Gallery:Step 7|Step 7: Silent Partners

Who Wants to Run a Mutual Fund?

Gallery:Step 7|Step 7: Silent Partners

I cringe when I hear comparisons between investing and sports, but I can't resist this time. When it comes to stock-picking, we're a nation of Monday morning quarterbacks.

Most of us, whether we admit it or not, have at one time or another sat comfortably in the safety of our armchairs with the latest fund shareholder report and wondered, "What was the manager thinking?" We confidently boast that we would never have sunk money into that online pet supply start-up. It's a biased and illogical response, yet so ingrained in our collective consciousness. Investment professionals spend most of their waking hours analyzing the stock market with superior research tools at their disposal, but some amateurs invariably feel they can do better in their free time armed with CNBC.com.

Marketocracy, a website that is conducting a three-year search to find top investors to run a mutual fund family, is the latest to chime in with this misguided chorus. The company allows members to create up to ten fictitious mutual funds, each with a base of $1 million in fake money, and tracks the performance of these virtual funds.

In a statement released today on the first-year anniversary of its contest, Marketocracy said the m100 Index, which tracks Marketocracy's top 100 virtual mutual funds, outperformed major indexes during Q2 and is trouncing 94% of professionally managed equity funds year-to-date. Now, there are apples-to-apples comparisons and there are apples-to-oranges comparisons. This one is more like apples-to-watermelons.

Marketocracy currently tracks over 45,000 virtual funds submitted by more than 37,000 members. With those kinds of numbers to start from, you bet the top 100 portfolios are going to be off the charts. A quick scan of the top Marketocracy virtual funds reveals two things: a lot of risk and highly-concentrated funds. Marketocracy didn't release the worst-performing funds, but I have to believe they also focus on volatile narrow market slices.

I asked for the average performance of all Marketocracy virtual funds, but was told that information was "unavailable." However, I was pleasantly surprised when a spokesperson told me that the virtual fund returns did factor in transaction costs.

In Fall 2003, Marketocracy says it will begin to recruit top-ranked members and invite them to manage real mutual funds. I can't promise that Los Altos-based Marketocracy will be around then, but I also can't say for sure that I'll be alive either. So just in case, let me say it now . . . . avoid these funds like the plague.