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Product Feature Request for Commonstock - Personalized Risk measure
I was thinking about my portfolio and it occurred to me that Commonstock has a unique position to create a product feature unavailable (to my knowledge) on other platforms. I’d like to make the case for why this should exist :)
There are three problems I see, the first of which Commonstock has already solved (kudos).
- There was no leading place on the internet where portfolio consolidation was done well. People had 401Ks, IRAs, and multiple brokerage accounts with no way to see the entirety of what they were invested in.
- I have a hard time reading through all the content online and connect the dots in an understandable and productive way to inform my investment strategy. Reframed, there is low signal-to-noise.
- Even when I figure it out for myself, I have limited ways to determine if other people think similarly or contrarian to me.
In the same way that LinkedIn became a place on the Internet to house a professional resume (the profile), Commonstock quickly became the way to house my personal portfolio. In my opinion, this is an apt parallel to draw and important to note that the initial network effects of LinkedIn were driven not because they had some differentiable value from the miniscule network they created at first, but rather the network manifested itself around an independent value proposition. This was LinkedIn’s solve for the ‘cold start problem’. I can see a similar optimistic future for Commonstock. By solving (1) above, Commonstock quickly became the way I could very quickly screenshot my % portfolio and share with friends to spur discussion.
Now, I think (2) and (3) are user problems which will quickly become platform problems. Okay, I have my portfolio here, and I can see others, but how do I know who to follow? Whether their investment strategies match mine, and whether I can leverage their shared knowledge to formulate my own? I think there are many solutions to this, but I’m going to advocate for one. A standardized and personalized measure of risk. I’m thinking of a Sharpe ratio or something Sharpe-ratio-esque.
The Sharpe ratio is a commonly used metric for portfolio risk-return, calculated by ((return of portfolio) - (risk-free return)) / (standard deviation of excess returns). Commonstock already has historical price information for all the securities listed on each person’s profile - I think it would be straightforward to calculate metrics based on each users portfolio. This can help users (and Commonstock) in a few ways:
- What is my risk-return ‘score’, and how do I compare to popular benchmarks (e.g. indices) or even my friends/followers/following? Depending on my risk tolerance, should I change my holdings? This can lead to lightbulb moments for people.
- As I read memos from other users, does this member have a similar risk appetite as me? This may affect the trust I have in them and their investment suggestions, and affect the probability that I actually act on any given memo.
- For Commonstock, having a way to standardize and cluster members can be vastly helpful as the network grows. It opens the path to experimentation. You can recommend high-risk/high-reward individuals and their content to like-minded investors to encourage engagement. You can recommend high-risk to low-risk folks to see whether any are interested in ‘broadening their horizons’, or if people prefer to maintain their existing strategy. This can be a much more personalized approach than simply showing the ‘highest voted’ content on the feed (though I’m sure there are plans to get smarter on recommendations already, perhaps I’m just injecting my own wishful thinking).
I’ll digress here, as this is longer than I intended. I skipped a lot of important material, like how we jump from the problem to this specific solution, but I wanted to suggest something for Commonstock to automate something I just did manually :). I’d love to hear what everyone’s thoughts are on this!
Investopedia
Sharpe Ratio: Definition, Formula, and Examples
The Sharpe ratio is used to help investors understand the return of an investment compared to its risk.
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