Investing in ideas – with Motif Investing’s Hardeep Walia

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Zack: Welcome to Tradestreaming Radio. I’m your host, Zack Miller. This is the place where investors come to learn about tools, tips and technologies to help you make better, smarter investment decisions.

Today’s guest on our program is Hardeep Walia. He is the cofounder and CEO of Motif Investing. Motif Investing is all about investing in ideas. Many of us don’t lack for investment ideas. They’re all around us. We see them in our work place. We see them in our individual lives. Where we struggle sometimes is implementing those ideas, finding the appropriate vehicle to invest in, to capture those themes. That’s what Motif Investing is all about. It’s almost like the next generation ETF, next generation separately managed account. It’s customizable and it’s social, a very interesting platform. Go and check out Motif Investing.

Thank you, Hardeep, for participating in this podcast, and thank you all for listening. You can find this program, as well as all my archives of Tradestreaming Radio, on my website, tradestreaming.com. You can also find the archives of the program on Stitcher Radio, as well as on iTunes. Thank you guys for listening. Your time is valuable. I appreciate it. We’ll probably be taking off for the month of August and coming back to you in September with some new material. Thanks again for your participation and have a great summer.

Hardeep: This is Hardeep Walia for Motif Investing. I’m CEO and co-founder.

Zack: So, you have a pretty interesting background. Can you tell us a little bit about yourself, how you got here?

Hardeep: Sure. I guess I started as a consultant and then, when Netscape happened, I saw the power of software, jumped into the startup world, ended up at Microsoft on their corporate development team doing MMA work and looking at new investments and managing Microsoft’s existing investment portfolio. I then went on to be general manager of their Enterprise Services business, did a medical device startup and then was catching up with an old friend of mine who worked at a hedge fund, Tariq Hilaly, and we were talking about investing and investing ideas, in particular. What we realized, as we were talking about the latest trends and tablet takeover of computing, to cloud, was that it’s very easy to come up with great investing ideas. They’re hitting you every day. The hard part is, actually, figuring out how to take those ideas and act on them. So, with that big epiphany, we quit our respective roles, moved to Silicon Valley and co-
founded Motif together. We’ve been at it about two years now.

Zack: You just launched out of beta, what, just a week ago, or so?

Hardeep: June 4th, we launched out of beta.

Zack: Wow. But, why investing? Obviously, there’s lots of inefficiencies in lots of different markets. Obviously, your co-founder had experience in the principal investing role. Maybe, I know too much from the inside but it’s a pretty monolithic industry where you haven’t seen a lot of innovation over the past few years. I think that’s changing now, obviously, but why pick that, of all things?

Hardeep: I think a couple of things. I think you said it exactly right, Zack, which is if you think about the brokerage world. In 1975 we deregulated this industry and we took the process, which is picking up the phone and calling a broker to say, “I want to buy 100 shares of Microsoft,”
we made it cheaper. In the ’90s, we took it online but we really didn’t rethink, what does the user, what does the investor really want? So, we think of Motif Investing as kind of a very intuitive way to invest, “I have an idea I want to put money to work. Let me go do that.” You can think of it kind of as Peter Lynch meets Jack Vogel, Peter Lynch in that “Great ideas are all around you, you just have to open up your eyes” and Jack Vogel, in the sense that you’re not going to win at picking stocks. Nobody wins at picking stocks, not even the pros and there’s enough data out there to go support that. So, buy indexes.

So, what we do is we create indexes around these ideas and we focus on making investing very intuitive. It is as simple as, “I see something, an idea that I want. I want to put money to work and I don’t necessarily want to spend tons of time messing around with research in stocks, because I believe the index will do its job.” Then, we have very sophisticated investors who say, “You know what, just give me a starting point for a portfolio of stocks that actually act on these ideas,” and that’s what Motif is.

At Motif, what we do is we take ideas and we solve the problem of figuring out how to invest by creating motifs of 30 stock portfolios that you can purchase in a single transaction. You can re-weight them, you can balance them out. You can share them over Facebook and Twitter with your friends and, what it does is it’s a subset of stocks that track a much bigger idea index that we built and that’s how we help solve a lot of problems, because you’re not going to beat the index. So, we create these indexes to allow you to beat the market.

Zack: So, in some sense, you’re playing in the ETF game, but you’ve sort of redefined the rules, in the sense that the ETFs are somehow tied to artificial, or arbitrary benchmarks, you’re really creating your own indices here, to some extent, right?

Hardeep: Right. And our early users have called us a customizable ETF, but we’re very different from an ETF in three ways. One is that we’re actually lower in cost. We can give you 30 stock portfolios for $9.95, no management fees. Contrast that to a world where you’re paying, for many of the, at least, the non-vanilla ETFs, you’re paying a transaction fee and your paying a management fee. We’re very transparent. With both funds and ETFs, it’s very hard to see what’s in it. In our case, because you actually own the underlying stocks, what you see is what you own.

