When The Average Joe Beats The Street

Benzinga.com Staff, 12.3.10

Today our guest is Matthew Schifrin, VP and Investment Editor for Forbes, and author of the book, “The Warren Buffetts Next Door: The World's Greatest Investors You've Never Heard Of And What You Can Learn From Them.” How you doing today, Matt?

Matthew Schifrin: I'm great. How are you?

I'm doing well. Could you start off by telling us a little about yourself and how you got your start in the financial world?

Matthew Schifrin: Sure. As you mentioned, I am the investing editor of Forbes Media, which includes the magazine and the website. I started at Forbes directly out of college. I went to Cornell – I was an economics major. I did an internship at a place called Financial News Network, which is now called CNBC. I met some people who knew some other people, and I went into Forbes and I got a job as a fact checker. I worked my up the masthead of Forbes as a reporter and as a writer, and then as an editor, mostly focusing on financial topics and investing.

Then in about 1999 I created an offshoot publication for Forbes called Forbes Best of the Web which reviewed thousands of websites and basically came up with a list of what we consider Forbes' favorites. A lot of those sites were financial and investing sites, and one of the sites that I came across that I really liked was Marketocracy.com. They had a proposition that they'll give you a million dollars of virtual money, and they want you to run a portfolio. They will hold you to the same standards as a real mutual fund manager. Their proposition was that if you do really well, they'll raise real money for you to manage.

When I first saw that in 2000, I was really intrigued. I wrote an article, ''Will The Web Produce The Next Warren Buffett?'' Ten years later, Marketocracy.com, as well as some other websites, has helped me identify some amazing individual investors who have performance track records on their real money that beat most professional investors. We're talking 30% on average and more for some of these investors. What my book is, it's profiles of 10 of these great individual, self-directed investors.

What sparked the idea for your book? Why did you decide that you wanted to call attention to these lesser-known investors?

Matthew Schifrin: I think because many of us are told [to] leave money management to the pros. The pros are best qualified, the financial advisors and the pros are the best qualified to manage your money. But I know from working at Forbes for the last 26 years that that's not necessarily true. If you look at any of the stats, most professional money managers don't outperform the indexes.

And I've met with so many financial advisors who want you to believe that you need them to manage your money, when the truth is [that] good investing and smart investing is not rocket science. If [more] individual investors would put the time into being better investors, [they] could do it. I think that right now we live in an age where you have all the tools you need to become a much better investor.

Benzinga.com offers a lot these tools and news. All the tools you need to be a great investor are available to you, but most people feel that they'll never be qualified enough to be a better investor. I think that, nowadays, most of us have 401Ks, so essentially our companies and the government are essentially saying, ''It's your money, you manage it, and we hope you make it to retirement.''

We owe it to ourselves to invest some time and effort into our own capital, as opposed to handing the keys to someone else who is going to secure your financial future. That's kind of what my book is about. It's about 10 people who said, ''I'm gonna learn to be a better investor.'' And they've done it.

My book offers different lessons from each one of these different investors about how they became really good at picking stocks and managing their own portfolio, and hopefully I've offered some lessons to investors on how they can do it as well.

This growing class of investors are not only earning enormous gains in this turbulent time, but they're typically investing from fairly average backgrounds rather than the typical prestigious Ivy League school or Wall Street bank. What do you think has contributed to the rise of this new type of investor? Is it the financial crisis? Have people lost faith in their financial advisors? Is it the development of easier ways to trade?

Matthew Schifrin: You're absolutely right. I think that it's a lot of the things you mentioned. The financial crisis has woken people up. When you sit there in a year and see your great professional investor -- when you see your nest egg drop by 45% -- and for anyone who started investing 10 years ago in a mere index like the S&P 500, your money has gone nowhere.

I read an alarming stat that was put out by Financial Engines (NASDAQ: FNGN) that said that the vast majority of people in their 40s and 50s have little hope of actually having enough capital and income to live [during retirement] as well as they do in their working life. Basically, a lot of us are not going to have enough in our 401Ks to provide a comfortable retirement. So I think that's one factor that has gotten people to start investing on their own. I think another obvious factor is what's [developed] on the Web.

