Today's Internet means unprecedented accessibility and transparency for investors -- a huge opportunity to learn from and invest like some of the smartest and most talented investors. One place this is clearly manifested is at Collective2.com, a marketplace of trading strategies. Whether you're a publisher or a consumer, a writer or reader -- investors can find thousands of investing systems on the site. Not only can you follow some of these unknown Buffetts, you can also auto-trade them (program your brokerage account to replicate their every move). Collective2.com's founder, Matthew Klein joins me on this episode of Tradestreaming Radio to discuss the foundation of the site and how some investors are getting rich by following some of the best trading models on the site -- while the publishers of those models also make real bank.
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About Matthew KleinA serial entrepreneur, Matthew Klein is the founder of Collective2.com.
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Announcer: You're listening to Tradestreaming Radio with your host, Zack Miller. Expand your mind. Become a better investor with tools, tips, and technology from the smartest investors on the planet. Zack: Welcome to Tradestreaming Radio. I'm your host, Zack Miller. This is a place where investors like yourselves come to learn about tools, tips, and technologies to make you a better, smarter investor. Today's guest is Matthew Klein. He's the founder of Collective2.com. That's Collective2.com. It's a marketplace of trading strategies. He's been doing this years before it became popular, these trade replication type platforms. It's a marketplace of trading strategies so whether you're a buyer, a seller, a publisher, or a consumer, you can go there to find cutting edge, mostly quantitative investment strategies. I've been playing around with it, as well. I have a portfolio that I've been using, a Tradestreaming portfolio, which is essentially a piggybacking portfolio where I look at some of the top gurus. I've spoken about this strategy and written about this strategy on my blog. But I've been playing around with the Collective2 platform. I'll put a link to that, as well. You guys can check out what I've been doing on the platform. Anyway I invited him on the program, Matthew, to discuss sort of the genesis of the program, where they're headed in the future, and sort of the competitiveness in the online finance space. Thank you to Matthew for joining us on the program. It was a great interview. Hop you guys enjoy it. You can find this interview as well as all my archives on my website, Tradestreaming.com. You can also find the archive on iTunes. Either place, you'll get what you need. If you come to the website I also publish, within a week or so after the episode has been published, a transcript so if you don't have the time to listen, you can always read about it. I also post important links, as well. There's a weekly newsletter I recommend. People enjoy that newsletter a lot. So if you want to stay up to date on the intersection of technology, social media, and investing, come over and give your email address at Tradestreaming.com and I'll keep you posted. Thanks for your listening. I hope you enjoy this program and we'll speak to you soon. Matthew: My name is Matthew Klein and I'm the president, that's a big term for a little company. I'm the president of Collective2, which is a company that runs a couple of trading related websites. The primary one is Collective2.com and just for your listeners, that's C-O-L-L-E-C-T-I-V-E and then the number 2 dot com. And I also run a small experimental site that we call YoutualFunds.com. It kind of rhymes with mutual funds, but it's spelled Y-O-U-T-what is it-U-A-L funds.com. Zack: So, curious about-we'll start talking about the sites in depth, but what does Collective2 mean? What does the name itself mean? What image were you trying to conjure up there? Matthew: Well, I know I should come up with a more interesting story that would make me seem like a very clever entrepreneur but I'll tell you the truth. I'm a fabulous cheapskate and I had this domain name lying around when I started the company. I have no freaking clue why I have this domain, or what I was thinking of doing with it but there it was. It was free. I already paid the nine bucks for it. I wasn't going to pay another $9, I can tell you that. And so I started this company under this relatively stupid name. And I've been regretting it for the last, oh, nine years or so. But once you build brand equity in a stupid name, you've got to keep going with it. And here we are, nine or so years later, with that same name. So now I can try to think of expo stories explaining what Collective2 means, how it harnesses the power of great investing minds all over the world and maybe that works a little bit. But the reality is it was just a random name. Zack: I appreciate the candor there. That's an awesome story. So can you tell us a little bit about the genesis of Collective2? Did you start out . . . I guess first explain what Collective2 does and then I'd be interested in knowing the evolution