My first real job was for a small independent consulting firm.
In fact, the company was so small we didn’t have an employee retirement plan. It was harder back then for a small business to have a 401k plan than it is today.
So I decided to buy a mutual fund from Vanguard. The only problem was the minimum to buy an index fund back then was $3,000. I didn’t have $3,000 because I didn’t make a lot of money and needed more time to save that much just out of college.
I had to wait for a long time until I was able to open an account and invest in the stock market.
In 2006 or so I read What Works on Wall Street by Jim O’Shaughnessy. It was my first real introduction to factor investing. Jim eloquently laid out the case for a quantitative investment framework using various value, quality and momentum factors. I loved the ideas in the book, but when I did the math on how much it would cost to buy 50 stocks with a $19.99 commission per trade it was simply too costly for my measly portfolio.
The barriers to entry in the market were much higher back then. Those barriers have effectively been destroyed today.
Minimums effectively don’t exist anymore. You can buy fractional shares. There are ETFs where you pay a handful of basis points to diversify into a basket of stocks in almost any combination you can think of. There are targetdate funds. There are no more commissions. You can open up an investment account — brokerage or IRA — in a matter of minutes on your smartphone. You can link your bank account, fund your account and invest almost immediately.
No more going to a brick-and-mortar building and filling out a bunch of paperwork to open an account, writing a check to fund it and waiting many days until you can finally invest.
No more saving for months and months just to meet high minimums while you’re out of the market. No more paying egregiously high commissions or front-end loads to buy shares in stocks or funds.
You can automate your contributions, buy/sell decisions, dividend reinvestment, rebalancing and more.
What are the implications when the barriers to entry fall like this?
For one thing, more people are invested in the stock market.
More young people are invested in stocks:
More people in the bottom 50% are invested in stocks:
There are other reasons for these charts going up but making it cheaper and easier for people to invest certainly helps.
The automatic investing revolution is likely one of the reasons valuations have drifted higher over time.1 Far fewer households invested in the stock market before the onset of 401k plans, IRAs, online brokerages and automated investing technology.
Having a huge group of people who buy ona regular basis regardless of fundamentals has to have an impact on valuations.
There could be downsides to a lack of friction as well. It’s never been easier to hop in and out of investments by over-trading your accounts.
The trading volume for SPY, the oldest ETF on the market (in America) is something in the range of 80-100 million a day. That’s something like 8-10% of the fund that turns over every single trading day, meaning the average holding period for this fund is maybe a couple of weeks.
Low barriers to entry can turn a passive product into an active strategy real quick.
I’ve been thinking about barriers to entry in light of the AI boom.
AI should make it easier for you to learn about anything and everything you want. Corporations are spending trillions of dollars to make it easier for all of us to ask supercomputer models how things work. You can learn about any topic imaginable and ask as many follow-up questions as you want with near-instantaneous research, analysis and feedback.
The barriers to entry for learning have been flattened.
With the caveat that no one knows how AI will play out, here are some potential pitfalls and benefits of this new world:
Skill atrophy. Some people will outsource their thinking and get dumber. Students will cheat. Papers, memos and reports will be written entirely by AI.
Business formation will explode. One of the unintended consequences of the pandemic was an explosion in new business applications:
I think AI lowering the barriers to entry on things like coding, learning and specific tasks will make it easier than ever before to launch your own business.
Non-tech people will now be able to compete in more high-tech areas.
AI bias. Some people trust anything and everything AI tells them. These LLMs are not always right. You need to check their work.
Personalized tutors. Theoretically, AI should allow for a personalized teacher/tutor for every kid who has access to these tools. This is what I want for my children because they all have different strengths, weaknesses and learning styles.
Closing the skills gap. People who don’t pursue higher education could potentially level up and save a lot of money in the process.
Jevons Paradox will kick in. If AI does the job of 5 paralegals do you think lawyers are going to work more or less? Everyone is getting sued if billable hours are still the business model.
Certain medical specialists will likely see a surge in referrals as AI makes it easier to screen patients with specific problems or needs.
I’ve been using Claude more to help with market research. It’s saving me time on certain projects but all that does is make me more efficient so I can focus on other tasks. It’s allowing me to get more work done.
There will be other unintended consequences too. I just don’t know what they are yet.
Further Reading:
Pros and Cons of Artificial Intelligence
1Combined with the fact that technology has made corporations far more efficient and tech companies rule the markets now.
