By Miriam Gottfried
When Ken Kam was a portfolio manager at Firsthand Funds, he came across a problem.
There were very few potential employees who had what he considered a long enough track record to entrust with clients' money. Many were straight out of business school and didn't have the exceptional five-year record Kam was looking for.
In 2000, that frustration led Kam to leave Firsthand and found Marketocracy, an online-trading platform that allows any individual to trade with a $1 million virtual portfolio. If after three years participants can demonstrate 1,000 basis points of excess return and do well in an interview with Kam, who serves as Marketocracy's chief executive, they can earn a research contract during which Marketocracy follows them more closely.
If the strong returns continue for two more years, using a consistent strategy, there is another interview. Successful candidates can earn a place among Marketocracy's "Masters," of which there are currently 16. Clients can then put real money to work in separately managed accounts tied to the strategies and portfolios of these heavily vetted few.
Title: CEO and founder, Marketocracy
Education: BSc, in finance, Leavey School of Business, Santa Clara University; MBA, Stanford Graduate School of Business
Kam spoke with Barrons.com about some of the Masters' top picks.
Barrons.com: From among your Masters, whose strategies would you like to explain in more detail?
Kam: I picked out two people to talk to you about because they are good contrasts. The first person is Kai Petainen. He started out as the manager of the computer lab at the Ross School of Business at the University of Michigan. All the professors and graduate students went to him for help in writing their papers and doing their research. He has had access to all the historical data you can get and a lot of the best academic minds. But more than that, he has been able to test what they do and "operationalize" it through a computer-based screen that he runs.
His domestic portfolio started on Feb. 11, 2003, so it is just over eight years old now. Over those eight years, this one has averaged 18.3% a year, and the market has averaged 7.8%.
Q: What goes into his screen?
A: There are factors relating to growth, but not all companies that are growing are good investments. Typically they tend to be much higher priced. So you wean out the ones with prices that are too high. Then there are the ones that are growing but look cheap -- often they turn out to be frauds. Joseph Piotroski, a professor at Stanford, probably wrote the most influential paper for him, about how you can see early signs of fraud in a company's financial statements. So then he applies another assessment and what he ends up with, in theory, is a set of stocks that is growing rapidly, that is not high priced and that are not likely to be frauds.
What is unique about him is that screening is all he does. He doesn't then dig into the company and interview the management. It is purely a screen, but it is a screen based on literally decades of academic research.
|Northrop Grumman /zigman2/quotes/205518355/composite NOC||(NOC)|
|Albany International /zigman2/quotes/208627197/composite AIN||(AIN)|
|Photronics /zigman2/quotes/208539163/composite PLAB||(PLAB)|
|ConocoPhillips /zigman2/quotes/207605056/composite COP||(COP)|
|Insight Enterprises /zigman2/quotes/208205029/composite NSIT||(NSIT)|
Q: Among his top five holdings I see Northrop Grumman /zigman2/quotes/205518355/composite NOC -0.31% (ticker: NOC), Albany International /zigman2/quotes/208627197/composite AIN -0.19% (AIN), Photronics /zigman2/quotes/208539163/composite PLAB +0.42% (PLAB), ConocoPhillips /zigman2/quotes/207605056/composite COP -0.66% (COP) and Insight Enterprises /zigman2/quotes/208205029/composite NSIT +0.04% ( NSIT). Intuitively these don't have a lot in common.