The mob is my broker: Cake launching crowdsourced stock fund

Stock community site Cake Financial continues to tweak its recommendation products, and will launch its first financial instrument in 2009.

Rafe Needleman Former Editor at Large
Rafe Needleman reviews mobile apps and products for fun, and picks startups apart when he gets bored. He has evaluated thousands of new companies, most of which have since gone out of business.
Rafe Needleman
2 min read

The stock tracking and community site Cake Financial is getting some interesting new features, including its first branded financial instrument, an exchange-traded fund (ETF) that rolls up the best stock ideas from the Cake communuty.

Cake CEO Steve Carpenter believes that of the approximately $100 billion that consumers pay for stock management services, "a lot is wasted." He's built a service that identifies the stock picks from the best performing members in his community, and lets other users take advantage of their investing skills. Importantly, Cake doesn't show you just which stocks have done well among its users. That's old information. Rather, Cake identifies the users that are doing well in their portfolios and highlights their transactions, as they happen, for other users. One of the byproducts of that is the Cake Take, a rating service "akin to Morningstar," Carpenter says. But it's more predictive, more timely, and a lot less expensive to run, since it's algorithmic and not based on the opinion of paid analysts. Fair warning: I don't know if the Cake Take's predictions are actually better than MorningStar's. I just think the idea is sound, and more contemporary.

Cake recommendations I'm supposed to be comfortable with.

If you're a Cake member and you link it to your stock trading accounts, it combines information about other members' activities with your own, and in the new "Scout" feature, identifies stocks that are performing better than yours, in users' accounts with similar asset allocation to yours, but that also evidence lower risk. In other words, stocks you'd be comfortable owning and that should make you more money.

Which brings us to Cake's ETF, the Cakedex, which should be available via ETF resellers like iShares in 2009 (Carpenter gave iShares as an example only; he's not revealing the outlets for the Cakedex yet). The Cakedex ETF will be an index fund made up of the top 100 holdings of the top-performing investors on Cake Financial. Details of the fund, such as how the holdings will be apportioned and how often the fund will rebalance, are still forthcoming. But this is a very interesting, efficient, and social financial product.

It's a timely idea, not just for consumers, who could always use better stock advice, but for brokerages. The price of stock trading is moving towards zero (see Zecco, among other trading houses). Online brokerages are now trying to make money by holding customers' assets (offering banking services) and by layering in social networking features that make it harder for customers to leave.

See also: Marketocracy.

Previous coverage: The Financial Wisdom Of The Crowds: Spendview, Cake, Mint.