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Not Your Average Investor
05/20/2005 12:00 am EST
"Our job is to find non-professional stock pickers who have the best track records," says Ken Kam, whose Marketocracy Web site monitors some 70,000 virtual portfolios run by individual investors. Here, he explains this unique strategy and their recent favorites.
"From my experience, I learned that the people who really understand every industry best are not the people on Wall Street. They’re people who work in the industry. The problem is that if you work in the industry, then your stock activities aren’t tracked. And it would be difficult for you to turn that track record into a career. At Marketocracy, we wanted to give individual investors a chance to put that track record in the public view, so that people can find you and you can be a part of how we manage our funds.
"We’ve been doing this for five years and had over 70,000 people come through our Web site and build a model portfolio and manage it as if it were a real mutual fund. Among those people investors, there have hundreds, perhaps thousands, of really terrific investors. Not just because they can tell you a good story. Not because they have good educational credentials. And, over the last four years, they have produced tremendous investment results. I learn an incredible amount talking to these people and I feel that I have at my disposal, the best possible team that any investment advisor can ask for to look within stocks in any industry. And those are the people we should all listen to.
"Each month we choose 100 people who we think have the best track records— the ones that we want to follow for the next 30 days. We then look at these top performers and ask, ‘What is it about the very best investors that makes them great?’ What we have found is the times when they really make a lot of money is when they are willing to take a position that is contrary to where everybody else is going. Based on this, we’ve created this system where we look at the trading activity of the very best investors and compare that to all the other investors on our site.
"We then look for situations where the very best investors are buying a lot of a stock while everybody else is selling. Typically, that situation leads to very strong gains and we call these situations ‘strong buy alerts.’ Every two weeks in our Marketscope newsletter, we search through the database of all publicly traded stocks to find three that meet this strong buy criteria where the very best are buying and everyone else is selling. Here are the latest three:
"Jakks Pacific (JAKK NASDAQ) has about $650 million in sales. The company designs and markets action figures— toys for kids. JAKK also participates in a joint venture with THQ Inc., which has worldwide rights to publish and market World Wrestling Entertainment video games. Over the past two weeks, the best investors increased their position by 15%, while the rest of the investors decreased their holdings by 4%. The best investors have been active in this stock since 2003, after which it rose from about $10 to over $25. Last October, when the market over-reacted to a lawsuit by World Wrestling and the price dropped to $12, the best investors were buyers. JAKK recently peaked at $23.96 in February but as the price dropped back, hitting $18.38, the best have been buying again, adding 20% to their position over the last three weeks and putting JAKK in the top 8% of all holdings in the Best portfolio.
"Pentair (PNR NYSE) is a $2.5 billion industrial company that would likely not have gotten any attention from anyone five years ago. It’s in the business of moving, storing, and treating water. It appears to be a pretty boring company. Except, it’s profitable and it is managing its business extremely well. The best recently increased their holdings by 35% while the rest decreased their holdings by 5%. The best investors started building their position in PNR back in 2003 as the price bottomed below $19 and then tripled their position in the first half of January 2004 as the price began to take off. They then doubled their position last June at $31 and by 32% in October around $34.50. By the end of 2004, the stock was up 95% for the year and the best added another 37%. When the price dropped 7% to $40.55 in January, the best reacted quickly and sold half their position. Now, over the last 3-1/2 weeks, the best have increased their position by 80%.
"Valhi (VHI NYSE) is another ‘boring’ company. The $1.4 billion outfit produces titanium dioxide pigments used for imparting whiteness and opacity to paints, plastics, and cosmetics. It also has its waste operations for processing, storing, and disposing hazardous, toxic, and certain types of low-level radioactive wastes. The best jumped into this stock in mid-2004, near the $15 level. Then, in the first two weeks of 2005 they added 50% to their position, before the stock busting out to $22.47 in April. The best added an additional 14% to their position and then last week increased it by 36% at $17.98 and $18.16 as the rest were dumping their shares, decreasing their holdings by 45%. In this case, when you see the best increase their position by more than a third while everyone else is selling nearly half their holdings, it suggests that the best likely see something there that is not visible to most investors."
"Scottish Power PLC (SPI NYSE) has been a strong buy recommendation for several months, and the stock has gone from roughly 26 to 32 in that time. The company is involved in electricity generation in the United Kingdom and the western United States, mostly coal and natural gas. What’s going on in this company, longer term, is that there have not been many new gas plants built in this country in the last ten years, so capacity for electricity generation is tight. Scottish Power is now in the process of renegotiating contacts with a number of cities in Oregon and Washington that are going to allow them to recover a lot of the money that has been formerly locked into their plants and was viewed as unrecoverable. The shortage of energy capacity is increasing their negotiating ability. In recent months, the m100 have been are increasing their positions by substantial amounts— 280% in one month, 410% in the next month, and most recently by 40%."
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