I'm the founder and CEO of Marketocracy.com and Marketocracy Capital Management, where I am also portfolio manager for the Marketocracy Masters 100 Fund (MOFQX)
I could give you the rest of my employment and educational history, but, in my quest to find the best investors in the world, I've found such information to be of little value. So, instead, I'd like to tell you what I have found to be of value.
When I graduated from the Stanford Business School in 1986, I was convinced that that market was so good at pricing stocks that it would be foolish to try to beat it. So instead of going into investment management, I chose a path that eventually led me to be a founder of a medical-products company.
We developed a cardiac catheter which we took through FDA approval and then manufactured, marketed and sold. We built a successful business, sold it and kept the remainder of the company, which eventually went public.
When the investment bankers came calling, I learned that Wall Street analysts really don't know a lot about the companies they cover. Warren Buffet likes to say that, in the short term, the market is a voting machine. If the people who have the most votes (because their opinions drive billions of dollars of capital) are not the most knowledgeable about the company, how can a stock's price end up being priced exactly right all the time?
Firsthand experience makes the difference
I founded Firsthand Funds more than 10 years ago based on the belief that someone with firsthand experience and a network of contacts knew more about their industry than the legions of people hired by Wall Street, most of whom have never worked in the industry.
As a result of my experience in the medical-products industry, I developed an extensive network among the best cardiologists across the country. So when I invested in medical products and pharmaceutical companies while co-managing the Technology Value Fund, I was able to tap into the opinions of the best research team in the world -- the people on the front lines, using and purchasing the products of the companies I was investing in.
I learned that even a bad product in the hands of the best cardiologist could work well and look great in a marketing video to promote a company. Until you test it in the hands of the average cardiologist, you don't know how well a product will really do. And I learned that staff members were the best people to listen to. Nurses aren't paid by product companies, and they see how the products work in the hands of all the doctors. When they give their opinions about a product, I listen.
My partner did the same in information-technology stocks, and our fund was ranked by Lipper as the No.1 fund of all mutual funds for the five-year period ending in September 1999, with a cumulative return of over 900% during my watch.
What kept me up at night
What does a portfolio manager do when the stocks he knows best are out of favor? After appreciating an average of 56% a year for five years, it seemed to me that all the stocks we followed and knew well were fully priced and the prospects for comparable returns over the next five years were not good.
The reality is that no system, style or strategy works in every market. Even great investors go through rough periods when what they do best does not work. After all, a guru who specializes in gold isn't going to make a lot of money when the yellow metal is in a bear market. So, if you stick with one single system or portfolio manager, you'll eventually start to lose money (often LOTS of money) when the market inevitably turns against your manager.
To do well consistently, a portfolio manager needs to plan for those times when his strategy is out of favor. Fortunately, the market is almost never all good or all bad, and so there are almost always some stocks that are good investments. The problem is that no single person has enough expertise to invest well across all industries.
This is why you need a team. At Marketocracy, I've taken the first-hand concept and expanded it to every sector and every stock. I wanted to be able to perform well for my shareholders even when the stocks I know best are out of favor.
The expertise necessary to perform well in the market changes over time. This year, for example, expertise in the oil industry is very valuable. This is why the team cannot be static. The expertise of the team members needs to match the opportunities available in the market. Technology stocks are not always in favor. When tech stocks aren't performing, you don't want a tech expert picking stocks for your portfolio. If the goal is to consistently make money or to beat the market consistently, no single person is going to succeed for long.
For most stocks, there are only a handful of issues that can drive a stock to double within the next two to three years. The secret to good stock research is to frame the right questions about the big issues, and then ask those questions of the people who are best qualified to answer them.
Applying the expertise of many people to evaluate a company from many points of view is a process that worked well for me at Firsthand Funds, and I am confident will work even better at Marketocracy, where the talent base is broad enough to research and find great investments in every corner of the market.