of the concept. Matthew: Sure. You know, well, when I started the company, when I started the website, Collective2, it wasn't exactly the same company it is today. But the basic 20 second summary of what we do is we allow traders all over the world, primarily systematic algorithmic traders who have trading strategies that are rules based--although not necessarily. We can talk about that in a little bit. We allow people that think they're good traders to publish their trading systems. And we verify the results of those systems in a third-party, honest, verifiable way. The genesis of it really was I was very annoyed by all the dishonest people in the world who, and the dishonesty. . . Zack: AKA financial bloggers? Matthew: Well, sure. Zack: Okay. Matthew: There weren't bloggers back then but there were people that published newsletters or proclaimed themselves trading geniuses who sold their systems . . . Zack: Earn 1000 percent in three days. Matthew: Yeah, yeah. And it's easy to do that. You just send out a thousand newsletters, each with a different stock tout, right? And you pick the one after the fact that actually did well. I mean, that's one way of doing it. But the essential genesis of the company was to say, wait a second. Let's step back for a second. Let's see who's real here and let's be the third party verification service for these guys that can claim to be, who want to publish what we call trading signals. You know, the lingo's a little unusual, obviously. And so that was the original vision of the site, just a way to kind of authenticate results. But what really became interesting in the site is we began to add technology layers to the site to allow people to automate the trading of these things in regular, everyday brokerage accounts. So one thing that's nice about Collective2 is that we're broker agnostic, more or less. There's a set, finite pool of brokers we work with but, you know, you kind of bring your own broker account. And you say, you look around on the site. We have all sorts of tools for slicing and dicing our big database of trading systems and results. And you find the system that you enjoy or think is right for you, whatever that might mean for you personally. And you can, if you want, turn on automation in your brokerage account. Now a lot of people don't actually automate. They just kind of get the signals in real time, you know, through cell phone or email or messenger or whatever and choose to act on them or not. But for me it's kind of magical. The notion of automating it is pretty cool and I think that's what excites people the most about the company. Zack: And you can automate both sides of trade, right? The model manager, whoever's sending out those signals, he can hook this up to his account as well. So you're just replicating the trades that he's making. Matthew: That's right. I mean, the actual input mechanism for the manager or the system vender or whatever you want to call it is, again, we try to be as open and un-opinionated as possible. So you can simply logon to the website and sort of type in trades as they happen into a web screen that looks a lot like your standard retail broker web interface for answering orders. So if you want to do that, that's fine. If you want to use a third- party application that's popular in the trading world like TradeStation or MetaTrader or NinjaTrader, you can do that. We have an open API that allows programmers to essentially program their systems and make the signals happen that way. We don't-there's also, we have an email interface, which I guess is API friendly so you can email your signals into a computer that parses them and publish your signals that way. So we don't really care how it comes it but, yeah, the idea is that you can-- oh, and of course as you said, Zack, you can also let, for certain brokers we have the ability to you just kind of control your brokerage account and that effectively inputs the trades into the publishing platform for others to follow. Zack: Is it fair to say that you started out doing something similar to what Covestor was doing back in the earlier days? Matthew: Well I think it's fair to say that Covestor started doing something similar to what we were doing many years before. Zack: You had your stake in the ground first, yeah. Matthew: Oh, certainly. I'm not going to let them get away with that. But well, I mean, they're similar ideas. I'm one of those entrepreneurs that really-maybe this is a terrible failing on my part--I don't really pay much attention to what else is going on in the space or in the world. And I just do my thing and build the product I want to use. And so I'm probably, what I'm about to say might be 100 percent inaccurate. But it seems to me the Covestor model is much more of a model to dis-intermediate the professional finance world, people that are registered and accredited and small hedge funds or small fund managers who want to kind of cut out the middle man and get rid of an expense layer. I think the Collective2 model is much more peer to peer. Anyone who wants to publish their methodology can publish it. We don't have, it's not an investment advisory