Micro-Investing and Fractional Ownership: Long-Term Trend for Investment-Grade Assets?
As time passes, retail investors become more and more interested in accumulating anything from stocks to tangible assets and ultimately digital ones as well. Some due to simply being curious, others because they are left with pretty much no choice but to learn about investing, in a world where ultra-low interest rates are here to stay and traditional savers keep being mercilessly punished.
The elephant in the room when it comes to pretty much all asset classes, from the perspective of the average retail investor, is represented by the fact that the barrier to entry is quite high when it comes to “the best of the best” in terms of investment grade assets. Simply put, the average person can simply not afford to buy let’s say a reasonably valuable work of art or to provide a domain-related example, something along the lines of a LLL.com.
Why Not Look Elsewhere?
A common, as well as common sense question is this: why not simply settle for a lower-value asset if the one you had in mind isn’t within reach? But as great as this sounds in theory, investors frequently end up getting burned practically speaking because a lot of times, the assets they settle for fall below the investment grade standard… without the retail investor realizing that.
From following more or less sketchy online guides about investing in “bargain” works of art to problems of our own when it comes to the domain industry (not affording a LLL.com and choosing to invest in 5L dot coms instead), we need to be realistic and come to terms with the fact that the average retail investor isn’t well-funded enough to afford many of the best assets out there on the one hand and on the other hand, he or she isn’t sophisticated enough to spot investment grade bargains either. In quite a few cases, retail investors have difficulties with respect to the very basics, for example figuring out if a certain asset truly is investment grade in the first place.
Broadly speaking, there are two main approaches. The first and most obvious one involves education, with retail investors learning as much as possible so as to be armed with enough knowledge to allocate capital properly on a low budget, without making silly mistakes. While this might seem like the obvious mindset to embrace to pretty much all of those who are reading this article, you have to understand the key distinction between you and the average retail investor: you are someone who took the time to drop by and read out of curiosity, the average retail investor doesn’t care. Instead, retail investors want something as close to a “set it and forget it” strategy as humanly possible. Most of them have jobs that are completely unrelated to investing, personal lives/families and generally speaking, a complete disinterest in anything investing-related.
Therefore, economic actors in the investment space were incentivized to fill this void and micro-investing as well as fractional ownership became legitimately possible. Nowadays, a retail investor who wanted to perhaps buy stocks with the $1,200 stimulus check received in the mail but who isn’t able to afford buying actual shares in some of the world’s top companies have various apps such as Robinhood at their disposal which enable them to for example buy only x% of one share rather than a full one.
The same way, options have appeared in other industries as well, for example Masterworks in the art space. The principle is similar: investors who aren’t wealthy enough to own truly investment grade works of art can opt for fractional ownership with entities such as Masterworks enabling them to own a small percentage of a truly spectacular work or art.
How Can This Be Done?
It is ultimately not all that complicated given today’s technology, with options ranging from ultra-centralized ones where everything is handled through a status quo website and records are kept via MySQL databases to more decentralized possibilities involving… you’ve guessed it, blockchain technology and hybrids thereof.
However, it makes sense to be realistic and understand that “more decentralized” is a relatively accurate description, as counter-intuitive as it may seem. After all, we are not talking about bitcoin for example, which isn’t “owned” by anyone and where there is no central authority whatsoever that can be reached. It takes a fair bit of legwork to facilitate fractional ownership of one asset or another, which actually incorporated entities needing to handle everything and, of course, not for free. It would be excessively optimistic at best to believe that something like blockchain-facilitated fractional ownership can truly be decentralized.
At the end of the day, let’s face it: as important as true decentralization is for true believers in bitcoin such as Michael Saylor (with even bitcoin itself having centralization-related problems such as an over-dependence on China for all things mining-related), the average retail investor doesn’t really care about this dimension all that much. As long as someone trustworthy offers a workable solution, a wide range of retail investors are more than willing to hop on board.
What About Downsides?
It would be naive to assume that something like micro-investing or fractional ownership can come with zero in the way of downsides. Of course they exist and not only that, they have to be included in the equation based on which you decide if going down this road is worth it in your case and if so, how much capital you should allocate toward these options.
On the one hand, we have downsides in the realm of emotion rather than reason, for example that some investors consider it important for an asset they buy to be one hundred percent theirs. MY painting, My house, MY domain and the list could go on and on. Perhaps you agree with this mindset, maybe not but regardless, it should be more than obvious that quite a few investors do.
On the other hand, we have downsides when it comes to the logistics of it all and the counterparty risk involved. More specifically, the counterparty risk dimension revolves around understanding that aside from risks related to the asset itself (for example the risk that the price of that asset goes down and you lose money as a result if you are forced to sell), there are risks related to the counterparty through which you are purchasing the asset in question. For example, there is always a legitimate risk involved that something happens to the middleman in question and while there are oftentimes measures in place to mitigate that risk (anything from strong internal procedures to insurance), the fact remains that if things turn sour, the end result can be that a truly Kafkaesque bureaucratic nightmare ensues.
Domain Industry Implications
Pretty much everyone agrees that the days of “the best of the best” in terms of domain names being reasonably accessible to the average investor on the retail market are long gone. For example, how many retail investors could afford to purchase a LL.com that is let’s say auctioned without a reserve so that the market can decide how much it is worth? Most likely next to nobody. LLL.com domains are still within reach but 10-20 years from now, it is difficult to believe that this will continue being the case and the same principle will probably be valid for a lot of other domain name categories as well.
As such, fractional ownership is something our industry should welcome with open arms, and the fact that we are dealing with digital assets here that tend to be more straightforward to store/manage than perhaps a work of art is also something that works in our favor. It might take a while until we find ourselves in a landscape where legitimate companies that offer fractional domain ownership options compete against one another, but it would take an extremely pessimistic outlook to believe that day will NOT come.
Yay or Nay?
Right off the bat, it makes sense to start with a preliminary conclusion: the more original options are made available to investors, the better off the worlds of let’s call it wealth management will be. Even if you do not agree with one option or another, it makes sense to welcome innovation with open arms for “a rising tide lifts all boats” reasons if nothing else.
However, you also have to look in the mirror and try to figure out whether or not these options are worth it as far as you are concerned. For the most part, unless there is something at an emotional level that turns you away from micro-investing/fractional ownership, it makes sense to allocate at least an experiment-level percentage of your net worth in this direction. Yes, there are risks involved but the same way, there are risks associated with full ownership as well. Can a painting you buy and store in your home not be stolen or affected by floods/fires? Of course it can and just like with fractional ownership solutions, there are options for mitigating risks (insurance, yet again, for example) but this doesn’t change the fact that the entire experience might leave a bitter taste in your mouth after drawing the line.
The most intellectually honest conclusion would therefore be this: don’t run away from innovation just because something feels risky or unnatural (it happens all the time whenever something groundbreaking occurs, so don’t expect comfort) and since risk was mentioned, don’t run away from that either because it is plain and simply impossible. Instead, do your best to quantify said risk to the best of your ability and tweak decisions accordingly. A combination between an open mind and reasonable risk tolerance can and will get you far as an investor if embraced properly, even when it comes to the less than sophisticated average retail investor.