There's an explosion of websites and Web tools that you can use to be a great investor. So, for example, Warren Buffett will read annual reports or SEC documents. It takes a few clicks from numerous websites and you can be looking at company financials. You can listen to company conference calls. News is at your finger tips. Financial stats are at your finger tips.

And, best of all, investor education is right there as well. So I think that has contributed to it. And certainly the rock-bottom commission rates. I mean, it's not expensive to invest on your own anymore. And you're absolutely right -- the guys in my book, one was a former truck driver. When he was at a rest stop he would use his Wi-Fi card and his laptop to do stock research while he was on the road.

There are a few civil engineers who are in my book who, in their spare time, have become great value investors or great options investors. You really don't need an MBA. A few of the guys do have an MBA. But you definitely do not need an MBA or CFA or any other fancy designation to be a really good investor.

Why do you think it is that this new type of investor is beating the market and the smart money on the street in such enormous ways? You'd think it would be the other way around.

Matthew Schifrin: First of all, I think there are definitely institutional investors who have outstanding investment returns. We've heard about some of the great hedge fund guys.

But I think the vast majority of professional money managers are hired without any real proof that they're good at investing. Most of ‘em have great degrees, they went to great colleges. They come out of school and they get a job with Fidelity or one of these other big mutual fund managers, and next thing you know they're managing huge portfolios.

As you probably know, there's a lot of emphasis on diversification. So many times investors will diversify away their returns. Even Warren Buffett has criticized if you diversify too much. I think his quote was, ''Diversification is protection against ignorance.'' It makes little sense for those who know what they are doing.

So, a lot of the people in my book who are outstanding investors – once they become convinced that stock is deeply undervalued and think that they're right, they will invest a lot of capital in that stock and they will have high returns on an individual stock or a group of stocks. And this is really very similar to what a lot of the smartest hedge fund guys do. They don't just run with broadly diversified portfolios. Oftentimes they will have a diversified portion of their portfolio, but also, when they find an investment they like they really commit to it.

You see some of that in my book. And I don't mean to indict professional investors; there are great professional investors out there, and a lot of us know who they are. But, what I'm saying is that, there's no reason why you can't become an outstanding investor on your own. You don't necessarily need to make 30% on average per year to be a really good investor. These days, if you can bring in 15% a year, that's pretty good. Most of the professionals will tell you that you should expect 6% average annual return from stocks for the foreseeable future. For a lot of us that's just not going to cut it.

Do you think this trend will continue? Are institutional players on Wall Street going to be superseded by these newly-empowered Average Joe investors?

Matthew Schifrin: I do think that Wall Street should take note...the individual investors, more than ever, have the opportunity to take control of their own portfolio. You already see that happening with commission rates coming down. Account minimums are coming down. There's always going to be a portion of the population that needs financial advice, ‘cause let's face it – most of us are very busy.

In the case of my book, most of these guys commit at least three hours a day to their portfolios -- but you can improve your investing skills with just a few hours a week committed to your portfolio. Right now, I think most of us probably think about our stock portfolio once a month, once a quarter. And I think things are changing because information and tools are so readily available to us.

I would imagine that going out and finding people must have been an enormous challenge while gathering information for the book. Your stated goal was to find the great investors that no one has heard of -- how were you able to identify these people?

Matthew Schifrin: As I mentioned before, there were some that I knew were good because of the verifiable track records that I had identified on websites like ValueForum.com and Marketocracy.com, where I could easily see who was superior in terms of returns. And then, when they pass that screen, I would interview them to find out if they were someone I thought the rest of the investing audience could learn from. That's how I ended up choosing these guys.

I only chose 10 outstanding investors -- but there are many more out there who are not in my book. In fact, if you look at some of the stats, 10 years ago when I was looking at this, there were about five million online investors. Now that number is much closer to 50 million! Just those years and kind of the law of averages would tell you there's going to be more people who have become much better at investing. And a lot of it's thanks to the Web -- the Web has been transformative in that area.