business. You don't actually speak to clients and you don't personalize your advice. That's very important in the world of the regulatory regimes we work under. Zack: Are you registered, by the way? Matthew: We are registered in the world of futures and Forex with NFA. We are not an investment advisor in the world of equity. And, you know, what we encourage people to do is if they have a great trading methodology and they want to be verified and publish it on the platform, they can go ahead and publish it. It's much better than publishing a newsletter on paper because you get much wider distribution and there's an authentication mechanism that lets you have the results tracked. Zack: I mean, I would assume that most newsletter providers wouldn't want to be verified because then the transparency sort of can let the word out the king has no clothes, you know? Matthew: Well, that's a really interesting observation. And now I'll share something with you about [inaudible 10:43] Zack: Professionals as well, right? I mean. . . Matthew: Yeah, I mean this is not a game where the people that are already successful are clamoring to get into it. Oh, sorry, to my platform, Collective2, for exactly the reasons you mentioned. I mean, there's no upside for them. They already have the customers. They don't need to get better distribution for their [inaudible 11:07] Zack: Right. There's some channel conflict, actually. Matthew: And, more important is exactly what you say. I mean, why do they want to be verified. There's so many, you know, I mean in the world of investing there's so much out and out fraud. I'm not even going to address that. But there's a different kind, it's a much more subtle kind of disingenuousness and dishonesty that goes on with companies that have multi-billion dollar market capitalizations. I mean, just look at the world of mutual funds for a second. All right, not to pick on them in particular. Zack: Oh, go ahead. Matthew: But, you start a fund family with 20 different funds and the ones that are unsuccessful you can fold into the ones that are successful. You essentially have survivorship bias and you can then later publish over the last five years this fund achieved this. And you don't talk about the 20 other funds that either got folded in or stopped. I mean, that's, nothing illegal about that, right? And that's what everyone does. But most investors don't really recognize that when they're reading those ads in Barron's or the Wall Street Journal touting fund results, that they're obviously that the fund manager wants to publish. And so . . . Zack: Sure, and there's selective benchmarking as well. I mean, there's a lot of stuff they do to make their results look better. Matthew: Yeah, and I get it. I mean, it's easy to criticize it sitting from far away. But everyone does it and apparently it's perfectly okay, is my understanding of it. So, you know, there's a pressure to have to do it. So in the world of Collective2, obviously, those guys aren't clamoring to get their results tracked in a way that they can't walk away from the results. I mean, one of the things that's really hard for me as an entrepreneur is that it's a hard business because half of your customers hate you at any given time. And I always think that the thing I most have in common, the business, is the Las Vegas casino. Not for the reasons you'd think. Not for the reason that, oh, it's just gambling. The real reason is that I think customers-you know, even if you're in the most beautiful casino, if you're in the Bellagio in Las Vegas, there's still security cameras looking at you and there's still pit bosses deciding how many drinks to serve you. And there's still a large distrust of the customer base because customers, they don't like actually using your product. They like the idea of it, but they don't like the end result. And very similarly, in the world of Collective2 at any given time, choose your number--20 percent, 30 percent, 40 percent of the people that publish their systems and their methodologies on Collective 2 hate the platform. They hate the site because you can't walk away from your track record. I get asked all the time by people who say, listen, I published this system on Collective2 and it doesn't really represent my work anymore. Can you remove it? Which, our policy is no, you can't. I don't know if that's the wisest policy from a business perspective, but in my mind it help prospective traders really see the historical track record of all the people that it's obvious. You can get around it in different dishonest ways. You can create separate identities, but it's a hassle. And so that's one of the nice things about the, well it's either nice or not nice depending on which side of the table you're sitting on right? Zack: Yeah. Matthew: But one of the nice things from a prospective subscriber to one of these strategies is you can really see all the broken systems in his past and make a more informed judgment about the value of the latest methodology. Zack: Sort of like a scorched earth policy. So, I think you were a little humble when you were describing what it is. So not only are people publishing and other