Why Acorns is a much better product than Robinhood*

*(for most people)

Two new mobile applications are getting a lot of buzz for disrupting the fairly antiquated world of the retail investor. Both Robinhood and Acorns allow users to start investing right on their mobile phones, albeit with very different philosophies. Each does something not possible until only recently. Robinhood has devised a product that utilizes digital technology that enables it to charge zero commissions on buy and sell orders, while Acorns allows users to link their credit and debit card accounts to “round up” transactions and invests those “round ups” in a diverse portfolio of index funds. While both are radically new products that lower the bar of entry into investing, Acorns is a much better product for those looking to get started in the world of investing.

The two apps are built on fundamentally different ideas and aims. By lowering the costs to trading with zero commissions and a sexy smartphone app, Robinhood will both encourage new investors to enter the market and encourage all users to trade more frequently. A similar phenomenon happened 15 years ago when e-trade hit the scene. The platform enabled the buying and selling stocks far more conveniently and cheaply, bringing in a wave of novice retail investors (affectionately known as “day traders”). In part this newly created convenience helped fuel the tech bubble of the early 2000s.

There’s too much evidence to cite that, unless you’re an investor able to commit the time and energy into analyzing every detail of a company’s financial reports, retail investors you’re much better off owning a diversified set of low-cost index funds. And that’s where the idea behind Acorns excels.

Robinhood has improved on one of the biggest pitfalls of day-trading by eliminating the transaction costs that eat into the minimal returns from most speculative stock picking, but that doesn’t mean gambling in equities is all of a sudden a good idea. By reducing the cost of trading even further, Robinhood will bring in another wave of amateur investors, convinced that speculating in the stock market with zero transaction costs is a new way to get-rich-quick.

Now, readers of this blog will know that I’m all for the lowering of transaction costs to increase overall market efficiency. And certainly Robinhood will lower the bar for buying equities even lower than the E-Trades and Scottrades of the world have done. That in it of itself is a good thing if used properly by investors who want to purchase stock to hold. What’s not good is if this convinces a host of new retail investors into thinking that they can compete with HFT firms and hedge funds in beating the market. There’s too much evidence to cite that, unless you’re an investor able to commit the time and energy into analyzing every detail of a company’s financial reports, you’re much better off owning a diversified set of low-cost index funds that track overall markets. And that’s where the idea behind Acorns excels.

Acorns leverages a few behavioral economics principles that enable it to be a much better deal for individual investors in the long-run than Robinhood. First, (after linking your credit cards and bank accounts) it automatically “rounds up” each of your purchases to the nearest dollar. Then, once the round up amount has reached $5, it debits your bank account for that amount and adds it to your Acorns brokerage account. Yet this account isn’t your average brokerage account, a user can only pick between five different portfolios of ETFs based on hers or his risk tolerance (from “Conservative” to “Aggressive”). By restricting it to these funds, Acorns makes sure that you’re only investing in broad market-tracking ETFs that have very low expense-ratios. For this service, Acorns charges $1 per month (regardless of your investment amount) and .25%-.5% of your assets. Cheap compared to the fees of most institutional money managers.

After using Acorns for the past 4 months, I sometimes forget that I have it at all! The more money I spend, the more money is “rounded up” and the more money is invested for me by Acorns. Given the long time horizons of most the users of the app (very long), it’s a fantastic way to get exposure to the market in a way that’s proportional to your spending habits and one that won’t break the bank. All the traditional investment mantras still apply, but the app makes getting the exposure incredibly easy. I’m excited to see where they’ll be taking the product in the future (towards support for retirement accounts, I hope!)

While Robinhood’s promise of zero transaction costs may seem like the better idea, most people interested in using their smartphones to manage their investments should start by using Acorns.

Comments or questions? Send them to me @jeremysjacob

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How the Apple Watch will usher in a new era of health research

On Tuesday, Apple didn’t spend a lot of time talking specifics about its “Next Big Thing”. Questions left unanswered include “how long will the battery last?” and “When exactly will it be released?”

But something that Tim Cook, among others, did spend a long time talking is the amount of health information that your Apple Watch will eventually collect on you, and how the device could help can “motivate people to be more active and more healthy”.

