When The Average Joe Beats The Street - Matt Schifrin - Zing Talk Part 2

This is Part 2, to see Part 1, go here.

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Can you share some of your favorite stories from the book?

Matthew Schifrin: Sure. There's a guy in my book, it's Chapter I believe. I call him Lady's Man. His name Mike Koza. He's a guy in Sacramento. He's a civil engineer. For most of his life, he couldn't care less about investing. His passion was whitewater rafting. That's what he liked to do.

But he was kind of lonely, and he decided [to] look for a wife. He went to the personal ads and found a woman named Maria, who was a Filipina immigrant who came from poverty. She met with Mike, they kind of hit it off, and she noticed that Mike had this portfolio of about $100,000 that he had saved. He was about 40 years old, and it was going nowhere.

He had a broker at Morgan Stanley charging him fees, but the portfolio was not going anywhere. And she said, “What's a matter with you? You're really smart! Why don't you invest on your own? I've heard people can do really well if you do that.” He kind of skeptical but said, “Okay, I'm gonna try that.”

Mike hunkered down. He's a really bright guy – he's one of these guys that gets a perfect math SAT. And he's become this amazing value stock investor where he's been really good at calculating intrinsic values of companies – worst-case scenarios – and coming up with his own valuations on companies.

He's turned that $100,000 into more than $3 million in about nine years. He read books like Benjamin Graham's “The Intelligent Investor,” and several other classics, and he taught himself to be a great investor. So, Mike Koza's story is one of my favorites. I call him Lady's Man because if it wasn't for his wife and his wife's urging, Mike would have never realized his potential as an investor.

There's a guy, Kai Petainen, who I mention in my book. He's a computer lab manager at the University of Michigan's business school. I call him the Sorcerer's Apprentice because Kai soaked in what the professors at the school were talking about for years and he researched academic theories, just as a computer lab manager, and created his own formula for quantitative investing.

What I mean by that is that he has screens for stocks based on certain quantitative properties. He's become an outstanding investor. He's created nine portfolios on Marketocracy.com and I believe all but one of them has far outpaced its benchmark.

Kai has a really interesting story because, just because of his day his day job, he's learned to be a great investor. It's very inspirational.

There's another investor, Jack Weyland, is the kind of guy that no one would have ever hired for any kind of Wall Street job. He dropped out of college. He was in the Air Force for a little bit. What Jack ended up doing was – he became a truck driver – and he discovered that he had a knack for picking biotech and health care stocks.

Jack would, while he was on his trucker routes, the Department of Transportation has these mandatory rests that all truckers need to take. So whenever Jack would take his mandatory rest from his truck route, he would log onto the Web, and use a 3G wireless card on his laptop and research stocks.

Over the years he has made himself an expert on biotech stocks using a number of Web resources. On Marketocracy.com, his average annual return (as of the time I wrote my book) was about 36% on average per year, investing in biotech stocks mostly. Jack is an interesting guy because it's not that easy for him to articulate what he does.

But when you start asking him specifics about drugs and pharmaceuticals and biotechs, he has this amazing ability to remember detail, and financial detail, and detail about drugs and FDA trials. He's become an outstanding investor. It's the talent that Jack Weyland has discovered that he has.

Do you think that Wall Street will look to pick up some of these investors and bring them to their companies?

Matthew Schifrin: Absolutely. In fact, I already know of one of the people I wrote about in my book who was offered a money management job at a major asset manager. So I think that these guys will get attention that they, perhaps, were not looking for. Some of them are young, like Jack Weyland and Kai Petainen. But others are retirees who are living idyllic, great lifestyles based on their ability to invest.

Some of those, the retirees, I don't think any of them are looking for new careers as money managers. But I think some people on Wall Street will certainly give these guys a chance.

Now that we've addressed “You've Never Heard Of” part of the title, what can we learn from the subjects of your book?

