Grass-Roots Gurus

Kiplinger's Personal Finance Magazine, July, 2001 by Brian P. Knestout

FUNDS | Can the COMBINED WISDOM of thousands of amateurs trump the pros?

CHIRAG AMIN is a busy man. An orthopedic surgeon by training, he spends a few days a week at a private practice in San Bernardino, Cal. At the same time, he's a full-time vice-president at Medschool.com, a Web site that sells study guides to medical students cramming for board exams. As if that weren't enough, the good doctor.com will soon get to run part of a $10-million hedge fund. And what credentials does Amin bring to his new assignment? He is currently co-manager of a small mutual fund that is affiliated with a Web site called Stock Jungle.com.

Well, sort of

To be honest, Amin's role in running StockJungle.com's Community Intelligence fund is infinitesimal. He represents but 0.005% (give or take a hundred-thousandth or two) of the fund's management team, a mathematical feat made possible by Community Intelligence's unusual mission: to excel by relying on the collective wisdom of StockJungle.com's 20,000odd bulletin-board participants.

The StockJungle fund is barely a speck on the map of the $7-trillion mutual fund world. It doesn't advertise, and its brief record overlaps considerably with the 2000-01 bear market, so it's no surprise that investors aren't breaking down the doors to get in. Assets total just $2 million.

The idea of harnessing the brainpower of thousands of amateur online investors whose posts and picks have become a staple of such Web sites as Yahoo! Finance and Motley Fool hasn't exactly spread like wildfire. Although several more such funds are waiting in the wings, another one sponsored by StockJungle has already shut down, and plans for at least one other have fallen by the wayside.

In their quest for better returns, these community-participation funds take one of two approaches. They comb through the heaps of online stock pickers (in the eternal hope of finding the next Peter Lynch or Bill Miller to hire as a fund manager), or they analyze the heap as a whole to help shape the investment choices of an existing fund.

The often vociferous conversations at investment sites contain commentary on stocks by the carload. Some of the discussion is insightful, but most of it is pompous and useless. That makes founding a fund based on a pool of amateur investors somewhat problematic. Then again, if William Carlos Williams could write poetry between patients, why can't a part-time 21st-century doctor also run a mutual fund?

Some old, some new

THE JUNGLE-GREEN offices of StockJungle.com, in a well-appointed building near the start of Los Angeles's Miracle Mile, overlook the L.A. County Art Museum and that most venerable of time capsules, the La Brea Tar Pits. Soon, however, StockJungle will move to a restored warehouse in Culver City, near the Sony studios. Bye-bye, sabertooth tigers. Hello, Jennifer Lopez.

StockJungle's system for taking the picks and pans of its 20,000 "analysts" and putting them to use isn't quite that sexy. In fact, it boils down to the mathematical equivalent of a sausage grinder. Start with the raw stock picks of the community members and drop them into an optimizer, a program that figures out how many members hold specific stocks and what sectors and industries are most represented. The optimizer then spews out data that gives the fund's full-time manager insight into the direction the community members are charting in relation to the market. It's a map of which way the flock is flying.

Subtract that process from the mix and Community Intelligence looks very much like a typical Nasdaq-heavy growth fund. Its top holdings include giants such as AOL Time Warner, Microsoft and Oracle, and the market value of the average stock in the portfolio is a hefty $34 billion. There's a single live human being in charge: Michael Witz, StockJungle's 29-year-old founder, who has the final say on which stocks are included in the fund.

Buried treasure

SIFTING THE community's stock picks gives the fund a source of information on the market that other funds just don't have, says Witz. It also gives StockJungle a way of tapping the expertise of its membership. Witz points to Chirag Amin as an example.

Amin, 28, spends about eight hours a day--in between patients, at night, and on weekends--researching medical-technology and computer stocks. He looks for companies with strong earnings growth and reasonably priced stocks. He posts his stock picks on StockJungle.com under the unpretentious nom de plume "chiragamin."

Amin has an edge over many investors because he has done business with many of the health care companies whose stocks he buys. Because of his dot-com experience, he also has business contacts with networking and fiber-optics companies. That, says Amin, gives him insights into those stocks that others lack.

It was his medical background that alerted Amin to Biomet, which makes surgical components used in hip- and knee-replacement surgeries. Amin says he actually worked with one of the trauma surgeons who designed and patented several devices for Biomet. He began purchasing shares in November 1999 at about $20; the stock recently fetched $40.