (ETFs) has long allowed individual investors to invest in a diversified portfolio of assets with a relatively small amount of capital."

The "newness" of fractional investing lies in the fact that it empowers individual investors to make their own investment decisions and invest in individual stocks on a fractional basis, without having to go through traditional investment vehicles like mutual funds, index funds, and ETFs. This allows for greater control and flexibility in investment decisions, as well as the ability to invest smaller amounts of capital.

The ~ 1% head start

When you don’t pay a fee or transaction costs, on average, you can save around 1% and even more if you are operating in an emerging space or some other new alternative space. This head start for the new fractional individual asset manager creates a level playing field, an advantage, it’s after all the investor’s money and he does not want to go for a ride. He knows he is not getting a fair deal, so he falls back naturally to the path of least resistance, relying on convenient, accessible tech. Now he can make his own investment decisions, build his portfolios, and potentially achieve better returns compared to relying on professional asset managers.

"This head start for the new fractional individual asset manager creates a level playing field, an advantage, it’s after all the investor’s money and he does not want to go for a ride. He knows he is not getting a fair deal, so he falls back naturally to the path of least resistance, relying on convenient, accessible tech."

The monumental odds for the greenhorn

Diversification - Diversification - Diversification. If there is one biggest mistake individual investors and individual fractional asset managers are prone to do is a lack of diversification. There is an easy way to learn it and there is a difficult way. The difficulty journey goes like this. It starts with the beginners' luck. Then comes mistakes. This is followed by more diligence, more hard work, and more time also referred to as experience. The easier way is to make diversification at the core of your investment thesis and begin with it.

It is hard to accept that stock selection is at a probabilistic disadvantage when it comes to buying a basket. You can't keep finding the winning lottery from the jar of tickets. The more you have a basket [portfolio] approach the better investor you are. The more you have a broad composite approach the better than sector betting investing you are. There are of course exceptions, there are good asset managers, macro funds, niche managers, ways to tactically allocate, a lot of great skill and a lot of ways to select and thrive. But before the rookie tries emulating to become a seasoned asset manager and decide to plunge in, he needs to understand the challenges of the terrain. In the long term, there will always be asset managers, fractional managers, who can do magic by selection, and insight, and who are up for the game of beating the market and can even do it repeatedly, but long term success does not happen without preparation.

If you can’t control your emotion and stay with the process, you are not a hero of this story. The hero of this story is the one who understands that mastering the mind is harder than becoming a great investor. If you want to emulate Warren Buffett, you have to perfect the process and replicate it. There is no hyper-growth if your emotional process is a speed breaker on a highway. Investment is for the long term, less than a year is not much different from high-frequency trading. You have to set the rules from the start. 

"If you can’t control your emotion and stay with the process, you are not a hero of this story. The hero of this story is the one who understands that mastering the mind is harder than becoming a great investor."

And then after our protagonist has learned all the above there will the realization that Warren Buffet, the famed investor also sometimes underperforms the S&P 500 and that investing and consistently beating the market is an overhanging obstacle. This is when the first quarter of great return excitement is always less than the first year of great returns of excitement which eventually fades away, as the beginner matures and understand that he needs more than simply informations analysis to become a seasoned investor.

The Man Who Thinks He Can

Records are meant to be broken. If you can not imagine, you can not do it. Look at all the success stories around you. They all start with a will as epitomized by Walter Wintle.

If you think you are beaten, you are

If you think you dare not, you don’t,

If you like to win, but you think you can’t

It is almost certain you won’t.

If you think you’ll lose, you’re lost

For out of the world we find,

Success begins with a fellow’s will

It’s all in the state of mind.

If you think you are outclassed, you are

You’ve got to think high to rise,

You’ve got to be sure of yourself before

You can ever win a prize.

Life’s battles don’t always go

To the stronger or faster man,

But soon or late the man who wins

Is the man who thinks he can.

The fractional investor's will here is connected to the use of technology and the belief that he can overcome the odds of competence, experience, and emotional control if he continues to move ahead as a visionary in his adoption of new tech. If new tech can give him a 1% advantage, it can also create for him a 3%, 5%, and 10% advantage, leaving his legacy peers behind. Just look around and see how a small company called OpenAi caught the giants sleeping. This will happen again. And you the fractional hero are doing it in real-time, challenging the hard to break into a profession called asset management.

"If new tech can give him a 1% advantage, it can also create for him a 3%, 5%, and 10% advantage, leaving his legacy peers behind. Just look around and see how a small company called OpenAi caught the giants sleeping. This will happen again. And you the fractional hero are doing it in real-time challenging the hard to break into profession called asset management."

The door that should break

There is still somewhere a disco club, with a door that opens inside the room not outside. It’s crazy, how poor design still causes fire hazards and deaths because the institution responsible did not bother to pay attention and grasp the concept of stampeding. People occasionally herd. And when they rush to the door on these rare occasions, the door should open outside not inside. This may be an exaggerated thought when speaking about financial instrument designs, but the fact that investors of the world pay an annual fee for things that they can do themselves, and this is happening for a few generations, is the idea of a poor design, where investors get hurt, and sometimes fatally, when markets herd and stampeded happens.