Post-2008 people really didn’t understand what they were investing in, so you can’t understand what you’re investing in if it’s not transparent and that’s another big problem. Three, if you see something that you don’t like in an ETF or a fund, even if it’s after the fact, because they report quarterly, you can’t do anything about it. In our case, you see a stock, we have a mobile Internet motif, if you don’t want RIM in it, you basically take it out and you put a stock that you do like in it. So, that ability to customize is a very, very powerful feature and we make it super easy to do.

Zack: Since your launch, you’ve been like, ubiquitous. I watched you on the Valley Girls Show, recently.

Hardeep: [laughs]

Zack: You were awesome, by the way.

Hardeep: Thank you.

Zack: That was a great program. One of the examples you gave there was your SIN portfolio. Can we talk a little bit, just using that as an example of how the motifs are comprised, how somebody purchases them? And, obviously, you’re dealing with fractional shares here, as well, right? So, if you’re putting $500 into a motif, I’m not getting a full share count, am I?

Hardeep: No, you’re not.

Zack: OK.

Hardeep: What we do, and let’s take the SIN example, it’s Dante’s Seven Sins, and that one was designed to get a little more attention but it started as a basic question, “Does sin pay?” What we do is we look through the universe of stocks that meet a certain liquidity threshold and we basically tag them to this specific sin. So, in Gluttony, you’ve got companies like McDonald’s. You got the cable companies in Sloth. You got the things that tie to the particular sin. You’ve got Worldwide Wrestling and gun companies in Wrath and, what we do is we create a bigger index of all the stocks that meet the Seven Sins criteria. We categorize them into different sins and then the motif is a subset of 20 to 30 stocks that tracks the broader index. Now, in this case it’s market weighting but a lot of our motifs are thematically weighted, and what that means is they’re intelligently weighted to do well if the underlying idea does well.

So, for example, take another example, mobile Internet. If you have Apple in there, you don’t want all of Apple’s market cap in the motif. You only want the market cap attributable to Apple’s mobile business, for example. So, back to SIN, for a second. What you can do is, if you log online, you look at a motif, you can see the different sins and what we allow you to do is to change the weightings. We have these very simple sliders, that you can slide them back and forth, customize it, make it your very own. You can substitute stocks. You can add stocks. You can delete stocks. We try to make this as easy as possible, so that within a few minutes, you can very quickly, build your own version of our SIN motif. Then, once you’re happy with what you see and if what you see is what you like, right away, you don’t even have to customize. You just click buy, type in $250, as little as $250, as much as $100,000, and in real time you would’ve purchased 25 to 30 stocks. It would’ve cost you $9.95 and you actually own those stocks. And, yes, you’re absolutely right, obviously, if you put $250 to work on 30 stocks, you’re dealing with fractional shares and we allow you to trade fractional shares in real time.

Zack: So, can we talk a little bit about how it works, maybe, behind the scenes? So, do you have a trading window where you’re sort of aggregating orders together? Are you a broker-dealer, as well?

Hardeep: We are a broker-dealer. We are a member of FINRA. We don’t do window trades, but we do actually trade in real time. And we don’t comment beyond that because, like I say, that is part of our secret sauce.

Zack: So, what about the motifs? I mean, you guys are dirt cheap. You’re talking about $9.95 a transaction. Obviously, you’ve done the numbers. You’ve raised a lot of money. Can you talk to me about sort of the… You don’t need to lift up the kimono but the scalability in that type of business?

Hardeep: Well, I think it’s very scalable. I mean, we’re just building our business right now. A lot of your listeners, are our customers and it really is about, back to this model, we’re tracking two types of customers. We’re tracking customers that are very savvy, sophisticated, like your audience, that just don’t have a lot of time. They know what they want. They want to put money to work very quickly and this ability to see an idea and put money to work, as little as $250, as much as $100,000, is very, very appealing to them. We’re also seeing a lot of newbie investors, to be honest.

Zack: Really?

Hardeep: We are saying, “This product is pretty easy and intuitive to use”.
I can go to a store and look at our Hot Retail Motif, I can see ideas that I may have thought about but had no idea how to put them to work. You know, the other day, I was telling someone this story. I met a group of doctors. We have a biotech motif and what these doctors were able to do is in, five, ten minutes, customize the motif based on what they knew from being in the industry, from reading medical literature, and they just did a few quick changes in five minutes. Then, we allow you to back test each performance, and within a few minutes of putting their ideas to work, they were able to beat our benchmark motif by 15, 20 points and it’s that ability to take your experience and put it to work that’s very, very… I mean, everybody’s doing it. So, the model itself is pretty scalable. We’re like any other broker-dealer, in that respect, and we’re attracting a great set of users. And it’s actually been interesting to see very savvy users but also very novice users that find the product pretty appealing for different reasons.

