Investment Tribes and the Rise of Social Trading

Investing is inherently social.

Why is that the case? Well, let’s start by asking the question: What is a security?

When it comes to the general applicability of the federal securities laws in the United States, the definition is quite simple. A security is:

  • the investment of money;
  • in a common enterprise;
  • with a reasonable expectation of profits;
  • that are derived from the efforts of others.

These are the four prongs of the famous ‘Howey Test’, a piece of 1946 case law whose use has skyrocketed with the extensive asset class innovation that has taken place throughout the fintech world over the past several years.

Smack in the middle of the definition is the idea of a “common enterprise”. That means MULTIPLE people (investors) pool their money in hopes of the receipt of profits on a pro-rata basis.

Eg. Venture capitalists syndicate deals and invest together as leads and followers. They then become advocates for the firms where they are present on the cap table.

Eg. Investment bankers build a book of institutional investors for public securities offerings. Those investors then hold hands and cheer on their investments at the market open on IPO day.

Eg. Retail investors, while mostly limited to participating on secondary markets, connect on online forums and social media sites like Twitter and Reddit to swap ideas and find others who share an interest in similar securities and investment theses.

When people invest, they are investing with a community of others who support the same mission and goals. These shared interests are why investing is inherently social.

Investment Tribes

Shared investing interests can also be very powerful coalescers.

One of the most instinctual needs human beings have is the need to ‘belong’. In fact, our survival used to depend on being a part of a tribe where the whole was greater than the sum of the parts.

In his 2008 eponymous book, Seth Godin defines tribes as:

… a group of people connected to one another and connected to an idea. For millions of years, human beings have been part of one tribe or another. A group needs only two things to be a tribe: a shared interest and a way to communicate.

Playing on our need to ‘belong’, shared investment interests often bring people together to form “investment tribes”. These tribes can be formally structured, evident in things like a start-up’s cap table or the book of investors built for an IPO. Tribes can also have a less formal structure, like a group of friends who get together on the first Sunday of every month for their investment club dinner to talk about their stock picking hobby.

Investment tribes are where people come together to be a part of a community of shared investment interests. And like everything else in the world today, technology is rapidly changing the way investment tribes can come together. Quoting again from Seth’s book:

There’s an explosion of new tools available to help lead the tribes we’re forming… There are literally thousands of ways to coordinate and connect groups of people that just didn’t exist a generation ago.

Investment tribes are being formed left-and-right thanks to an explosion of online options that provide the connective communicative tissue for investors.

Investment Tribes Come in All Shapes and Sizes

Most investment tribes are not mutually exclusive. In fact, most people belong to multiple tribes at once depending on their beliefs and theses. In fact, investment tribes are better described as fractal in nature, and can form around different levels of the investment continuum:

  • Investing beliefs (fundamental principles): Are you a strong believer in active management, a steadfast indexer, or someone who falls in between?
  • Investor values (personal principles): Does the E, S, or G matter more to you when it comes to the companies you invest in? Or does it matter at all?
  • Macro theses (economy-specific): Will rates be lower for longer, or is the 40-year bond bull market as good as dead?
  • Industry theses (industry-specific): Will cannabis finally be de-scheduled and federally legalized in the United States?
  • Micro theses (company-specific): Does Tesla have a chance at taking over the transportation industry with their autonomous driving capabilities?

Each of these domains are a set of ideas around which investors can form a community. I myself belong to a number of tribes: I am somewhat agnostic to the active versus passive debate, but tend to be part of the ‘lower for longer’ rates tribe and align myself with a few company-specific stories here in Canada.

Tribes Matter

Given that investing is inherently social AND people have an instinctual need to belong to communities AND we have an explosion of online tools that can facilitate the formation and maintenance of tribes, we may be on the precipice of a new age of self-directed investing/trading where investment tribes start to matter a lot more than they did in the past. These tribes have an increasing amount of influence and this has implications.

Association/Affiliation: In crypto, there is a concept called token gating by which ownership of a specific asset (an NFT) grants its holder access to a community. Shopify retailers, for example, can add token-gating to their ecommerce sites enabling them to provide benefits to their most loyal customers including exclusive products, digital content, membership club benefits, and beyond. In the investing world, whether stamped by a state or mined on a blockchain, money is a medium that carries data. Whether we like it or not, our portfolios are signalling vehicles that say a lot about who we are. In the future, there may be benefits to being a part of an investment tribe should the owner of the idea the tribe coalesces around want to provide them. AMC already started to try this out, creating AMC Investor Connect to form a community around the stock and offer its holders access to important company information and special offers (including free popcorn at theatres).