Can you share some of your favorite stories from the book?

Matthew Schifrin: Sure. There's a guy in my book, it's Chapter I believe. I call him Lady's Man. His name Mike Koza. He's a guy in Sacramento. He's a civil engineer. For most of his life, he couldn't care less about investing. His passion was whitewater rafting. That's what he liked to do.

But he was kind of lonely, and he decided [to] look for a wife. He went to the personal ads and found a woman named Maria, who was a Filipina immigrant who came from poverty. She met with Mike, they kind of hit it off, and she noticed that Mike had this portfolio of about $100,000 that he had saved. He was about 40 years old, and it was going nowhere.

He had a broker at Morgan Stanley charging him fees, but the portfolio was not going anywhere. And she said, ''What's a matter with you? You're really smart! Why don't you invest on your own? I've heard people can do really well if you do that.'' He kind of skeptical but said, ''Okay, I'm gonna try that.''

Mike hunkered down. He's a really bright guy -- he's one of these guys that gets a perfect math SAT. And he's become this amazing value stock investor where he's been really good at calculating intrinsic values of companies -- worst-case scenarios – and coming up with his own valuations on companies.

He's turned that $100,000 into more than $3 million in about nine years. He read books like Benjamin Graham's ''The Intelligent Investor,'' and several other classics, and he taught himself to be a great investor. So, Mike Koza's story is one of my favorites. I call him Lady's Man because if it wasn't for his wife and his wife's urging, Mike would have never realized his potential as an investor.

There's a guy, Kai Petainen, who I mention in my book. He's a computer lab manager at the University of Michigan's business school. I call him the Sorcerer's Apprentice because Kai soaked in what the professors at the school were talking about for years and he researched academic theories, just as a computer lab manager, and created his own formula for quantitative investing.

What I mean by that is that he has screens for stocks based on certain quantitative properties. He's become an outstanding investor. He's created nine portfolios on Marketocracy.com and I believe all but one of them has far outpaced its benchmark.

Kai has a really interesting story because, just because of his day his day job, he's learned to be a great investor. It's very inspirational.

There's another investor, Jack Weyland, is the kind of guy that no one would have ever hired for any kind of Wall Street job. He dropped out of college. He was in the Air Force for a little bit. What Jack ended up doing was -- he became a truck driver -- and he discovered that he had a knack for picking biotech and health care stocks.

Jack would, while he was on his trucker routes, the Department of Transportation has these mandatory rests that all truckers need to take. So whenever Jack would take his mandatory rest from his truck route, he would log onto the Web, and use a 3G wireless card on his laptop and research stocks.

Over the years he has made himself an expert on biotech stocks using a number of Web resources. On Marketocracy.com, his average annual return (as of the time I wrote my book) was about 36% on average per year, investing in biotech stocks mostly. Jack is an interesting guy because it's not that easy for him to articulate what he does.

But when you start asking him specifics about drugs and pharmaceuticals and biotechs, he has this amazing ability to remember detail, and financial detail, and detail about drugs and FDA trials. He's become an outstanding investor. It's the talent that Jack Weyland has discovered that he has.

Do you think that Wall Street will look to pick up some of these investors and bring them to their companies?

Matthew Schifrin: Absolutely. In fact, I already know of one of the people I wrote about in my book who was offered a money management job at a major asset manager. So I think that these guys will get attention that they, perhaps, were not looking for. Some of them are young, like Jack Weyland and Kai Petainen. But others are retirees who are living idyllic, great lifestyles based on their ability to invest.

Some of those, the retirees, I don't think any of them are looking for new careers as money managers. But I think some people on Wall Street will certainly give these guys a chance.

Now that we've addressed ''You've Never Heard Of'' part of the title, what can we learn from the subjects of your book?

Matthew Schifrin: Well, I think that if you read my book you'll see some common themes throughout. I would say that the majority of the people in my book are value investors. They look for stocks that are somehow being mispriced by the market. One of the common trends I found is that these guys look for big gainers and big losers everyday. They're looking for stocks where there's some market overreaction. Where a stock has been unfairly punished or, on the other side, if it's moved up irrationally.