While I’ve long argued that the problem with wearables (the Fitbits and Jawbone Ups of the world) is that, while they collect a lot of data on you, they don’t actually apply that data in many ways that are truly useful to you. (Aggregated, there have been some cool applications of this data, including this chart put together by Jawbone after the recent Napa earthquake. But more on this later) So why does Apple have a chance to succeed where others have fallen short? The opportunity lies in Apple’s ability to use this information it collects on you will now be collecting on you to productive uses.

Providing real-time health information to you and your healthcare provider

Between the iPhone 6 and the Apple Watch, users will be carrying an accelerometer, a gyroscope, a barometer, a GPS beacon and a heart rate monitor. These devices will be capable of collecting thousands of data points a day on our health and activity. With these sensors (as well as any other third-party sensors that could be connected through HealthKit) and the new Health app, Apple will now aggregate all information about your heath and activity in one place. This will provide a much larger window into your health and fitness than any wearable has provided before. And think how useful this data will be farther down the line, when the watch will (I’m sure) measure everything from blood pressure to oxygen levels. That kind of data, when combined with information about your activities (and hopefully soon again health-related genetic data from companies like 23andMe), could provide you and your doctor with important early warning signs. Yet, on the individual level this kind of data is only so useful. The real boon to society comes when this data is aggregated.

A massive health and activity database

We’ve seen how companies have been successful at using aggregate data provided by wearables to reduce their health insurance premiums, but this is just one example of how the data collected by these devices can be put to good use.

The true potential for this data, when aggregated, will be to provide the most complete picture of society’s health that we’ve ever had. This massive new health and activity database, when combined with other information, could lead to some fascinating insights on what makes people healthy. First, it’s important to note why Apple is in a unique position to be able to do this.

Because Apple is first and foremost a product company, with over 50% of its revenue coming for iPhone sales alone, it doesn’t have the same monetary interest in data as some of its competitors. That allows Apple to both provide assurances of privacy and put the data to more altruistic uses. While these two options may come into conflict with one another, they do provide Apple a huge opportunity. Given the company’s (correct) stance on the privacy of your health data (they’ve made specific promises about how not even Apple will have access to it) if they did want to facilitate the creation of this database they would have to have clear consent from customers before releasing any of this de-identified data. This database would be an incredible boon to health researchers. At no other time in human history was it possible to both collect and analyze this amount of health data. We don’t yet know what trends it will uncover or problems it will help solve, but potential of this data is enormous.

Companies increasingly have the ability to collect and analyze more and more information on us and our behavior. Most of this data is used to sell us more stuff. It’s about time that we harness this information in truly equitable way, one that would provide dividends not just to the customers or the companies collecting the data but to society as a whole. With the Apple Watch, Apple has the potential to build a database that could unequivocally change the world for the better.

Comments or questions? Send them to me @jeremysjacob

Donald Sterling’s wife (or son-in-law) will sell the Clippers

After Adam Silver brought the hammer down on Los Angeles Clippers’ owner (and notorious racist) Donald Sterling, the NBA and the country breathed a sigh of relief. When the Clippers’ answered with a win against the Warriors in Game 5 of the first round of the playoffs, it was in part to try and put this dark episode in the organization’s history behind it. Yet now, after the owner received his lifetime ban from the league, sportsfans and non-sportsfans alike are asking the question: will Donald Sterling sell the Clippers?

We can look to economics for the answer to the question (what issue can’t be informed by a little economics?)

Tyler Cowen suggests that the Coase Theorem can explain what the beleaguered Clippers owner will do with his team. First, a little background on the Coase Theorem. Conceptualized by economist Ronald Coase, the theorem states that, no matter resources are allocated initially, economic efficiency can be reached in a market even when externalities are present as long as property rights are clearly defined and transaction costs are sufficient low. According to Coase, economic actors will bargain to reach the most effective allocation of resources based on who is able to reap the most economic benefit from the good. For example, say a wind farm operating near homes causes noise pollution. Assuming negligible transaction costs and sufficient property rights, if the value of operating the turbines is greater than the noise costs imposed on the residents, then the turbine operator could pay the residents an amount between its benefit and the residents’ cost. This allocation will thus make both parties better off. To figure out if the theorem holds in the case of Sterling, we need to figure out if its conditions are met.