Learning: While there is much theory to be learned around the world of finance, when it comes to investing, there is little substitute for lived experience. Trading/investing is actually very well suited to the apprenticeship model, where time tested tricks of the trade can triumph over time spent heads-down in textbooks. Social investing has the power to spread good financial knowledge through lived experiences far and wide. Sure, there is a lot of time and effort focused on finding the next great trading idea, but after one or two losses, people start to take the hint that their financial literacy needs a boost. That’s the great thing about the stock market: it is a forcing function for learning. Social trading can reinforce this through the power of learning from the actions of others.

Coordination: Time travel back 10,000 years and you would be hard pressed to find hunter-gatherer groups of more than 100 people. Dunbar’s number is a suggested cognitive limit to the number of people with whom one can maintain stable social relationships. That magic number is 150 people— more than that, and we have trouble keeping track and/or keeping those relationships healthy. Yet, the internet has exploded that idea. The ability to form a tribe is easier than ever, always just a tweet or two away. We are better able to coordinate and communicate with one another, 24/7 and on a global scale. This means investment tribes that are effectively able to coordinate can wield substantial power over others (insert quote about Wall Street Bets…). But with great power, comes great responsibility, and the power of coordinated investment tribes took off during the pandemic and is showing no signs of slowing down.

Where Do Investment Tribes Connect?

Tribes typically require a gathering place: somewhere individuals can connect with one another to seek, share or validate their ideas. Historically, investors have gathered as tribes in funds, investment clubs, and at the annual investor meetings of their favorite companies.

Today, however, most ‘gathering’ takes place online. As alluded to already, we have all heard the recent sagas of the Wall Street Bets crowd causing chaos in meme stocks or the Constitution DAO’s noble (but failed) quest to buy a copy of the U.S. constitution. Yet, most investment tribes are more subtle than these well-known examples.

Gathering can take place on general platforms like online forums and social media websites like Twitter and Reddit. It can also take place on more specialized grounds like online brokerages with social features or investing-specific social media platforms. These generalized/specialized gathering places also exist on a continuum from local to global. Putting it all together, you get the social investing industry framework below:

The largest gathering places for investment tribes [with two prominent examples] are:

  • Global general social media: From Twitter to Reddit, large generalist social media platforms host a massive amount of conversation on the markets and individual securities. However, the global nature and low barriers to join in the conversation means information can be lower quality where it is hard to find signal through all the noise.
  • Global investment social media: Global social platforms have also been developed specifically for the investment community. From StockTwits to CommonStock, these platforms promise the reach/scale of their generalist brethren, with a hyperfocus on investment conversations and features. More signal, less noise.
  • Local investment social media: Geography-specific social platforms have also developed. Canada’s Blossom and the U.K.’s Shares have built platforms for their home markets, likely with the idea of eventually offering regulated trading to their user base, which makes global applicability a challenge. More signal, less noise, more relevant features.
  • Local brokerages with social features: Some companies have gone the opposite route, beginning life as an online brokerage and eventually layering in social features. Younger companies like Public (formerly known as Matador) have popped up with social features embedded from the start, but there are also examples from established brokers like RBC Direct Investing, who have added things like their Community as an additional tool/feature for their investors.

Competing in the Social Investing Arena: Local or Global?

Understanding the social nature of investing is now table stakes for firms participating in the retail investment industry. Companies that put social front-and-centre in their business models are the first to the table in what is becoming an increasingly crowded kitchen.

These platforms are competing on a variety of factors, many of which relate to their decisions around how general vs specialized they make their platforms and whether they serve local or global markets.

As a broadly applicable rule, the more local an offering is, the more specialized it must be to that market. If it is not differentiated from the more generalized platforms, it will have a difficult time competing since global platforms will have an advantage in the factors in the image below:

These factors form the competitive considerations in the social investing arena. To create an effective social investing experience, firms must aim to deliver:

  • Discovery: The frequency and ease with which an investor discovers new ideas is directly correlated to the amount of value a social investing service can deliver to its user base. Discovery is a big reason why investors want to connect and is a primary motive for social investing activities. Why stick to one investment tribe when the next great tribe is right around the corner.
  • Validation: Sometimes investors do not want to discover new ideas, but rather validate their own. Social platforms can be fuelled by the confirmation bias of its users. Yet, validation provides relief, so investors will seek it out, which is the reason it is a key function of a social investing service.
  • Information: Social platforms also serve an information dissemination function. Beyond the generic company news headlines one might find on Bloomberg or Google, social platforms contain specific information. They host the conversations of investment tribes, the participants of which are often unearthing information that would be hard to come by anywhere else.
  • Relevance/Noise: While information is a blessing, it can also be a curse. Information overload is real, and to the extent signal is crowded out by noise, the effectiveness of the social investing platform becomes limited. Not only is hosting the conversation important, so to is the ability to curate and filter it.
  • Trust: Curating conversations becomes seedy territory when the word ‘censorship’ comes out. There is an open societal debate taking place right now around the merits and drawbacks of the censorship that takes place on our largest social media platforms. When it comes to social investing, curation can correlate directly with trust, so if it is an option, it must be used with care.
  • #Influence: Of course, any social platform will attract people who want to use it as a social status gathering mechanism. The #influencer cannot be stopped, but depending on the social investing platform’s form factor, they can be limited to just their local circle of friends.
  • Connection: While #influencers may seek out breadth over depth in their relationships, there are others who do the opposite. The ability to form strong one-on-one relationships with other individuals and build connections with specific investors in the tribe is what can make social platforms so powerful.

