Covestor

Access to financial markets is fairly open. All it takes is a bit of money to set up a brokerage account and one can start buying stocks. Over the last decade the Internet has further opened up access by letting people trade from home (more recently even without commissions) and putting financial data, SEC filings and more at investors’ fingertips. The result of this accessibility of the markets is that many people try their hand at investing. Some of them turn out to be exceptionally good. Probably the most extreme example is of course Warren Buffett who has become the world’s wealthiest individual and accumulated much of his wealth by trading in the public market.

Most of us (myself included), however, are fairly lousy public market investors. For every great pick we make, we tend to have more than an offsetting number of stinkers. Of course in talking to friends who would mention anything but the winners? So how can one tell if one is talking to the next Warren Buffet or simply someone grossly exaggerating their actual track record? Thanks to Covestor this is now easy. Covestor publishes the returns achieved by individual investors based on actual trades in their brokerage accounts. So next time a friend brags about a great trade they made, just tell them that if they are really that good they should go ahead and prove it on Covestor.

Creating a publicly verifiable investment track record with Covestor is really easy. After signing up for an account with Covestor, all one has to do is provide login credentials for one’s brokerage account (Covestor takes extensive security measures to protect those credentials in transit, does not store them and has only read access to account information). Covestor does all the rest by automatically extracting holdings and trade data from the account. Covestor then does all the number crunching necessary to let other investors judge the track record, for instance by graphing it, comparing it to benchmarks and examining stats such as the Sharpe ratio.

One might ask why anybody would want to share their great investment ideas with the world in the form of a detailed track record. Probably some are doing it simply as a competitive sport. Many participate because Covestor offers a vibrant community of active investors who learn from each other. Others, however, do it because they realize the value of an established and verifiable track record. For now they would have to “monetize” this track record elsewhere, in the same way that great coders don’t get paid for their contributions to open source projects, but the recognition of the community can translate into a promotion or a paid speaking engagement or book contract. We are excited about our investment in Covestor because of the possibility for going much further by creating a platform to enable talented individual investors to compete directly in the trillion dollar market for money management. Instead of having to join an existing firm or go through the difficult and expensive process of trying to form their own firm, Covestor will handle asset management, and these individual investors will be able to concentrate on picking winning investments. We are convinced that opening up the asset management market to talented individuals will be as fundamentally disruptive to this huge industry as blogging has been for journalism (what would Mike Arrrington’s or Om Malik’s influence be if they were working for the San Jose Mercury News?).

Covestor will use the funding to build out the “asset management” side of its platform which will permit the successful investors to collect fees. By doing so, Covestor will fall squarely in the category of new marketplaces that we believe will at least partially supplant what currently happens inside of firms.

We are excited to be investing in Covestor together with Spark Capital and Amadeus Capital. We look forward to working with them and the Covestor founders Rikki Tahta, Perry Blacher, and Simon Veingard.
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