1. Is there an externality?

Does Donald Sterling’s ownership of the Clippers create externalities? In other words, does his ownership the team incur a cost or benefit on a party who did not choose to incur that cost or benefit? In this case, the NBA, as well as Clippers fans, are both outside parties who have to bear costs of Sterling’s poor ownership of the team. Any decreased advertising revenue to the NBA constitutes as a negative externality. Also, any emotional or otherwise negative costs bore by fans supporting a team with a racist as an owner would be a negative cost. 

2. Are property rights clearly defined?

While you can argue if Sterling deserves to own the Clippers, no one can argue if Sterling owns the Clippers. The NBA also has a clear set of rules and property allocating outlining advertising revenue.

3. Are transaction costs sufficiently low?

In this case, Ygalesias is right, there are are some significant transaction costs to Sterling selling the Clips. While the market for national sports franchises (even the worst ones) is hot right now,  Sterling would have to pay some significant transaction costs when selling the team. After buying the team for just $12 million back in 1981, many now value the franchise at close to $1 billion. Like any other investment, if Sterling sells he’d have to pay the 33% capital gains tax in the change in value ($987.5 million x 33% = $329 million in taxes).  Now, if Sterling dies and one of his family members inherits the team, they’ll only have to pay capital gains tax on the value that appreciates under their ownership reign. So, if the team only appreciates from $1 billion to $1.1 billion they’d only have to pay tax on $100 million ($33 billion). Besides being a litigious and ornery man, this difference in transaction costs is why Sterling is planning to sue the NBA if (but more like when) the owners try to force him to sell.

While countless billionaires and celebrities have already expressed interest in purchasing the team, the Coase Theorem tells us that Sterling will use any means necessary to hold on to the team until the transaction costs are significantly lower.

Comments or questions? Send them to me @jeremysjacob

The Case for Open Borders

In Sunday’s New York Times, just below the fold, there was a heartbreaking story about a young girl, Noemi Álvarez Quillay, who died in a Mexican shelter last month, she was 12 years old. Her parents, currently undocumented immigrants living in New York City, had paid smugglers (“coyotes“) to bring her all the way from Ecuador, a journey of over 6,500 miles. After being caught by Mexican authorities and sent to the youth shelter, she was inconsolable and was later found hung in a bathroom. Her death as been ruled a suicide. Noemi’s story is not unique. The Office of Refugee Resettlement estimates that the number unaccompanied minors caught entering the country will reach 60,000 over the past 12 months ending in September 2013. The sad part? 60,000 is a drop in the bucket when you’re deporting over 30,000 undocumented immigrants a month and your border patrol has an annual budget of almost $13.5 billonIt doesn’t have to be this way.

What if, instead, we lived in a world where anyone could move to wherever they wanted at any time and for as long as they wanted?

What if, instead, we lived in a world where anyone could move to wherever they wanted at any time and for as long as they wanted? This revolutionary idea started to intrigue me following a passionate post by Alex Tabarrok of Marginal Revolution. I try not to summarize Tabarrok’s post, you should just go and read it yourself, it’s that good. Beyond preventing heartbreaking stories like Noemi’s, eliminating the borders globally could bring about massive gains in human welfare, economic output, and equal opportunity.

Below I’ve complied some of the most compelling of those arguments. (For an even more in-depth exploration of the theoretical underpinnings of the concept, check out the excellent openborders.info.) 

1. The Moral Case

Using a strict reading of moral frameworks (libertarianism, utilitarian, egalitarian, etc.) restricted national borders are nearly impossible to justify. How is is my liberty jeopardized by someone wanting to come into my country who couldn’t before?  If we believe in providing equal opportunity to all (not just our fellow citizens) how can we limit the potential of those who don’t have the same opportunities as we do just because they were born somewhere different? In many countries there are institutional and structural impediments that limit occupants’ potential. When people are granted the chance to move to locations where institutions and growth are strong they see a huge boost to their income and productivity. So, if by giving people the right to move freely across borders it allows people to provide better lives for themselves, can a practical case also be made for opening up the world’s borders?

2. The Practical Case

If you’re serious about alleviating (and ultimately destroying) global poverty or at least reducing global inequality you have to be serious about the idea of open borders. It’s been estimated that opening the world’s borders could bring about a 50-150% one time increase in global GDP. As people move to locations where there skills and labor are most in demand, their incomes will rise. Not only would opening the borders increasing the size of the pie that is the global economy, but it would also likely begin to shift the sizes of the slices by increasing both income and growth globally. (As an aside, it’s interesting that Piketty doesn’t mention this in his Capitalism in the 21st Century while proposing the almost equally politically/practically infeasible idea of a global wealth tax, but more on the book later). Clearly open borders would have a significant impact on potential immigrants, but there’s also evidence that it would have an impact on immigrant-receiving countries, especially highly-developed ones.