people following them, you've also built-there's a revenue model associated with this. You've built a marketplace of these types of trading systems, right? Matthew: Yeah, I think from a, you know, pure business analysis point of view, one way of looking at it is it's a marketplace. It's almost like an eBay type of marketplace where there are buyers and sellers of intellectual property, a very narrow vertical niche of intellectual property, trading methodologies. And then there's all these ancillary software and technology services that make the stuff valuable. So it's great if you have a trading methodology and you kind of "publish" it on the internet. Like maybe you blog about your trading strategy and you make your picks, you know, on a blog. But that has less value just kind of propagating out into the ether than a platform where people can, number one trust the result. But number two, if they do like the results, they can turn on automation in their account and actually benefit from it. So we have all sorts of cool technologies where you can build portfolios of different trading methodologies at different weightings and scales and you can track your results and you can- I'm trying to encourage more sharing of information across the site, more transparency in the sense that you can let other people know what you're trading and how well you're doing. I like that idea. I thought that would be a big hit among the users. And it's kind of interesting, I don't know what to make of this, exactly. It hasn't been-I've offered it to a lot of users, the ability to do it, but most people don't want to share their trading results. They really want to keep them private and I don't know if that's embarrassment or, you know, people want to keep good things to themselves or maybe a little of both. Zack: Right. Matthew: But in any case, yeah so it's a marketplace where . . . Zack: And they could also be incubating ideas, right? I mean, they could be testing systems as well. Matthew: That's right. And we have, in the for what it's worth department, we have the ability for users who want to come to the site and just sort of fool around with it to create what's called a test system, where they have to declare it a test system and then they can just kind of screw around with the platform and test it out and no one will ever see those results. They're kind of private forever. And so that's a great way to come to the site and see if it's right for you and then you don't have to commit to publishing that track record and you can walk away from that. But once you do commit to publishing on a go-forward basis, that's part of your identity on the site for forever. Zack: Can you give us a little flavor, Matthew, on who are the publishers and who are the subscribers? Like, what's their character--how do you characterize them? Are these professionals? Are these sort of like stock jockeys in their underwear? What does your user base look like? Matthew: Well, I think it varies a little bit by instrument class. So one of the nice, or cool things about Collective 2 is we try to cover every instrument class that, you know, most average people would consider trading. That includes foreign exchange, over the counter Forex, futures, options, equities and that's really it. ETFs are, I guess, counted as equities on our platform. And I think the user base varies a little bit by instrument class. I think that my, you know, as a businessperson I'm incredibly interested in who the users are and I want to understand them as much as possible. It's a really hard thing to figure out. I mean, it could just be that my data gathering and my tool sets are just not up to the challenge. But I think it's just really hard because there's a lot of different kinds of people. I'd say that the groups of people are probably wealth-, in the world of stocks and futures, I have found that I think the demographics skew a little bit older, male, and wealthier. People that are sort of on the tail end of their career or in a kind of active retirement, investing, using this platform. They feel empowered by it. This is gross generalization and probably horribly untrue-but they seem to be people that maybe had entrepreneurial backgrounds themselves, or at least were business leaders [inaudible 19:30] Zack: Sort of like early adopters, in a way? Matthew: Yeah, it's those technology early adopters but more, I think the point really, to me, is that they seem to be people very comfortable taking control of, say, their investing. They don't- , so it seems to me. You know, so one way to look at Collective2 is it's a site where you sort of subscribe to a trading system and it automatically does stuff. I don't think that's how our users think of it. I think our users think of it as they're taking control. They're deciding which trade, we literally have tens of thousands of strategies available on the site. And you know, admittedly, most of them are bad. But we also have tools that allow you to kind of sift through that relatively easily so that you can find the several dozen or maybe hundred or so good ones. And I think people really enjoy, it's a very fine level of