XBRL – the OTHER technology wave hitting Fintech

Judging by Google trends, if XBRL was a stock it would a penny stock and heading towards delisting.

Bitcoin – judged on the same Google Trends analysis – would be a momentum stock that is covered in breathless terms by talking heads on CNBC.

Both are disruptive Fintech technologies, it’s just that one is undervalued.

There is a reason why I use the analogy of a stock. If you look at Google Trends for Bitcoin, it tracks the price of Bitcoin. People are interested in Bitcoin because you can buy it and maybe sell it later for a profit. It’s exciting, with huge price action.

Tech entrepreneurs are also interested in Bitcoin as a disruptive technology. The same is true of XBRL. However there simply are not that many entrepreneurs checking out fundamental technology that could be disruptive to big financial services markets to make a big impact on Google trends. What registers is a lot of people wanting an answer to “how can I make lots of money, fast?”   

(I am assuming readers already understand the basics of XBRL. If not, here is a link to a post on ReadWriteWeb from 2009 which explains why I am excited by XBRL; it also contains links to some good basic introductions).

Here is why XBRL may be about to have it’s  “show me the money” moment:

1. There are easy pickings in small cap stocks, because it is a very inefficient market. Here is a report from Credit Suisse that shows why trading in Big Caps is a mugs game for retail investors, but how there are big opportunities if you can quickly find the undervalued/overvalued small cap stocks. The TL:DR summary of that Credit Suisse report:

“Shares in small and mid cap companies are, for the most part, less liquid than those of large caps. The typically higher risk of an investment in small and mid cap stocks is reflected in higher risk and liquidity premiums and has a positive effect on performance over time.”

2. HFT (High Frequency Trading) killed off the Day Trading business. When speed of trading is the game, computers will always beat humans. So there are a lot of retail investors looking to find the next game.

3. The XBRL rollout on US stocks is now complete. The SEC mandate was that over time ALL publicly listed companies would have to report in XBRL. When I was writing the SAAS Insights Report in 2010, only Big Caps (over $2bn market cap) had to report in XBRL. Now I can get all the SAAS stocks in XBRL. Or all Biotech, Oil, Property, e-commerce stocks, whatever is the focus of your research. Then I can set up automated screening programs to find the investing gems (long or short) in those markets. in 2010, Small Cap stocks were in “Small Cap Hell” and there was not much that anybody could do about it.

Those who have been toiling in XBRL world maybe thinking “but the data is still not totally reliable”. True, but it is still way better than what we have now (manually cutting and pasting from HTML into Excel). To the retail investor, finding a data problem is an opportunity. They have the time. If you use XBRL to screen 100 stocks based on some parameter and end up with 3 that “look interesting” they can easily eyeball those three to spot where data errors might be or why a stock that looks crazily undervalued based only on the numbers is still a lousy stock to buy. Automated analysis of the basics enables more time for value added analysis (“Alpha” in Hedge Fund speak).

So, XBRL needs stories of a couple of geeky young Warren Buffet like investors to make a fortune this way. That will get them onto CNBC or Fortune or Business Insider. A good reporter with a nose for the story will ask “how did you do it?” and that is where the newly-rich investors will go against their best interests and reveal that XBRL analysis tool they used.

This will be like somebody in 1994 talking about how they were making a lot of money trading stocks at home using this e-Trade platform.

Don’t expect a lot of positive stories about XBRL from Wall Street, because XBRL is deeply disruptive to “the way we do things around here”. XBRL democratizes fundamental stock analysis in the same way that PCs democratized computing and social media democratized HTML. When you can compare the cash holdings across 100 companies with a single entry in your spreadsheet, or see quarter to quarter revenue growth for every company in the index that you devised, do you need mega brokers and their me too reports churned out by freshly minted MBA graduates in an outsourcing center somewhere?

Maybe XBRL will remain a hidden enabling technology. Maybe the tech entrepreneur who makes fundamental stock analysis as easy as day trading based on chart action will be the name that everybody is Googling. Maybe that tech entrepreneur used XBRL to make it happen. In which case, XBRL will have just quietly disrupted the world of money management. I think that is inevitable, but having tracked the emergence of a lot of new technologies I have stopped trying to figure out when this will happen because “inevitable does not mean imminent”.


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