  • Highly developed countries tend to have knowledge intensive economies where labor tends to be complimentary. If an astrophysicist can spend more time studying the stars and less time doing other tasks everyone will be better off.
  • Since advanced economies tend to offer better institutions, legal structures, and infrastructure, they’re better able to reap the benefits of additional innovation. The founders of the next Google may only be able to start and build that company in the US, rather than the country they emigrated from. Since the company’s founded and based in the US, the country will reap most of the benefit.

While it remains revolutionary*, opening the world’s borders should be the next big equal rights and globalization campaign. As Tabarrok writes, when Thomas Clarkson founded The Society For The Abolition of the Slave Trade in the late 1700s, the idea that he would live in a world where slavery was socially unacceptable was inconceivable. Yet by the end of his life, slavery was abolished in the British Empire.

By opening the world’s borders we could advance the rights of billions of people while also bringing about the potential for a massive gain in human welfare. Revolution happens, and it can’t afford to happen with the potential to improve the lives of this many.

*If you’re more interested in some constructive, practical solutions to the US’s immigration problem specifically, take a listen to this Planet Money episode.

Comments or questions? Send them to me @jeremysjacob

Why we should have one global timezone

What if, when it was 09:00 in New York it was also 09:00 in Beijing? What if, instead of going to sleep at 23:00 PST those of us in California went to bed at the same time, but that time was called 06:00 GMT instead? What if, when you were trying to talk to someone in another country, you suggested a time and they immediately knew when you meant? What if we had one global timezone, where it was the always the same time everywhere?

What if we had one global timezone, where it was the always the same time everywhere?

Timezones were conceptualized in an era when the world was much less global. 100 years ago it wasn’t very important that the time be the same in San Francisco and London. You didn’t have to know the time outside of your immediate zone, even if you wanted to coordinate a meeting with someone far away, figuring out what time to do it was the least of your concerns.

Today, business and communication is routinely conducted across regions, cities, countries and, most importantly, timezones. Meetings have to be coordinated, flights have to be scheduled and deliveries have to be made. Beyond history and convention, there’s no reason that we have to have 24 timezones. Sure, it’s nice for the sun to come up around 07:00 and set around 19:00, all over the world since that’s how I’ve always known the world. But what if it didn’t? What if the entire world had one timezone, say GMT/UTC (obviously time is relative so it doesn’t matter which zone we chose)?

That’s what astrophysicist Richard Conn Henry and and economist Steve Hanke suggested two years ago. In their proposal the world would have only one timezone, GMT/UTC, which would mean that when it’s 03:00 in Tokyo it’s also 03:00 in Buenos Aires. It would mean some people would wake up on a Tuesday and go to sleep on a Wednesday, but a day change is just as arbitrary as an change in an hour (or a second for that matter!) The point is that it would be the same time everywhere all the time. When I want to schedule something with someone in China, I just ask what time they’re available and we’d know right away if it would work or not. When I’m calculating how long a flight takes, I don’t have to scribble a few calculations on a piece of paper just to find out when I land or how long the flight is. Think of how easy that would be! Once everyone got over the initial confusion to the change our lives would only be easier, nothing else would change. In industries that require coordination across timezones (banking, etc.) companies would open and close at the same hours, no matter their location. Beyond the long term “harmonization dividends” this change would also be convenient for those who must work during daylight hours (farmers, etc.), as in many places these newly coordinated companies would be open either early or late in the day than they are today.

While they’re at it, Henry and Hanke also advocate streamlining another arbitrary time keeping device, the calendar. Each day would fall on the same day of the week each year, and we’d have a “leap week” every 5 or 6 years.  That means less workdays lost to holidays (not great for most of us, I know) and a much easier time figuring out what day birthdays fall on each year, plus no more having to plan out schedules of events, etc. Sports games would always be on the same date and day of the week every year.

There are some obvious drawbacks to a single timezone (you’d still have to figure out what time normal sleep/wake hours in each location and the initial costs brought about by the confusion of the change would be large) but in the long run the gains from this harmonization would be massive. It would represent one of the biggest decreases in global transaction costs and lead to a much more efficient world in the long run.