Zack: It’s interesting because I think, to some extent, we saw the ETF industry sort of go through this, I don’t know, Balkanization, a couple of years ago when you were getting these very finite, very thin ETFs trying to target a very specific sub-industry, and it takes $1 million to take an ETF, give or take, and bring it to market, and this is such a …

Hardeep: And it takes $100 million in assets to get enough revenue to make it this [inaudible 12:27]. So, 60 to 70% of these ETFs go out of business within the first year.

Zack: Yes.

Hardeep: And the need that they’re addressing is valid, right?

Zack: Totally. Yes.

Hardeep: People have great ideas that are very niche, but the model of ETFs, as you point out, is it’s an expensive fixed cost and it doesn’t address the need. So, we actually address the need with a very different model because we’re not a pooled investment vehicle. We are creating these portfolios. So, it is like buying stocks, except we take the effort out of putting your portfolio together and the effort it takes to actually execute on that, because if you wanted to buy a 30-stock portfolio at your typical brokerage firm, you’d end up spending $10 a trade and spending $300. We’re able to give you that for a fraction of the price.

Zack: So, I can come in and you have these stock portfolios. I say stock, I mean not equities, but things that you’ve prebuilt, pretested, through your own analysis. I can use the sliders. It’s very easy. I’ve used the interface. It’s very easy to use. Can I see what those doctors did, even though they can share it, or do they have to share that directly with me?

Hardeep: We are the world’s first investing platform made truly social. What we mean by that, back to the example we used earlier, we’re not trying to create new behavior. One of the things I learned in my Microsoft days is it’s very expensive and very painful to try and change user behavior, unless what you’re trying to push them towards is inherently very natural. That’s how we thought about product, when it came to motif. And on our social platform, we’ve done very much the same thing. These conversations are happening everywhere. I’ll have a very different, more intimate, conversation with my father and my brother about investing than I will with my friends that I trade commodities or trade techs with and with other people whom we just generally talk at a very high level. So, that ability to control what information you want to share and with whom, in your social network, is very important, and all we’ve done is taken those interactions online and we’ve left them the way they are.

So, the ability to randomly meet someone to talk about investing, we rely on you having to friend that person, getting to know the person before you go do that. So, amongst your friends, absolutely. You can tweet it, you can Facebook it and you can discuss it on Motif, on our social platform, but we don’t necessarily want to encourage, unless you decide, the user decides, to go meet people online and then friend them. We try to keep a model of transparency. It’s something that we think is very important, when it comes to investing, that you need to know who you’re dealing with. So, we will, eventually, allow you to share, kind of, the wisdom of the crowd, customization with everyone, but it will be done anonymously and on an aggregative basis, but you have to know the doctors, in your example, to get access to that.

Zack: Sorry to be so anal about the question, but I guess, so those doctors have now shared with me their portfolio. When I come into Motif, I can get the presets that they’ve, sort of, jiggered their portfolio to do?

Hardeep: It is coming soon. Right now, they could share that motif but the ability to quickly and easily do those resets, we’re in the process of making that streamlined.

Zack: Interesting. Are there other things that you’ve spoken about publicly that you plan on adding to the product pipeline that are sort of rounding out the product, I guess, if this is stage one?

Hardeep: Yes. Absolutely. I think there are a lot of things. I think the key one is a lot of people have said, “How do I manage and rebalance the portfolio, every quarter, every year?” So, we will be launching a rebalancing service and that does two things. It allows you to re-weight the portfolio to your benchmarks, but it also allows you to kind of keep the portfolio updated.

So, we have a motif that we call “No Glass Ceilings”, for example, and that’s built around women CEOs. And a lot of our ideas start as questions,
“Do women make better CEOs than men?” and we put out a motif to kind of address that question. In that case, women get hired and fired into the list, and so, just keeping that motif relevant to its theme, that’s part of what rebalancing does, as well as a rebalancing of the weights in the portfolio as well.

Zack: Can you do tax loss selling, like if I have one individual stock in the entire motif that’s sort of out of whack? Can I sell that off?

Hardeep: Absolutely. We allow you to sell individual stocks for $4.95. Anything we do at the motif level is $9.95, anything at the individual stock level at $4.95, and we will be releasing — we’re working on a tax optimization solution as well, to make that even easier to do than you manually having to do it.

