I used to work at a newspaper that had an annual stock-picking contest.
In the four years that I observed, the winners were an unemployed accountant, a 74-year-old retiree from a steel company, an 11-year-old fifth-grader and the wife of the president of a large company.
Of course, most people wouldn't have invested money in a mutual fund run by any of those people. Yet, today, a fund-investing Web site is in the early stages of a contest where winners will someday be hired to run funds.
The idea is to find the next great "professional mutual fund manager."
The money-management firm Marketocracy is using its Web site (marketocracy.com) "to identify and recruit new mutual fund managers," by holding an investment competition. The contest started in July. Contestants can open a fund at any time and those with the best records after a three-year period may be offered the chance to run a fund.
Each "manager" can run up to 10 different portfolios, all starting with a hypothetical $1 million. The funds are "nondiversified," meaning they can hold fewer than a dozen stocks (the minimum standard for a diversified fund is 16 issues). Top players will have to deal not only with the growth of their initial $1 million, but with some pattern of hypothetical in-flows and redemptions, so that the managers get a sense of what it's like to run a real fund.
More than 20,000 Web site members are now competing.
"We're shining the spotlight on performance as the main feature of a successful fund," says Marketocracy Chief Executive Officer Ken Kam. "Past performance is no guarantee of future returns, but I think it's still the best indicator we have. If I had my choice to have my money managed by anyone in the world, I'd bet my money on the people with the best track record."
That's exactly what Kam will do when he someday hires the winners to run new funds.
Anyone who wants to win the contest needs to play for maximum performance.
"If your goal is to win a tournament, you maximize risk," says Terrance Odean, a professor who studies investor behavior at the University of California at Davis. "That's also the best way to finish last in the tournament. As a result, it's not necessarily how you should manage other people's money."
The early leaders in Marketocracy's competition all have impressive returns, up more than 20 percent since mid-July. Kam acknowledges that a contestant could open 10 funds, manage one big winner and nine losers, and come out on top. "If we hired that person," Kam says, "we'd want him to learn from what has happened and run the fund in the style that brought him the good results."
Of course, investors in Marketocracy's funds (when they open) won't know if the winning manager's portfolio showed real skill or dumb luck.(The current leader of the contest is a 25-year-old research analyst from Chicago whose fake health care fund is up 30 percent since July and who says it has been his dream since high school to run a mutual fund. The guy in third place is an 18-year-old student from Canada who has been investing for less than a year.)
Thankfully, investors won't be sizing up Marketocracy funds for a few years. In the meantime, you may want to play along, especially if you are considering moving money to FolioFN or any of the other newly developed services that allow you to manage your own personal quasi-fund, building your own personal portfolio of stocks and making unlimited trades at a flat rate.
"As education and entertainment, contests like this are good - investors can learn a lot about the market and themselves," says Odean. "As a way to manage money in real life, however, you have to wonder who really wants to invest with some guy who has no real experience other than playing a computer game."
Chuck Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.