control, much more so than, say, choosing an ETF or two to trade in your Ameritrade account. It's a way of empowering people and keeping them in control. And, you know, the other nice thing in terms of power and control is it's your trading account. It's not like you hand over your account to some manager or something. And it's not like you've signed a check to a hedge fund and then your money kind of is out of your hands forever. It's your regular, say, optionsXpress trading account. And you can see the trades going in second by second, minute by minute. And we have the ability to control those trades. So, sure, it's called automated trading but at any given time you can say, that guy, this trading strategy is really stupid. You could either turn off the strategy in an instant or you can close particular trades. You can make certain trades bigger. I think it's a way of empowering these people and that's why I think, to answer your question, Zack, the people that like that are generally, with some notable exceptions, it does seem to skew to be a very male user base. I don't know what that means, necessarily. And a slightly older than middle-aged user base as well. Zack: That's like why do bank robbers rob banks? Because they go where the money is. It could be. So I'm curious also. I stumbled upon the fact-- you were upfront about it initially--Youtual funds. You've separated the site. So, I mean, I don't think there's a lot of intermingling, let's call it. How do you segment those two? Obviously you saw the need to create two different sites. They do something very similar. Can you talk about the difference between those two? Matthew: Well, I think a couple of different things caused us to start a second site. I mean, on just one level there were a bunch of nifty, radical ideas that we had that we wanted to experiment with that we couldn't shoehorn into the Collective2 business model. And specifically, what I think was really interesting about Youtual Funds, or the idea we had here at Collective2 was, well what if everyone-what if we kind of broke down the barriers between people that are "subscribers" and people that are publishers. What if everyone's brain was sort of used in some useful way so that, you know, there are some people that are good at, for example, picking stocks. And maybe there are some people that are really good at picking people that pick stocks. So because our original idea was to say, we have a bunch of power users on Collective2 that seem to be doing really well in their trading account. They're good at picking automated strategies on the platform. Is there a way that they could share their expertise? And, frankly, we just couldn't figure out a way to make that work technically or in a business model of the Collective2 site. So we started a second site called Youtual Funds where the metaphor, we needed a kind of an intellectual metaphor for the site. But everyone on the site gets his own symbol, like his own stock symbol. And we tried to make the interface much less technical, much more simple to understand because, you know, this isn't about technical analysis as much as it is about stock picking. So we have an interface where you just kind of pop down into the site and you have this big pie that you get to allocate among all the stocks you're interested in. So, of course, I'm a technology buff so I would pick--I don't know--40 percent of my pie would go to Google and 30 percent would go to Apple. And I would allocate my pie and I'd write a little not explaining why I think Apple and Google are good and why I want the let the rest of my pie stay in cash. And then, so my symbol, the Matt symbol or whatever my symbol is, anyone can come and see that pie. And then, where it gets kind of cool is the idea that then someone can say, this guy, Matthew Klein, he's a genius. I happen to believe that many people would say that. And they would look at my pie and say I want to own his system in my pie. So when they allocate their pie, the can choose to buy a little IBM but also to allocate 50 percent of their pie to Matt, to the symbol that I created. And then, so maybe there are experts that are good at picking people in addition to picking stocks. So that was kind of the, revolutionary is a big word. That was the incredibly cool idea that we were trying to experiment with on Youtual funds, this idea-we call it is recursive portfolio allocation where you can own people's pies as a slice of your pie. And in turn, someone can own your pie which owns another pie, and so on and so on. So this was the sort of the big radical step that we took in Youtual Funds. And you can see why that's really, you know, on some level they're both sites that allow people to invest in some sort of methodical way. But you can see why it's a very different experience. Zack: Did they experiment work? Matthew: Well, I would have to say the jury's out. I mean, every entrepreneur wants everything he touches to be golden and to be a huge success. I think that Youtual Funds wasn't as big as we hoped it would be. It wasn't as obvious as we hoped it be to people. And so, I mean it's a site we love and we work on so hard