There have been two dramatic transformations in investing over the course of the last few decades. The first was a massive transition from individual to institutional investing. In the 90s it was assumed that most of the owners of a new growth tech stock were individual investors, the ones who would call up their Schwab broker and ask to get a piece of an IPO. Those were the people who were willing to take risks, those who were excited about new things. The institutions meanwhile would sit back and wait for the business to develop. Retail stock trading was deregulated in the late 70s and by the early 90s there was a dramatic reduction in commissions that made it possible for many more individuals to participate in the stock market. If we observe what happened in the past 30 years there’s been a massive re-consolidation of individual investor capital into institutions. We experienced a transition away into mutual funds at first and most recently into ETFs.
The second gigantic transition we’ve seen is Active Management into Passive Management. Active Management being managed portfolios, and Passive Management being index funds. This year, for the first time in history, more money is managed passively than actively. We’ve witnessed an order of magnitude transformation on both axis’: institutional to individual investing and active to passive investment management. These two trends lead us to the stagnation thesis which prompts us to ask ourselves what do we get in a stock market in which most of the money is managed by: (1) large institutions (2) passive institutions? We get a re-enforcement of the status quo.
In an interview Marc Andreesen responded to this thesis with a two-part question: are there going to be new things in the world and if so where will they come from? We’re not going to get space travel, AI, and advanced medications by continuing to support a circular market structure that is engineered to reinforce the status quo and feed back capital into the same companies. We’re not going to get the innovation we’re looking for from the companies these index funds invest in.
The system as a whole is headed in the wrong direction. The precondition for everything is that there should actually be new things in the world and those are going to take the form of new companies and they’re not going to start as incumbents, and they’re not going to start off from the big holdings of index funds. The existing system is becoming so oriented towards stagnation that there’s just a huge opportunity towards new things.
Luckily, we are seeing sparks of consumer trends pushing towards the opposite direction. While baby boomers have been trained to embrace the passive only investing approach, young millennials and Gen Z consumers have enthusiastically embraced active investing. The reasons for this are manifold, but the psychology of American exceptionalism, coupled with a challenging path to financial progress for Gen Z are two of the largest secular trends pushing younger generations towards embracing more risk. Further, young consumers demand easy to navigate, mobile-first interfaces as well as transparency from their banks and financial partners. They want to deeply understand how their money is being invested and participate in the learnings that result from the process. This is a generation for whom “set and forget” investing just isn’t going to cut it, and legacy investment management vehicles provide neither the ease of use nor transparency they are looking for.
Crysp fits right into these trends by offering a new type of financial vehicle that combines the predictability and financial safety of passive investing with the personalization of active stock picking. As we continue to build our product and interview users in our invite-only beta we couldn’t be more excited to see this vision turning into a reality. While our users select stocks they want to invest in Crysp effectively builds a mini highly-personalized fund around each position, analyzing in real-time both macro and portfolio parameters.
Index investing ushered in a multi-trillion dollar industry, and while passive investing has never been accelerating faster, the opportunity for disruption has never been bigger. Index funds have identified the trends within this new generation of consumers and are trying to stay ahead of the curve by offering new financial vehicles such as Directing Indexing (sometimes called “Index 2.0”), and while these vehicles offer a higher level of personalization they do not offer the education, opportunity, and decision making that tomorrow’s consumers demand.
Stopping retail investors from losing money has always been my North Star, but the macro impact of accelerating innovation by re-engineering the stock market while we’re doing it is a mission I could not be more proud to be taking on.
p.s. - this piece includes several quotes from Marc and his team @ a16z