Matthew Schifrin: Well, I think that if you read my book you'll see some common themes throughout. I would say that the majority of the people in my book are value investors. They look for stocks that are somehow being mispriced by the market. One of the common trends I found is that these guys look for big gainers and big losers everyday. They're looking for stocks where there's some market overreaction. Where a stock has been unfairly punished or, on the other side, if it's moved up irrationally.

One of the guys I mentioned, Mike Koza – during the financial crisis he did the analysis on a company called Radiant Group, whose shares had gone as low as a $1 a share. But Mike, who plowed through their financial statements, and kind of did a worst-case scenario analysis, realized that there's no way this company, even under a liquidation scenario, would be less than $25 a share. So he bought lot of Radiant group down near $1 a share. He didn't wait for it to get to $25 before selling it; I think he sold it at $16. But that's an example of somebody who takes advantage mispricing anomalies in the market.

There's another guy I profile whose specialty is producing income from options. I'll probably be writing about him in Forbes pretty soon. And, one of his rules is, don't become emotionally tied to any stocks. I think that most of when we invest, we invest two currencies in a stock: we invest our dollars, our real currency, and then we invest emotional currency.

You've done the research, you think that the stock is really good because you believe you're right. But the best investors have discipline and they don't become emotional about it. Don't fall in love with the stock that you buy. This investor – I believe his rule was – if something goes against him significantly (I think the number was 20 or 25%), he's out. He will sell that stock.

Each one of my chapters has rules and case studies that investors can learn about investing. Rules that will help them become better investors.

Has the experience of writing your book changed your view of Wall Street at all?

Matthew Schifrin: Absolutely. Frankly, if I didn't have to work my day job so hard at Forbes, I would love to invest my own money myself. What I'm saying in this book is that we all need to spend time on our most important assets. If you've ever bought a home you know that everybody spends a lot of time on the house they're gonna buy. But when it comes to our portfolios, we hand the key to someone else. I think that people need to spend more time on their own portfolios, their own retirements, their own nest eggs. I think people can learn a lot from these books.

Me personally, I envy the lives of a lot of the people that I wrote about. One of these guys, he lives this idyllic life in New Mexico. He built his own house using the profits he made from investing in stocks. He just has this great life where he invests his portfolio for half the day; the rest of the day, he does what he wants to do. There's stories like that in my book.

If anyone wants to see videos from some of the people in my book, they can go to MattSchifrin.com and you'll see videos of some of The Warren Buffetts Next Door, explaining a little bit about their investment styles. They're also on Forbes.com as well. If you go to blogs.forbes.com/schifrin.

What was your first and what was your worst job?

If you include my paper route when I was a kid, that was probably my first. [Laughs] But my worst job was… One summer I worked at a sunglasses factory, which was mind-numbingly boring. I am fortunate in that I've worked for Forbes pretty much since I graduated from college. And that's been a great job for me.

Tell us something about yourself that no one has asked in an interview before.

Matthew Schifrin: Let's see… I don't have that many interviews. I doubt anyone's going to ask me what my hobbies are. I like digital photography and I play guitar.

What was the best and what was the worst investment decision that you've ever made?

Matthew Schifrin: At the end of my college years, I bought the stock of a company that I was very… The company was called Verbatim. They made floppy disks. This was in the '80s, and I was convinced that it was a great company. Unfortunately, the market was not agreeing with me.

The funny thing was that the stock got taken over by Kodak EK, and I was one of the few people to lose a significant amount of money on a takeover play where I think I only invested $2,000 and I think I lost $1,000 on it.

I've had some good investments. I invested in GameStop GME many years ago – the video game store. I quadrupled my money in that. It's funny – it was a Peter Lynch type of investment where I saw my eight-year-old playing video games all the time and I'm like, “Wow, this is so powerful!” It's not like a movie where you spend three hours on it. I mean, my son would spend hours [playing games].

I did more research on the company, I looked at the SEC documents and realized they had a magazine [Game Informer], a big list of over two million subscribers. I thought it was a really good buy. I think I bought it before they merged with EB Games and before all those new consoles came out, like the Wii. That was a great ride for me.

Another good investment that I made was Apple Inc. AAPL. That's been awesome.