When The Average Joe Beats The Street - Matt Schifrin - Zing Talk Part 1

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Today our guest is Matthew Schifrin, VP and Investment Editor for Forbes, and author of the book, “The Warren Buffetts Next Door: The World's Greatest Investors You've Never Heard Of And What You Can Learn From Them.” How you doing today, Matt?

Matthew Schifrin: I'm great. How are you?

I'm doing well. Could you start off by telling us a little about yourself and how you got your start in the financial world?

Matthew Schifrin: Sure. As you mentioned, I am the investing editor of Forbes Media, which includes the magazine and the website. I started at Forbes directly out of college. I went to Cornell – I was an economics major. I did an internship at a place called Financial News Network, which is now called CNBC. I met some people who knew some other people, and I went into Forbes and I got a job as a fact checker. I worked my up the masthead of Forbes as a reporter and as a writer, and then as an editor, mostly focusing on financial topics and investing.

Then in about 1999 I created an offshoot publication for Forbes called Forbes Best of the Web which reviewed thousands of websites and basically came up with a list of what we consider Forbes' favorites. A lot of those sites were financial and investing sites, and one of the sites that I came across that I really liked was Marketocracy.com. They had a proposition that they'll give you a million dollars of virtual money, and they want you to run a portfolio. They will hold you to the same standards as a real mutual fund manager. Their proposition was that if you do really well, they'll raise real money for you to manage.

When I first saw that in 2000, I was really intrigued. I wrote an article, “Will The Web Produce The Next Warren Buffett?” Ten years later, Marketocracy.com, as well as some other websites, has helped me identify some amazing individual investors who have performance track records on their real money that beat most professional investors. We're talking 30% on average and more for some of these investors. What my book is, it's profiles of 10 of these great individual, self-directed investors.

What sparked the idea for your book? Why did you decide that you wanted to call attention to these lesser-known investors?

Matthew Schifrin: I think because many of us are told [to] leave money management to the pros. The pros are best qualified, the financial advisors and the pros are the best qualified to manage your money. But I know from working at Forbes for the last 26 years that that's not necessarily true. If you look at any of the stats, most professional money managers don't outperform the indexes.

And I've met with so many financial advisors who want you to believe that you need them to manage your money, when the truth is [that] good investing and smart investing is not rocket science. If [more] individual investors would put the time into being better investors, [they] could do it. I think that right now we live in an age where you have all the tools you need to become a much better investor.

Benzinga.com offers a lot these tools and news. All the tools you need to be a great investor are available to you, but most people feel that they'll never be qualified enough to be a better investor. I think that, nowadays, most of us have 401Ks, so essentially our companies and the government are essentially saying, “It's your money, you manage it, and we hope you make it to retirement.”

We owe it to ourselves to invest some time and effort into our own capital, as opposed to handing the keys to someone else who is going to secure your financial future. That's kind of what my book is about. It's about 10 people who said, “I'm gonna learn to be a better investor.” And they've done it.

My book offers different lessons from each one of these different investors about how they became really good at picking stocks and managing their own portfolio, and hopefully I've offered some lessons to investors on how they can do it as well.

This growing class of investors are not only earning enormous gains in this turbulent time, but they're typically investing from fairly average backgrounds rather than the typical prestigious Ivy League school or Wall Street bank. What do you think has contributed to the rise of this new type of investor? Is it the financial crisis? Have people lost faith in their financial advisors? Is it the development of easier ways to trade?

Matthew Schifrin: You're absolutely right. I think that it's a lot of the things you mentioned. The financial crisis has woken people up. When you sit there in a year and see your great professional investor – when you see your nest egg drop by 45% -- and for anyone who started investing 10 years ago in a mere index like the S&P 500, your money has gone nowhere.

I read an alarming stat that was put out by Financial Engines FNGN that said that the vast majority of people in their 40s and 50s have little hope of actually having enough capital and income to live [during retirement] as well as they do in their working life. Basically, a lot of us are not going to have enough in our 401Ks to provide a comfortable retirement. So I think that's one factor that has gotten people to start investing on their own. I think another obvious factor is what's [developed] on the Web.