every day. But I was hoping for millions of users every day and I think we're orders and magnitudes away from that. Whether that changes as a result of this podcast or as a result of a gravitational shift in the earth or whatever. Who knows. But one of the other reasons we started the site was to be, to have it be a test bed for new ideas and new business models, a new user interface experiment. So some of the stuff we actually worked on in Youtual Funds, we brought over to our main site, Collective2. I mean this is all probably stuff that most people aren't interested in. But from an entrepreneurial or software design point of view, it is kind of interesting to run two different sites and to try to have one that's more of your experimental site and then you can bring the stuff that works over to the big one. And that's pretty much what we've been doing with Youtual Funds and Collective 2. Zack: So just, I don't need numbers, but in terms of relative size, Collective2 is sort of the mainstay site and I assume most of the activity is happening over there. And Youtual Funds is still just sort of searching for the large, mass audience? Matthew: Yeah, I mean, I think that's really fair. I mean, I personally, I dislike listening to people never talk about their lack of success. Actually, you see, there I go. Zack: Well, you attacked, you attacked the newsletter industry, so. Matthew: Well, right. I guess what I mean to say is, look, to be really honest, no. The Youtual Fund site has been much less used than the Collective2 site. And it's really hard to say what that is. Is it just an idea whose time hasn't come? Is it an idea whose time never will come? Is it bad marketing? Is it a bad user interface design? I mean, there are a thousand fathers of every failure, right? So who knows what it is. But the way I consider the site right now is we'll keep plugging away at it and it's a great test bed. And there are a bunch of users who do seem to love it and are really emotionally attached to it and I don't want the site to go anywhere. But to answer your question, Zack, yeah, Collective2 is really the main engine of my little company's growth and that's what we think is a big success. I mean, that one we don't have anything to be ashamed of. Zack: How many systems do you have up? Can you share that? Matthew: Yeah, I think it's really on the front page of Collective2. Now, it's one of those things where you put a big number up and it's completely honest and real but it really does need a little bit of explanation. I think, actually, yeah I'm just going to Collective2.com right now and it says we have 18,010 trading systems in our database. But just to kind of fully disclose . . . Zack: I assume most of those are not active. Matthew: Yeah, a lot of them are not active. But it's something we talked about, touched upon earlier. There's some value in keeping in your database all the failures that people strew along the roadway on the way to their success. So there's that. There's the fact that one of the things you asked me earlier, Zack, like who are the customers on Collective 2? Who are the people that create trading systems? Who are the people that trade? The people that create trading systems, you know, one of the really powerful and amazing things about the site is that we're open. Anyone can come to the site and propose their trading methodology and be tracked and. . . Zack: No credentialing required. Matthew: That's right. If you have a couple of nickels to rub together, it's not a lot, you just sort of start your system and there you are. You're on the site, you're right next to everyone else who might. So, if you're a Harvard MBA or. . . Zack: Egads. Matthew: [inaudible 30:09] math major, you're right next to the same guy who's working in the Moscow basement and living with his mother in Moscow. And I think that's really cool and that allows, I mean it removes a lot of friction and barriers in the world of finance. It doesn't really make a whole lot of sense to me, personally, that you need to go to Harvard and work at Goldman in order to be someone who writes trading methodologies. Although, that is effectively the way the financial world works today. I mean there's just these big barriers to regular, everyday smart people participating in the world. And I think Collective helps break down those barriers. So there are a lot of systems. And one of the downsides of opening up a platform to the entire world is that you get a lot of crap. And so out of those 18,000 systems, I won't even venture a guess as to saying what percentage is crap, probably a lot. But there's value in that and as long as we, as programmers here at Collective2, can make it so that people can fairly easily kind of hide the crap and get rid of it really fast off their screen so that all they need to look at is the good stuff, we're find with that. Zack: Okay. I just have a couple more questions. So we've got this marketplace. I'm curious how Collective2 makes money, right? From what I've seen, you charge, I guess we call them trading system managers or whatever, a fee to publish on the system if they want to share it? And also the