One way to invest: Trade just like Uncle Herb

CHRISTINA REXRODE
Associated Press
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In this Sept. 12, 2012, photo, Joe Fox, CEO of Ditto Trade, poses in his offices in Los Angeles. Ditto Trade is a new online brokerage firm where one can attach their stock portfolio to that of person they trust, so that when they make a trade, so will you. (AP Photo/Reed Saxon)

NEW YORK (AP) — To the long list of investing strategies, add this: I'll have what she's having.

That's the idea behind Ditto Trade, an online brokerage for anyone who has a lot of faith in the cousin, best friend or next-door neighbor who's always bragging about their stock-trading chops.

Attach your investment portfolio to theirs, and whenever they make a trade, so will you. No time to watch the market? No problem, as long as you trust the instincts of your Uncle Herb.

Ditto Trade's CEO, Joe Fox, says his company will empower the stock-trading masses. What he's doing, he says, is tapping connections people already have with friends and family.

"We're not trying to reinvent the relationship," Fox says. "We're trying to automate it."

There are reasons to be skeptical. Among the most obvious: Maybe your best friend isn't the stock-picking savant she makes herself out to be. Maybe it's better to follow a safe, boring index than try to beat the market.

And maybe the same people who share all about their breakups and brunches on the Internet will still see money as something you don't discuss with friends.

But with Americans skeptical of traditional investing — they are still pulling money out of stocks despite a three-year rally of historic proportion — the appeal of something like Ditto is obvious.

Think the big investment firms are more interested in making money for themselves than for you? Why not hand the reins to your old college roommate, a trusted friend who quadrupled his retirement portfolio by betting on Google?

At Ditto, which went live this summer after several years of development and testing, business has been brisk — so much that Fox, 46, skipped a vacation to Europe last month with his wife, Lauren. (She went with a friend instead.)

The company has about 25 employees, split between Chicago and Los Angeles, and has already outgrown the first two offices it rented in Chicago. Fox declines to give specifics but says the website has thousands of lead traders, each with an average of three to five followers.

Clayton Cohn, 25, is a satisfied customer. He has a couple dozen friends, mostly Marine buddies, hanging on to his portfolio's coattails.

He started trading a few years ago with money he'd saved from deployments to Iraq, with no formal training but reading everything he could. He's jaded by the traditional brokerage experience and doesn't want his friends to have to endure it.

Just before the market crashed in 2008, Cohn says, he invested his savings with a persuasive broker who told him he should leave the trading to the professionals. Within a month, two-thirds of his money was gone.

Now, his portfolio has ups and downs, but he's doing well enough to trade full time and says he's up about 20 percent over the past year. The site allows people to charge friends a monthly fee to follow, but Cohn doesn't.

"It's no sweat off my back," Cohn says. "I'm trading anyway."

Ditto isn't the only brokerage to tap the follow-the-leader sentiment. Covestor, for example, lets people comb through online profiles of "model managers," then set their portfolios to mirror the trades of their favorites.

TradeKing, Zecco, Charles Schwab and others have websites where clients can post about what they're buying and selling, Facebook-like, with peers. On a recent afternoon, investors under names like BankerBob and OptionsHawk were swapping strategy on TD Ameritrade's MyTrade. Over on E-Trade Community, bulls and bears slugged it out.

Brokerage giant Vanguard is among the nonbelievers. It offers no such platform, saying it's safer to invest broadly across the market than to chase hot tips — even those from the collective wisdom of other traders.

"We advocate that buying the haystack is a better approach than looking for the needle," says spokesman John Woerth.

Like anything on the Internet, there's also the risk that people aren't who they say they are: Is the middle-aged financial adviser really just a 19-year-old day-trading between classes? Is the person who's buying Apple in one account secretly trying to drive its price down in another? Some companies offer to authenticate, to varying degrees, the traders who list themselves on the companies' websites.

Fox says fraud shouldn't be a problem at Ditto. The website's customers aren't searching for an interesting stranger to mimic, he says, but syncing up with people they already know.

A sister website, Followable.com, does allow investor matchmaking between strangers. Fox points out that lead traders there can choose to have their results "validated," meaning the website will note that it has confirmed that person's trades.

At Ditto, followers pay about $7 per trade, about what you'd pay at bigger online brokerages. Lead traders get a discount depending on how many people follow them, and trade for free if they have 18 or more.

People being followed by family and friends often don't charge the monthly fee. But Ditto also attracts professional financial advisers who tie their accounts to their clients', and they sometimes do charge the fee.

If you sign up to copycat your cousin and she buys 500 shares of Microsoft, your portfolio will make the same trade. You can set your portfolio so you always buy half the shares your cousin does, or so you always invest the same proportion of your portfolio as your cousin does, or some other formula.

You can also set up other preferences, like specifying that you'll follow only when your cousin buys stocks of particular companies. The lead traders are supposed to trade as they normally would for themselves, rather than tailoring their decisions to fit their followers.

In some ways, Ditto is simply computerizing an old routine. People have always tried to imitate their successful friends, seeking stock tips at neighborhood barbecues and downtown lunches.

And a lot of people, Fox points out, already oversee online brokerage accounts of their family members. Ditto makes it less of a hassle, he says, because they don't have to sign in and out of each person's account.

Fox got the idea in December 2008. The financial world was crashing, and he and his brother and business partner, Avi, wanted to get in. They were driven, Fox says, by a desire to help small investors.

Fox called a trader friend, Brian Lund, who told him to stay away from the stock market. As they talked, an idea hit Fox. "It would be great," he told Lund, "if I could put jumper cables to your trades and benefit from them."

Lund is now an executive vice president at Ditto.

The brothers Fox already had experience in both finance and reinvention. Joe was 24, working a dead-end sales job, and Avi 26, already burned out on the corporate rat race, when they decided to open their first brokerage.

They started trading from Avi's Chicago apartment, nearly collapsed after arranging the financing for a hotel deal that fell through, then decided to resurrect the business as an online brokerage on a hunch that the Internet would be big. It was 1997 when they opened Web Street Securities. Four years later, they sold it to E-Trade for $50 million in stock and cash.

Not everyone is convinced by their new venture.

"Uncle Harry has probably only bragged around the dinner table about his big hits," says Erik Gordon, a professor in the business and law schools at the University of Michigan. "He probably hasn't come to dinner and told you about all the stuff that has moved sideways, or the stuff he lost his shirt on."

Fox acknowledges that Ditto isn't for everyone.

"Not everybody," Fox says, "has an uncle who's very good."