There's an explosion of websites and Web tools that you can use to be a great investor. So, for example, Warren Buffett will read annual reports or SEC documents. It takes a few clicks from numerous websites and you can be looking at company financials. You can listen to company conference calls. News is at your finger tips. Financial stats are at your finger tips.

And, best of all, investor education is right there as well. So I think that has contributed to it. And certainly the rock-bottom commission rates. I mean, it's not expensive to invest on your own anymore. And you're absolutely right – the guys in my book, one was a former truck driver. When he was at a rest stop he would use his Wi-Fi card and his laptop to do stock research while he was on the road.

There are a few civil engineers who are in my book who, in their spare time, have become great value investors or great options investors. You really don't need an MBA. A few of the guys do have an MBA. But you definitely do not need an MBA or CFA or any other fancy designation to be a really good investor.

Why do you think it is that this new type of investor is beating the market and the smart money on the street in such enormous ways? You'd think it would be the other way around.

Matthew Schifrin: First of all, I think there are definitely institutional investors who have outstanding investment returns. We've heard about some of the great hedge fund guys.

But I think the vast majority of professional money managers are hired without any real proof that they're good at investing. Most of ‘em have great degrees, they went to great colleges. They come out of school and they get a job with Fidelity or one of these other big mutual fund managers, and next thing you know they're managing huge portfolios.

As you probably know, there's a lot of emphasis on diversification. So many times investors will diversify away their returns. Even Warren Buffett has criticized if you diversify too much. I think his quote was, “Diversification is protection against ignorance.” It makes little sense for those who know what they are doing.

So, a lot of the people in my book who are outstanding investors – once they become convinced that stock is deeply undervalued and think that they're right, they will invest a lot of capital in that stock and they will have high returns on an individual stock or a group of stocks. And this is really very similar to what a lot of the smartest hedge fund guys do. They don't just run with broadly diversified portfolios. Oftentimes they will have a diversified portion of their portfolio, but also, when they find an investment they like they really commit to it.

You see some of that in my book. And I don't mean to indict professional investors; there are great professional investors out there, and a lot of us know who they are. But, what I'm saying is that, there's no reason why you can't become an outstanding investor on your own. You don't necessarily need to make 30% on average per year to be a really good investor. These days, if you can bring in 15% a year, that's pretty good. Most of the professionals will tell you that you should expect 6% average annual return from stocks for the foreseeable future. For a lot of us that's just not going to cut it.

Do you think this trend will continue? Are institutional players on Wall Street going to be superseded by these newly-empowered Average Joe investors?

Matthew Schifrin: I do think that Wall Street should take note…the individual investors, more than ever, have the opportunity to take control of their own portfolio. You already see that happening with commission rates coming down. Account minimums are coming down. There's always going to be a portion of the population that needs financial advice, ‘cause let's face it – most of us are very busy.

In the case of my book, most of these guys commit at least three hours a day to their portfolios – but you can improve your investing skills with just a few hours a week committed to your portfolio. Right now, I think most of us probably think about our stock portfolio once a month, once a quarter. And I think things are changing because information and tools are so readily available to us.

I would imagine that going out and finding people must have been an enormous challenge while gathering information for the book. Your stated goal was to find the great investors that no one has heard of – how were you able to identify these people?

Matthew Schifrin: As I mentioned before, there were some that I knew were good because of the verifiable track records that I had identified on websites like ValueForum.com and Marketocracy.com, where I could easily see who was superior in terms of returns. And then, when they pass that screen, I would interview them to find out if they were someone I thought the rest of the investing audience could learn from. That's how I ended up choosing these guys.

I only chose 10 outstanding investors – but there are many more out there who are not in my book. In fact, if you look at some of the stats, 10 years ago when I was looking at this, there were about five million online investors. Now that number is much closer to 50 million! Just those years and kind of the law of averages would tell you there's going to be more people who have become much better at investing. And a lot of it's thanks to the Web – the Web has been transformative in that area.

Part 2 of the Matt Schifrin is available here.