ability to make money by doing that. So I assume you take a piece of that. Matthew: Yeah, I mean the pricing is not at all secret. It's right out there on the website and we publish it and everyone can come look at it. But it's basically, this is the business model. A system decided to publish there, it's like a hundred bucks, not even, to turn it on. And then to the extent you take subscribers, we have 50,000 active users who use the site. And to the extent that any one of them sees your system and says, oh yeah, I'll subscribe, you set your price as a system developer. You can say I want to charge, oh $10 a month or you can say I want to charge $500 a month, whatever you want. And then Collective 2 takes 30 percent of that as its fee. And that's essentially, there are other ancillary things going on. There's some advertising. There's some marketing. But that is effectively the business model of Collective 2. Zack: And the advertising and marketing is internal. Meaning if I had a model and I want to, like I would do on eBay like you were saying. That was the metaphor you were using before. If I want to just sort of help boost the people seeing my system, I can advertise within the platform. Matthew: Yeah, that's right. I mean, again just in the interest of full candor, I mean I don't think that amounts to a whole lot in terms of the revenue stream for my company. But yes, you could for example get more, let's call it more effective placement. If you started a new system and you really wanted to make sure that the right people saw it, you are very proud of it and you didn't want to wait for them to sift through a database to find it, you could kind of feature your system for some nominal fee. But that's hardly even, I mean, certainly I'm happy to talk about it but that's not really a big part of the business model. The real model is frankly, is the ability to get subscribers on the platform and when you do and when you are successful on the platform, that's when Collective2 gets its success. So it's a pretty nice model. I mean, you don't really risk a whole lot to start out as someone who's being a trading system developer. And similarly, as a subscriber to the systems--if you come to the site and want to just be a subscriber--a lot of the systems offer free trial periods and the ability to kind of just fool around with the system. And we have a really nice simulated brokerage account ability. So you don't even need to bring your own brokerage account with you. If you don't have one, you can use our sim broker, or simulation broker. And it's really like you have all the same features as you would if you brought your real broker account with you. You see your daily statements and you see how you're doing and you can affect your autotrade. And so it's a nice way to experiment. Of course, I should just say for regulatory purposes, of course, a simulated broker is not the same thing as a real broker. And if you make $1 million in a sim broker, that's not the same thing as making money in a real broker. But it's a cool thing to experiment with. Zack: Are some of the, I'll call them model managers, are they making real money or is this sort of like just ancillary to what they're doing? Have they quit their jobs? I mean is this like a full- time thing for some of them? Matthew: Well, look. In any business, in any intellectual property business, there's kind of a long tail thing where there's a lot of people making an okay amount of money and then there's a group, a cluster of people that make a ton. I'm a part-time novelist as well, so I write books in my part time. And I am one of the guys on the right side of the tail who, you know, I ain't paying the mortgage with my books but, you know, I enjoy doing that. And similarly I think the James Pattersons of Collective2 make, they do really well. I mean, there's a bunch of them, more than a handful, that, I don't know where they're living and if they're living in Manhattan, you know, maybe it's not- it's a good living in most of the country, what they're doing. And so I think the site is growing. We're getting new users every day. And so it seems to me- and there are people that are making a lot of money publish their models. I think what I have seen happen is some of the very successful ones-I mean, I don't promise this and it's really not part of our marketing spiel at Collective2, but it does seem like some of the more successful ones sort of get snatched up and create a hedge fund or they sort of take their models and turn them private after achieving a lot of success. I think it's the kind of thing where you can do really well, if you have a good model. It's not overnight. It could take you six months to build a following. It could take you 12 months to really start making a ton of money. But then the really good ones kind of get taken away from us. So from my perspective, that's a business challenge. From the perspective of someone coming to the site, it's an opportunity. Zack: Right. I guess, according to the model, you're sort of like a farm league for investing ideas. All right. So somebody can come in and sort of mature through the system and you