Zack: Can you envision a time, I’m just thinking off of one foot here which is generally dangerous for me, where you allow in third-party branded motifs, where maybe, I come in and I’m overwhelmed with the choices or I don’t quite know and maybe, there’s a third party advisor who’s talking about and marketing an individual motif that he’s developed on the platform?

Hardeep: Stay tuned.

Zack: OK. [laughs] It becomes a marketplace, then, of ideas and I think that’s really interesting. I think that’s interesting even without that, but…

One question I ask a lot of the attendees on the podcast is, “Where do you go for your own individual investing advice? What are you reading? What resources do you use?” It’s not necessarily a recommendation but we’re just interested in knowing sort of your work flow and where you go for ideas.

Hardeep: Well, I obviously read the major newspapers. I read a lot of blogs. I think a lot of the great ideas come sort of from blog sites, and I have a lot of discussions with people. I have a good circle of friends who are all investors. My closest one is, obviously, my co-founder and we spend a lot of time just talking about ideas. We’ve got deep technology backgrounds, so our original ideas were wedded in technology and now we’re branching along. I trade commodities a lot, so I’m very interested in what the markets tell us around that. I think a lot of it stems from the discussion, the dialogue, around investing. So, I don’t think there is any unique source other than, you kind of open up your eyes. You could be staring at a cup of coffee. This is what happened one day. We were staring at a cup of coffee one day and said, “Wow, boy, do I need a cup of coffee. Would that make a good investment?” Then, pretty soon, we built a caffeine motif that’s done really well.

Zack: That’s interesting.

Hardeep: And a lot of the things started as… The best source of investing, for us, is just listening to people, ask questions and ask ideas and throw out ideas. The other day, someone said, “Facebook is not public yet.” This was pre-IPO. “Is there any way to play off Facebook” and we built a Facebook motif. We called it “Lots of Likes”, which is if you took the most liked companies, companies with the highest number of clicks on Facebook, re-weighted them every year to keep that list consistent, you would’ve beaten the S&P over the last two years by 42 points. So, you’re not going to read about that anywhere.

Zack: Never.

Hardeep: That just happened to come from one of our users who was thinking about, “Would that make a good idea or not?” So, I think there are a lot of contrarians who like to go to news sources that no one else reads, but I think a lot of great ideas start as great questions. The other day someone said… I was talking to a Congressman who said, “Does lobbying pay?” And we’re having a good discussion and I said, “Well, let’s go and find out,”
and now we have a “Kings of K St.” motif. It attempts to answer that question, at least, at some level.

So, I think a lot of ideas happen in conversation. The problem is taking those ideas, from the beginning of our conversation, and putting them to work. I think once you’ve got a platform that allows you to express ideas, and you’re not just focused on the underlying securities, right away, I think you start to open up a whole different world of investing that you may not have thought was possible before.

Zack: It’s almost like thematic investing. It reminds me a lot of… We had somebody on the program, maybe six months ago, Chris Camillo. Have you ever read his stuff, or met him?

Hardeep: No. I haven’t.

Zack: He wrote a book called “Laughing at Wall Street”. It has some crazy name, too, like “How to beat Wall Street by reading tabloids, shopping in your supermarket” and whatever, but he’s had an audited track where he’s done really well as an individual investor. His whole thesis is very much in line with the “Buy what you know” type philosophy, where he doesn’t make a lot of purchases, but he’s very sensitive to his surroundings and he’s always looking for ideas and he’s very much an idea-driven investor. So, I thought it was a very interesting book and a very interesting methodology, definitely not espoused by modern portfolio theory but just a really good way to make use of your talents and your skills and your own social network to bubble up ideas. Anyway, it’s something to check out.

Hardeep: And you bring up a very good point, Zack. If you think about hedge funds, for a second, how do they work? A lot of them have these expert networks. They reach out and they get expertise. A lot of their value is interpreting the expertise and putting the ideas to work very quickly. So, those doctors we were just talking about, they can be on an expert network and the doctors themselves might not be able to take advantage of their own insights, yet someone else might. Part of what we’re doing is allowing people to take their own insights, because we’re all unique, we all have a very different perspective on the world, we all have a different set of experiences, putting that to work.

Now, that’s the competitive advantage, and the quicker you put it to work, the better you do. And this comes back to, how do we make investing very intuitive. It’s interesting, when you look at our users, a lot of them customize the thing that they know the best and they’ll sit there, they’ll tweak it, they’ll really put together an amazing motif, and that’s because they have that area of expertise to go put to work. In areas they don’t necessarily tend to know, they’ll buy the index because it’s hard to beat the index unless you have something value added to do.

Zack: For sure.

Hardeep: And that’s kind of the motif approach to investing.

Zack: Hardeep, thank you so much for joining us on Tradestreaming Radio.

Hardeep: Oh, thanks, Zack, for having us.