Startup Journey Log #3: My Terrible Idea
A robo-advisor that automatically invests money for people at a fraction of the cost of a regular financial advisor.
(There. I said it.)
It would be similar to Wealthfront and Betterment, both of which have raised over $100M at this point, manage billions of dollars of assets, and have been around for 4-7 years.
So why would I even try?
Before I tell you that, let’s explore the huge reasons this is a terrible idea. Let’s start with the obvious ones:
Taking people’s money and investing it in the stock market comes with an enormous legal and accounting overhead. This is no easy task.
Plus I have no fin-tech (financial technology) background. This is a biggie. With AppFog, I had over a decade of experience building web apps, so creating a platform for others to build web apps on was not such a stretch. But I’ve never worked on wall street or done anything in the financial world, so technically I have no experience. Big red flag there.
Maybe you could make a case for me being the CTO if I could find a CEO co-founder with fin-tech experience. But I don’t have one lined up (yet).
I also don’t really have a way to get in front of potential investors who might want to use a robo-advisor app. Second huge red flag.
So I have no experience, no demonstrable demand, no access to the market. I pretty much have nothing. Nothing but an idea.
So why would I even try, again?
First, I should explain that I have been interested in investing (and speculating) in stocks, options, and commodities since I was in high school. So this is not totally left-field for me.
Granted, nobody has paid me to do this, per se. But this has been a long standing hobby for me. One I invested a lot of time and resources in over the years: books, newsletters, etc. I cut my teeth losing money plenty of times in many different ways. Finally I decided that Jack Bogle was right: just dollar-cost average and buy-and-hold the entire stock market.
Then something big changed everything.
Two years ago I sold my startup. It was the first time in my life I had far more money than I needed.
My first instinct was to stick a big chunk in the Vanguard Total Stock Market Index or the S&P 500 and just forget about it.
But the more I stared at the charts, the more scared I became. Seven years of crazy year-over-year growth with no significant market corrections. If you came into money in 2000 or 2008 and stuck it in the S&P 500, it could be 5-10 years before you broke even again. And as much as I wanted to be a buy-and-hold investor, I didn’t have the stomach for sticking it all in.
I could have continued dollar-cost averaging it little by little, but I decided to go on a reading binge before I made any decisions.
A fateful book
That’s when I came across Tony Robbins’ new book simply named Money. In it, he has an interview with legendary trader Paul Tudor Jones. Jones had been able to get out of the stock market before every big crash over many decades, so Tony Robbins asked him how. He said it was easy, he just looked at the 200-day moving average.
He didn’t explain any further what he meant by that in the book. And I had never heard that term during my high school years studying investing. So it sent me down a rabbit hole of learning about financial technicals and making investment (or rather speculation) decisions based on charts and formulas based only on the price data of a stock (not the earnings, profits, cash-flow, or any other piece of fundamental data).
My General Conclusion: the overwhelming majority of the technical stuff out there is pure bullshit. People putting best-fitting curves onto datasets and gleefully ignoring the primary tenant of investing: past performance is no guarantee of future results. If you flip a coin 200 times and it comes up heads every time, it does not make the next flip that much more likely to be heads. It’s still 50/50.
The smartest speculators out there are NOT the ones with the best formulas, but with the best risk management strategies. Like startups, in financial speculation mitigating the downside is much more important than optimizing the upside.
And yet the 200-day moving average that Paul Tudor Jones mentioned kept enticing me. Could it really tell me whether it was (relatively) safe to stick my money into the S&P 500?
The Death Cross
So I learned about the death cross and the golden cross. A golden cross happens when the 50-day trailing average of the S&P 500 (~3 financial months) crosses higher than the 200-day trailing average (~1 financial year). That means the short term average is higher than the long term average… hence things are generally moving upwards.
Basically the death cross is when the short term average crosses below the long term average.
I wondered what would happen if you took your money out of the stock market when the death cross happened and put it back in when the golden cross happened. Not surprisingly, a LOT of research has already been done in this area.
The General Consensus: Yes, the death cross trading system keeps you out of the biggest market crashes, which saves you a lot of money. But it also has false alarms where you lose money. And you have to pay taxes more often which makes you lose money. So the net result is that you get about the same results as buy-and-hold with a lower “draw-down” (you don’t lose as much money when markets crash as buy-and-hold investors do).
But I became obsessed with seeing if I could find a way to reduce the false alarms while still signaling the big market changes.
And now I believe I have figured it out
If I am right (that is a big if), it could be a very interesting alternative for investors who don’t want to spend their days day trading, believe in buy-and-hold in general, but don’t want to be caught with their pants down in the next big crash.
It’s not a crystal ball that predicts when a crash is going to happen. It’s a lagging indicator so it can only tell you after a crash has started to happen. Like a smoke detector for your buy-and-hold investments. But in the right hands, that information can be extremely valuable.
When I finally did make my breakthrough, I immediately thought I should create an app for this where people can invest their money and it will automatically take it in and out of the S&P 500 when the indicators told it to.
So I reached out to some investors to test the water around this idea.
Boy were my first instincts wrong! Tune in next week and I will tell you where I made my big mistake and what I am doing about it now.
P.S. If you want to guess where you think I went wrong, leave a comment.
About the Author
Lucas Carlson is a hands-on consultant, author and entrepreneur. He helps founders discover opportunities for growth, both for their companies and for themselves. He was the CEO and founder of AppFog, a popular startup acquired in 2013 after signing up over 100,000 developers and raising nearly $10M in venture funding from top angels and VCs.