Most social platforms have a single overarching goal that the above seven factors drive toward: community. Community is the mythical factor that all social platforms strive to attain. Everybody can build social features, but only few can truly build community. Community is the culmination of all of the previously aforementioned factor’s ability to generate positive engagement. To the extent that users act in a positive or constructive manner, it can build a flywheel of momentum that can help increase the value of the network.

The Magic of Social

Beyond some of the competitive characteristics of hosting a gathering place for investment tribes, there are features that are native to social investing platforms that produce unique forms of value for investors.

$Cashtags: Perhaps the most prominent innovation around social investing has been the $Cashtag. An idea borrowed from other social formats, the $Cashtag helps to organize the global/local conversation around a specific investment or topic. It is an archive of the discussions, deliberations and developments of an investment tribe. Arranged chronologically, it serves the function of real-time newsflow and a source of hot takes. Without $Cashtags, information would not flow as freely making them a key component of the social investing ecosystem.

Social Exhaust: Social exhaust is the data and metadata produced from any type of on-platform transactional activity: posting, sharing, liking, or trading. The contribution of social exhaust to the value created by social investing platforms is tough to put a finger on. This can be best described as the Venmo effect, and it is particularly acute when it comes to investing. There is information contained in the actions of others. It can be useful at the micro-level, observing the actions of close friends or high-profile traders. It can also be useful at the macro-level, understanding trends and what the crowd is paying attention to. Actions speak louder than words, which is why social exhaust will continue to be a valuable element to participating in social investing.

Public Accountability: To the extent that one’s actions are linked to a verified identity, there can be some unique forms of accountability created through social platforms. This is less true for the global general platforms like Twitter where a divide can exist between online and offline identities (ie. bots and pseudonymous accounts) and can lead to frivolous / attention-seeking behavior. However, when it comes to regulated entities like Public where users are KYC’d before joining the conversation, people are inescapably tied to their offline identities. This is adds a level of accountability to people’s conduct since their actions and ideas will actually accrue to their reputation. In addition to limiting unwanted behavior, there is something strange that happens when posting your portfolio online… you begin to question your own behaviour and look at your own ideas in a new light. People who take-on too much risk, invest heavily in non-ESG-friendly companies, or deviate from social norms / financially healthy behaviour in other ways will likely think twice about their actions, or at least see a counter-perspective emerge from the crowd.

Social Investing: Its Time Has Come

A funny paradox exists in today’s online investment industry: while most would assume Millennials and Gen Z are the largest demographic user of online brokerage services, it is actually the Baby Boomer generation that continues to make up an above average proportion of retail DIYers. Many Boomers were onboarded during the online brokerage heydays of 1995-2000 and have not left the platforms since.

Those demographic proportions, however, are slowly but surely shifting in the direction of Millennials/Gen Z. As this technology-adept and social media savvy group reaches their wealth accumulation years, they will start to become the primary user group in the online brokerage world. This leaves room for social investing platforms and features to become more prominent in the industry.

Outside of demographic shifts, technology trends are also supportive. In particular, open banking-related initiatives across developed markets have enhanced the availability and ease of access to investor portfolio data. Companies from Plaid to SnapTrade offer plug-and-play APIs that platforms can use to bring user portfolio and trading information into their UIs. The ability to build social feeds and capture social exhaust has now been made much easier than in the past.

Finally, when it comes to markets and the macro perspective, this is a glass half full or glass half empty situation. The glass is half full when you consider that the pandemic created a perfect storm that brought a wave of new users into the investing world for the first time who are ready to flourish as social investors. Yet, the glass can also be seen as half empty if you consider that online brokerage engagement tends to fall off heavily during down markets, a trend that looks set to continue into 2023.

Regardless of the macro picture, social investing is clearly on the rise and the ability to host the gathering of investment tribes will be an important service and competitive lever for industry participants to consider going forward.

Investing is inherently social… after all.

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