Consensus-Based Funds, or in which an idea is sketched broadly out

In one of those comments where one never knows quite what the author originally thinks, I had written on Fred Wilson’s blog, avc.com,

Why aren’t there easier ways for average people to invest outside of pooling there money into institutions which then invest for them. Who says I have to like CalPers choices? (if I were a resident of California)- wouldn’t the game changer be easy-enter, easy exit funds that are designed to allowed members to understand and cohesively agree on their investments. And if they wanted to do startups- despite the risk- by all means.

Looking back on this- I think I should have thought the comment out more.  But that is what blog posts are for.

From what I can tell by listening carefully, and reading some pop books, (I may love Nudge, but it’s not the original research Material), I’m a little to right for English readers of the Bell Curve of Understanding Investing.  I can tell you some basic idea of number of investing concepts: what a stock is; what a bond sort of is; who gets money first if a company goes illiquid and bankrupt one day;  and that funds generally have a wide mix of “financial instruments” in them, etc.

However, I couldn’t tell you for the life of me how to calculate all of this.  Or even how to best invest for me:  What mix I need at age 23 with very very minimal amount of money to become similar to a Vogue “It Girl” by age 32*, or at least be a fun, classy, funky Grandma-character with no worries by age 70.  I’m probably somewhat typical in that regard as well. I’d like to eventually invest (when I get money), and there are many choices set out for me to do so.  How do I figure out what is right for me?  Is it even necessary for me to figure it out on my own?

Nudge has a wonderful discussion, from roughly pg 119 onwards, about how bad people are at choosing the Right Fund, let alone individual stocks.  One of the peak moments is finding out that conservative investors, on page 125, when give the choice of three funds based off risk, will end up splitting the pool because that choice is the least risky.  So clearly all these people must have some idea on their own of what makes for a good investment.

Another fact about people: A large, heterogeneous group of people is likely to make better predictions about some event. Each person has a certain level of individual knowledge and wisdom, which remains relatively un-impacted by the community s/he relies on.  That knowledge and wisdom in its un-impacted form, cohesively drawn together in a large group, tends to make better predictions, as long as this large body of information can aggregate.

And that is the state we are in when making group decisions- except about the Financial Markets.  At least in the US, we leave that to professionals, who we consider outliers through Institutional Investing, in which we give our money to someone else to manage directly or indirectly, or we as individuals dabble (and sometimes do well, sometimes lose our shirts) in the markets that are open to the public, within the limitations provided.

This seems somewhat silly.  If I can figure out with a large group how to (not usually at least ) crash into others while walking on sidewalks where others also bike, isn’t a fair assumption that I could invest in a large group based off the knowledge I have and come off doing well, probably better than the market leaders?

If I were in a low cost group, (to get a lot of people), and given the right to secret ballot, the same way we vote for the president, to vote for my pretend fund’s finances, based off prospectives prepared by someone, would my fund based-off consensus do better?

Further, if we assigned voting rights, say after six months, based off the idea that the members have to present the prospectives in working groups to the members anonymously in order to teach basic investing thoughts about whatever the instrument being traded is, would this mean the vote is better or worse, because of the increase of general knowledge.  How would this situation be affected if we treated the members of our pretend fund like consultants, and forced them to rotate often through different basic research goals to present anonymously to this fund? How does the anonymity effect the group?  Would it be a very smart fund? Would I as an investor alone get smarter as well?

And finally, what would the risk tolerance for both the consensus-based fund, and for individuals coming out of this fun investing on their own.  I would figure that learning about investing makes an individual more tolerant of certain kinds of risks.  Would it mean that  this fund would or would not allocate to a much more disruptive industry, say invest in a venture where there are chances it may not succeed, while also balancing for that risk?  Or would it shy away?  What about individuals?  Would this fund be more conscious of social issues, or would it become more fundamentally market socialist?  So many more questions come to mind, but I don’t think I could or should enumerate them all.

What would this fund do?  What would it be like?  Any ideas?

*This is my attempt at a joke.  I do not want to be Paris Hilton.

Related articles by Zemanta

• My Dumbest Financial Non-Move (dilbert.com)
• kaChing: the sound of money flowing away from mutual funds (trendcaller.com)
• Better Index Funds (dilbert.com)