One of the guys I mentioned, Mike Koza -- during the financial crisis he did the analysis on a company called Radiant Group, whose shares had gone as low as a $1 a share. But Mike, who plowed through their financial statements, and kind of did a worst-case scenario analysis, realized that there's no way this company, even under a liquidation scenario, would be less than $25 a share. So he bought lot of Radiant group down near $1 a share. He didn't wait for it to get to $25 before selling it; I think he sold it at $16. But that's an example of somebody who takes advantage mispricing anomalies in the market.

There's another guy I profile whose specialty is producing income from options. I'll probably be writing about him in Forbes pretty soon. And, one of his rules is, don't become emotionally tied to any stocks. I think that most of when we invest, we invest two currencies in a stock: we invest our dollars, our real currency, and then we invest emotional currency.

You've done the research, you think that the stock is really good because you believe you're right. But the best investors have discipline and they don't become emotional about it. Don't fall in love with the stock that you buy. This investor -- I believe his rule was -- if something goes against him significantly (I think the number was 20 or 25%), he's out. He will sell that stock.

Each one of my chapters has rules and case studies that investors can learn about investing. Rules that will help them become better investors.

Has the experience of writing your book changed your view of Wall Street at all?

Matthew Schifrin: Absolutely. Frankly, if I didn't have to work my day job so hard at Forbes, I would love to invest my own money myself. What I'm saying in this book is that we all need to spend time on our most important assets. If you've ever bought a home you know that everybody spends a lot of time on the house they're gonna buy. But when it comes to our portfolios, we hand the key to someone else. I think that people need to spend more time on their own portfolios, their own retirements, their own nest eggs. I think people can learn a lot from these books.

Me personally, I envy the lives of a lot of the people that I wrote about. One of these guys, he lives this idyllic life in New Mexico. He built his own house using the profits he made from investing in stocks. He just has this great life where he invests his portfolio for half the day; the rest of the day, he does what he wants to do. There's stories like that in my book.

If anyone wants to see videos from some of the people in my book, they can go to MattSchifrin.com and you'll see videos of some of The Warren Buffetts Next Door, explaining a little bit about their investment styles. They're also on Forbes.com as well. If you go to blogs.forbes.com/schifrin.

What was your first and what was your worst job?

If you include my paper route when I was a kid, that was probably my first. [Laughs] But my worst job was… One summer I worked at a sunglasses factory, which was mind-numbingly boring. I am fortunate in that I've worked for Forbes pretty much since I graduated from college. And that's been a great job for me.

Tell us something about yourself that no one has asked in an interview before.

Matthew Schifrin: Let's see... I don't have that many interviews. I doubt anyone's going to ask me what my hobbies are. I like digital photography and I play guitar.

What was the best and what was the worst investment decision that you've ever made?

Matthew Schifrin: At the end of my college years, I bought the stock of a company that I was very… The company was called Verbatim. They made floppy disks. This was in the '80s, and I was convinced that it was a great company. Unfortunately, the market was not agreeing with me.

The funny thing was that the stock got taken over by Kodak (NYSE: EK), and I was one of the few people to lose a significant amount of money on a takeover play where I think I only invested $2,000 and I think I lost $1,000 on it.

I've had some good investments. I invested in GameStop (NYSE: GME) many years ago -- the video game store. I quadrupled my money in that. It's funny -- it was a Peter Lynch type of investment where I saw my eight-year-old playing video games all the time and I'm like, ''Wow, this is so powerful!'' It's not like a movie where you spend three hours on it. I mean, my son would spend hours [playing games].

I did more research on the company, I looked at the SEC documents and realized they had a magazine [Game Informer], a big list of over two million subscribers. I thought it was a really good buy. I think I bought it before they merged with EB Games and before all those new consoles came out, like the Wii. That was a great ride for me.

Another good investment that I made was Apple Inc. (NASDAQ: AAPL). That's been awesome.

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