This past year, we spent a lot of time looking into music royalty investments, an alternative asset class typically unavailable to retail investors (individual investors).
We discovered few companies exist that allow retail investors to interact with music royalties. We believe this is because royalties are complex, volatile, have a high barrier to entry, and require a keen ear for music. This is why skills and knowledge about royalties have traditionally been the domain of music labels and managers.
With knowledge and data, music can be an attractive investment for retail investors because the time spent listening can easily translate into an educated investment. That’s not the case with traditional assets like stocks. Let me explain.
In 2020 we saw a surge in consumers opening new investment brokerage accounts. A FINRA investment survey done in October 2020 showed that 38% of households surveyed were new investors who recently opened an account for the first time.
What’s surprising is that these new retail investors had a significant impact on the US stock market, making up as much as 25% of activity on peak days. In comparison, retail investing activity only accounted for 10% of US market activity in 2019.
The increased investment behavior generated equity mania in companies declaring bankruptcy – companies like Hertz and shorted stocks such as GameStop and AMC Entertainment. Regulators and Wall Street were concerned over whether new investors fully understood these risks.
While the rise of commission-free brokers and access to market research has benefited retail investors, there is proof that the average retail investor significantly underperforms the markets. That means they tend to lose money rather than make money. Dalbar, a firm focuses in tracking retail performance, found that the average retail investor underperformed the S&P 500 by a compounded 3% from 2005 to 2015.
Underperforming the market by retail investors is heavily studied by researchers in academia. This underperformance is attributed to financial illiteracy, asymmetric information, overconfidence, and sensation-seeking/gambling tendencies. It’s simply everything that regulators are trying to protect consumers from.
Despite the challenges, investing remains an essential step toward wealth creation. We believe it should be cultivated at a young age due to the power of compounding returns. While there are powerful ways to improve performance for retail investors, there is a rise in alternative investment options for both existing and newer retail investors.
More and more US consumers are becoming interested in non-traditional investment opportunities; alternative assets range from cryptocurrency to collectibles such as sneakers. A 2020 report by Cornerstone research found that 15% of Americans owned some form of cryptocurrency. The reselling of collectibles is also becoming more popular as barriers to entry are lessened by platforms fractionalizing expensive collectibles, such as cars and art, allowing for micro-investment.
What’s fascinating about alternative investments is that they naturally create good behavior among investors. A deep interest in the market or asset makes investors savvy traders. Perhaps the future for investing is not how retail investors should invest but in what they should invest. The appeal of some of these assets is enhancing investment participation, especially among younger people.
While financial literacy means greater investment performance, a better understanding of particular alternative assets may make them preferable to traditional stocks or bonds. For example, someone with little experience in stock markets but expert knowledge of baseball cards may find it more profitable to invest in the latter. The same can be true for music.
A 2019 Nielsen Music report shows that the average US music consumer listens to 26.9 hours of music weekly. This implies that many retail investors are organically rating and discovering songs. This capacity of accumulated organic knowledge could help tackle the search problem many retail stock investors encounter. Retail investors often cannot find quality investments since they lean on attention-grabbing headlines, such as stocks in the news, rather than performing their own research and analysis.
Music can be an attractive investment opportunity since many retail investors are already spending hours vetting and discovering new music.
1 – FINRA Report https://www.finrafoundation.org/sites/finrafoundation/files/investing-2020-new-accounts-and-the-people-who-opened-them_1_0.pdf
2 – Nielsen 2019 report – https://www.nielsen.com/insights/2019/u-s-music-mid-year-report-2019/