Your portfolio an open book

Millions of people log into “social networking” websites such as Facebook or MySpace every day to check what their friends are doing. If Richard Tahta has his way, millions of investors will be logging into Covestor.com to see what they are investing in.

Backed by Tony O'Reilly's Independent News & Media (the UK parent company of ASX-listed APN), Covestor is part of the growing phenomenon of “social investing” in the US. The trend harnesses the technology behind MySpace and Facebook and uses that framework to track more than $1 billion in capital across the portfolios of several thousand people.

Richard Tahta (right) is the chief executive of Covestor. He believes that the internet is the great leveller for investors: “I want to democratise fund management,” he says. “People tell me that I’m a lunatic but that’s what I want to do. With low transaction costs and the internet there is no reason nowadays why individuals can’t compete against big fund managers”.

What Covestor does is provide a free platform on which investors can track the performance of each other’s portfolios, against the index and against each other. The site goes to great lengths to confirm your identity and your trades – so what you see are the real investments of real people. The number of Australian users is small, but growing.

Tahta is a serial entrepreneur. He has been behind a number of internet successful internet start-ups including online bookstore Bookpages, which was sold to Amazon for an undisclosed sum in 1997. On Covestor, his portfolio is listed under the name “RikkiTahta” and is down 2.5% over the year. Not great but not bad. His stock in Amazon accounts for 46.1% of his portfolio.

The site operates on the principle that the best investors aren’t professional money managers. Tahta believes the smartest stockmarket players can be found among ordinary everyday investors. He says Covestor is seeking to identify tomorrow’s fund managers today.

The website’s search function allows users to search the best performers across a number of categories using several variables – based on particular markets, return or sector focus. Searching for buy-and-hold investors who have an expertise in commodity stocks, reveals that a 40 year old from Zagreb, Croatia, has achieved an annualised return of 205%.

Is it all secure? Well, I’m confident that this is accurate because I’ve gone through the process of joining up and having my own trades verified. This is done by either giving Covestor access to your online broker or a copy of your brokerage statement.

Many Eureka Report subscribers are probably horrified at the thought of this. Give someone the password to your online broker? Or a copy of your brokerage statement? But in today’s online environment no topic is too personal, no subject out-of-bounds (You should have good look at Myspace or Facebook!)

Before you open another browser window to log in and check out my net worth, remember Covestor only displays the stocks in my portfolio as a percentage of my total holdings rather than the meagre dollar amounts they are.

Tahta explains: “Investors are happy to share with you what they are investing in but they don’t want you to know just how wealthy or poor they are. Second, people don’t want their real name out there. They are happy to share their portfolios but they want to use a screen name.”

Take Tim Sykes. Sykes is something of a drawcard at Covestor after he day-traded a $US12,415 bar mitzvah gift into $US1.65 million while he was in college. He then started an award-winning hedge fund, starred on a cable TV reality series and earned the wrath of day trading community for being a bit of a show pony. Unfortunately for Sykes, he took a huge bet on a single stock in 2006 which wiped him out, much to the delight of many.

Now he is planning to repeat the feat, trading the same small stake back up to $US1.65 million but he has one problem: credibility.

This is where Covestor comes in. Covestor not only authenticates his returns and make up of his portfolio, but it informs other users tracking his trades of the exact moment that he buys or sells. On the subject of day traders, Tahta is very diplomatic. “Everyone has different strategies and methods. The great thing about Covestor is that we don’t judge you; we just provide a platform so that you can establish your track record.”