Steve Cordasco and David Evanson
TheStreet.com, Summer, 2012
NEW YORK (TheStreet) — Were you ever standing in line getting coffee, and wondering to yourself: how do I make money on Americazzs obsession with getting a caffeine fix?
For instance, you can buy individual stocks, but that can be risky. Take a look at the one-year chart for Green Mountain Coffee Roasters for a glimpse of just how dangerous cashing in on caffeine can be. You can buy coffee indices, but these are bets on coffee the commodity, not coffee the consumer product. The two are not unrelated, but Dunkin Donuts stealing share from Starbucks, or vice versa, is not going to impact the underlying commodity price.
You can look for a caffeine products index or ETF, but you are not going to find one. The closest you will get is the PowerShares Dynamic Food & Beverage Portfolio(PBJ_). Take one look at the holdings of this ETF, and you can see this is not getting you any closer to making the bet that you want to make.
I believe all of that is about to change with the launch of a tiny investment technology company called Motif Investing, which is empowering individuals to act on their own investment ideas, in a diversified way, at a low cost.
Specifically, what Motif Investing enables individuals to do is shop among their 60 or so “motifs,” which resemble indices, and buy the ones they like, in whatever denomination they like, for a fee of just $9.95. Not much new here, except the low cost.
But what is revolutionary is that if you want to change the composition of the index, based on your own ideas, you can do it almost instantly and get some idea if you might be on the right track with instantaneous back-testing.
Looking at the sitezzs “Caffeine Fix” motif, for instance, we find a 12.4% weighting in soft drinks. If youzzre like me and believe that soft drinks have nothing to do with caffeine fixes, you can take the soft drink weighting down to zero. Further, if you believe therezzs more bad news in store for Green Mountain Coffee Roasters(GMCR_), you could take that out of your customized motif.
In this case, you would have been well rewarded for your intuition. The adjustments produce, on a back-dated basis, a return of 37.1% for the last year vs. a return of 10.3% for the motif as originally constituted.
Up to this point in the article, Izzve been pretty upbeat on the entire concept. But of course, therezzs no such thing as a silver bullet, anywhere.
First, if ever the term “past returns do not guarantee future results” was relevant, itzzs here. Specifically, I think you can back-test your way into spectacular returns. However such returns are dangerous because they often rely on the performance of too few stocks, one-time industry events or perhaps even an accounting rule change that are largely unknown and unlikely to be repeated.
Second, as Dr. Ian Malcolm (Jeff Goldblum) said to John Hammond (Richard Attenborough) regarding the latterzzs advances in biotech that made “Jurassic Park” a reality, “Your scientists were so preoccupied with whether they could that they didnzzt stop to think if they should.”
I feel that motifs put a lot of power in the hands of individual investors. Maybe too much. Although Motif Investing does not yet acknowledge the role of advisers, I feel itzzs an important part of the equation in all long-term wealth planning — motifs included, if not motifs especially.
Third and finally, therezzs an entire social media aspect of Motif Investments I did not go into. I would posit this is value-adding, but makes the product much more appealing to 20- and 30-year-olds. My question is whether Baby Boomers, who stand to gain the most from the emergence of this exciting new investment product, will migrate to it.
Motif Investments launched in early June, and I suspect it has little investor capital under management or administration. Only time will tell how popular it becomes, but regardless, you owe it to yourself to take a closer look at this new investment technique.