"There is still somewhere a disco club, with a door that opens inside the room not outside. It’s crazy, how poor design still causes fire hazards and deaths because the institution responsible did not bother to pay attention and grasp the concept of stampeding. People occasionally herd. And when they rush to the door on these rare occasions, the door should open outside not inside."

Electronic Investment Funds

Negroponte’s paradigm suggests that electronic intelligence is for everyone. It also means that if tech can get you to zero fee and fractional capability, it can also assist you to enhance your wealth.

We call this electronic intelligence, Electronic Investment Funds [EIFs], a better alternative to Exchange Traded Funds [ETFs]. Unlike the ETFs, EIFs are designed for this new age. They don’t control your money, they don’t charge you an upfront fee, and they don’t operate in the secondary market. They charge you, if they do, what they claim they will do i.e. help you go from a 1% advantage to a 3% additional advantage on whatever that you can do yourself. This may sound like magic, but it’s not, the capability and technology are already here, to add to the incrementing benefit so that you can do a better job of investing than what you can do without a machine. This is the antithesis of the current asset management industry which charges you for a job that it can not do better than what you can do yourself. This also gives hope, because the fractional heroes nudge can shake the industry out of its slumber, and impel the legacy asset managers to do more to stay relevant and ahead in the game.

"This also gives hope, because the fractional heroes nudge can shake the industry out of its slumber, and impel the legacy asset managers to do more to stay relevant and ahead in the game."

The unique design of this EIF is the primary market. John’s Electronic Investment Funds on U.S. 100 can not be bought in by Mathew. And Florina’s EIF Indonesia 30 can not be emulated by Mukul. The whole idea of successful investing for an EIF is based on the idea of seeking opportunities, where investors are not stepping on each other to buy something which everyone wants to buy, all at the same time, or doing the opposite, that is stampeding out of the door at the same time.

Unlike legacy markets, which are designed to favor intermediaries and buy the same thing at the same time, the new EIF technology can diffuse these herding clusters and offer everyone a different version of the same basket, like the Canada 60 with the same 60 stocks, but different weights for each component. A standard but still individualized solution, based on their preference, their starting point, their investment style, allocation preference, etc.

EIFs need no market makers, don't suffer from premiums and discounts on NAV, there are no ETFs induced systematic risk, and no recurring fee-charging intermediation. EIFs hence offer a dampener for the market risk. If everyone is buying a different weightage of Apple stock, the masses of investors are not herding anymore. There is nano efficiency, a new micro market, and unique machine-driven customized decision support.

"Unlike legacy markets, which are designed to favor intermediaries and buy the same thing at the same time, the new EIF technology can diffuse these herding clusters and offer everyone a different version of the same basket, like the Canada 60 with the same 60 stocks, but different weights for each component"

This nano-invest tech, the idea of it being unique for each investor, has one task, to do more than what you can do yourself. That increment, outperformance, above that unique mandate, is an impossibility for legacy asset managers to deliver. If they can’t beat a broad composite, when do you think they will come about to assist you with your mandate? The short answer, Never. 

The EIF tech could assist to build on that 1% zero fee fractional advantage and add a risk management, asset allocation layer to your unique mandate. Think about billions of macro Electronic Investment Funds. A nano investing tech could first talk to the fractional hero about his space, how well it’s placed, in the context of valuation, and objective scoring, a create an ICE score that measures the investing decisions for Impact, Confidence, and Ease of beating the respective mandate before going ahead and executing it electronically. And by the way, the legacy Indexes, which drive the index funds, suffer from the same broken door design, the only difference is that this door is on the cliff, and instead of opening inside, it opens outside, everyone who is herding has no hurdle, the door opens, on the cliff, with the masses desiring to rush up for the gold mine on the cliff, and it does not need imagining what happens next.

"And by the way, the legacy Indexes, which drive the index funds, suffer from the same broken door design, the only difference is that this door is on the cliff, and instead of opening inside, it opens outside, everyone who is herding has no hurdle, the door opens, on the cliff, with the masses desiring to rush up for the gold mine on the cliff, and it does not need imagining what happens next."

Technology drives Modern Science

Technology drives Modern Science. If you can imagine it, you can do it. EIFs are not imagination. They can give the fractional manager an advantage that is hard for the legacy asset manager to catch up with. Because a legacy asset manager will always offer standardized solutions. He can never go to the unique preference of a fractional manager. Negroponte's era has finally dawned on asset management and it's you the zero fee fractional tech adopter that is creating the revolution and it's the legacy asset manager, who needs to catch up and deliver that elusive alpha.

Bibliography

[1] Negroponte, N. Being digital. 1195. Vintage.

[2] Maureen,  O. Bhattacharya, A. ETFs and Systematic Risk. 2020. CFA Research Institute