have to expect that, at some point, they graduate beyond the platform. Matthew: Yeah, and I hate that. I really feel if I could only sign people to lifelong contracts and subject them to servitude, that it would be much better for my business. But, yeah, you're right. I mean, that is sort of effectively what happens to the best of the best. And it doesn't happen right away and it doesn't happen all the time but it certainly does happen and it's just part of the way we have to make our business work. Zack: Last question, and it's a personal one. You said you built this platform to sort of scratch an itch of yours. Are you a trader by background? You're a novelist, you're sort of like a renaissance man. How would you describe yourself? Matthew: Well, how would I describe myself is probably a lot different from how my wife would describe myself, as it probably takes with everyone. Zack: It's a family program. Matthew: So, yeah this is one of those weird things where I grew up in a house where my dad was, he was using technical analysis back when there were, I think they were called the TI-59 programmable calculators. For those of you who remember those, were little calculators that had magnetic cards you could put through the calculator and you could store a program that had, like, 20 instructions on it, or something like that. And he was using that to trade futures. So I grew up in a house where technical analysis and trading was just something that people talked about and did which was kind of slightly unusual. And I guess, I have been a trader for many years and that was what led me to start Collective2, about a decade ago at this point. But at this point, running, it's a small company, admittedly. But for me, it's my whole life. So running that company takes up so much of my time that it's very hard for me to even consider trading at this point personally. So I am a reformed trader, a retired trader, maybe is the right word. And now I just spend my time trying to build a great platform for other traders. Zack: I lied. I have one more question. Can you talk about maybe where you're going to be, and whether it's just Collective2 or Youtual Funds where, some of the things on the road map, on the product road map. I guess where you'd like to be in a couple years. Matthew: Well, obviously, when you do something for your life you want more people to see it rather than fewer people. It's not even about money, although of course if someone starts a company you want more customers rather than fewer customers. But I think that systematic trade-well, let me step back for a second. I think that most of the world is getting ripped off in the world of investing, trading. I think people are sold products that are not right for them. I think that people spend too much money and lose too much trading. I think people make bad decisions. They generally make worst decisions they can make and the primary cause for those bad decisions is A), lack of knowledge and B), following human emotions. And I think emotions kill you when you trade. I think you really, as an investor, should consider one of two possibilities. One is have some sort of investing thesis, make a decision, execute that decision in your account and then don't look at your account for 10 years. That's a viable strategy in my mind. The other strategy, and that's a viable strategy, but it's hard for most human beings to do, I think. So if you're not a Vulcan and you can't really follow that advice, I think they next idea to consider is to try as much as possible to eliminate emotion from your decisions. And I think it's not quite there yet but I think that a platform like Collective2 helps people do that. I mean, it could be misused like every platform could be. It could help people make bad decisions. That happens. I can't deny it. But my goal, to answer your question, the goal is I would like more people to be able to understand what Collective2 is and to use it. So from a design and product development road map point of view, my goal is to try to make the site-it's hard to do-but more user friendly, more obvious. I grew up with a father who traded and who explained to me all these technical analysis terms. I think that the legacy is still there in the site and I think that the regular Joe investor probably comes to the site and his eyes glaze over and he falls asleep at his computer. So I think my job is to make that a little less daunting, a little safer, a little more obvious. And if I can do that at the edges a little at a time, in a few years maybe the company will be a little bigger and we'll have even more happy users. That would make me really delighted. Zack: Awesome. Matthew Klein, founder of Collective2.com. Thanks for joining us on Tradestreaming today. Matthew: Thanks, Zack. It was great.
- Tradestreaming Guru Portfolio (I've published a model portfolio on Collective2 based on research I've done into replicating hedge fund returns and wrote about in my book, Tradestreaming)
- Youtualfunds.com (sister site)
- Tradestreaming Insider Trading Portfolio (my insider trading portfolio built from some of the ideas I'm publishing weekly at Insiderize)