Comments or questions? Send them to me @jeremysjacob

Two trends that could crush innovation

I was out with a few friends the other night and we got to talking about the problems of the patent system (the problems that the 2011 America Invents Act failed to address) and how it’s already making a serious impact. This got me thinking, what are the current trends that could damage the rapid pace of innovation we’re experiencing in the Bay Area and elsewhere? It’s clear that both the growth in patent litigation and the erosion of Net Neutrality are already having a serious impact on the environment of rapid innovation.

1. Growth in Patent Litigation

With large tech companies in an arms race to gather as many patents as possible while at the same time spending hundreds of millions on lawyers to file as many new software patents as possible, it’s clear that the current patent system is still ill-equipped to handle the current innovation environment.

First, a little background on the state of the patent system. Before the America Invents act, the last major update to the patent system was in…1952. I don’t need to tell anyone that that’s even before most of the current patents being filed could even be dreamed up. Clearly, a few things have changed since then. The America Invests Act was supposed to bring US Patent law into the 21st century. Unfortunately, it did nothing to address the biggest problem of all: the proliferation of overly broad, ambiguous software patents. These are the patents that some of the biggest trolls out there: Intellectual Ventures and others, use to both settle or take (mainly software) companies to court with. For a great overview of patent trolling I highly recommend this two part “This American Life”, When Patents Attack! The below graph shows the rapid rise of patent litigation over the past decade:

Image

via PwC

It’s clear that patent litigation is a growth industry. And as this trolling has grown more profitable it’s expanded the reach of the market. A tactic that was once only reserved for the largest companies with large patent portfolios and numeous products who have the resources to defend against these attacks, it’s now being used to go after small business and individuals. And that’s what’s frighting. There’s no doubt that many of the highest growth potential technology start-ups are infringing on hundreds, if not thousands of already-issued, overly-broad patents. And as the second part of the “This American Life” story explains, it’s already discouraging innovation before it can happen. If the potential for patent infringement is already discouraging those in this state of rapid innovation, it will only get worse as the market for patent litigation increases. A 21st century overhaul of the US patent system is the only way we’ll reverse the growth and increasing profitability of patent trolling, enabling the pace of innovation to continue unhindered. Luckily, there is a bill that passed the US House in December that would stop the most egregious tactics currently used by these trolls.

2. The Erosion of Net Neutrality

This trend is as potentially harmful (if not more so) as the growth in patent legislation. After a Federal Appeals court ruled that Verizon could charge internet companies to deliver content at higher speeds under the current rules outlined by the FCC, the internet was ablaze.

It’s clear that both the growth in patent litigation and the erosion of Net Neutrality are already having a serious impact on the environment of rapid innovation.

Comcast didn’t wait long to start taking advantage of the ruling, striking a deal with Netflix for “faster and more reliable access to Comcast’s subscribers”. Netflix has not yet passed these higher costs on to its customers, but higher costs for existing services is not the biggest threat of the erosion of Net Neutrality. Guan, in a post right after the decision, said it best when explaining that it’s going to cause the most harm to what he calls the environment of “permissionless innovation”. In other words, if it becomes standard operating procedure for ISPs to charge companies (both small and large) for access to deliver content to consumers it will effectively be a tax on innovation. Taxes tend to dissuade growth, and this “tax” will dissuade potential internet entrepreneurs from going to market.

Luckily again, we may actually get a response from the Federal government. The most important aspect of the decision was that it still granted the FCC the jurisdiction over Net Neutrality. The FCC has said that, while it won’t appeal the decision, it is working on drafting new rules that will (hopefully) rebuild the idea of a free and open internet. An internet that will continue to enable “permissionless innovation”.

I also thought about including the currently frothy market valuations as one of the trends, but it’s unclear whether this is currently a threat or a catalyst for innovation. To a certain point, higher valuations act as an added incentive to innovate (capital is easier to raise, and the payouts are bigger). But if these higher valuations lead to a bubble, a burst could have the opposite effect on innovation.

In the age of Washington gridlock it’s a relief to see some bi-partisan support for patent legislation, as well as a Federal agency actually taking some action. It would really be a shame if either of these trends continue and start have a real, measured effect on the current pace of innovation that’s creating jobs and adding value to the economy.

Comments or questions? Send them to me @jeremysjacob