Advisor Perspectives is read by approximately 60,000 people in the financial advisor community. Dougal Williams wrote an article entitled  Collective Wisdom, Financial Markets, and Investment Lessons from Google™. In response, Ken Kam, CEO Marketocracy, wrote the following article as a rebuttal:

Dear Sir:

I am writing in response to the April 1, 2008 article titled, “Collective Wisdom, Financial Markets, and Investment Lessons from Google.”  In the article, the author uses a thought experiment in which a stadium full of people are called upon to flip coins to reach the conclusion that you cannot tell anything about a manager’s future performance from his past track record.

It sounds persuasive until you realize that once you assume that everyone is tossing a fair coin you’ve already conceded the argument because no one can be “better” at tossing fair coin than anyone else. Dr. Hersh Shefrin, a professor at Santa Clara University, uses a similar thought experiment in his book, Beyond Greed and Fear to reach a very different conclusion. Let me try to explain.

Let’s suppose we have a group of 42,000 people who each receive one of three types of coins - gold, silver, or bronze. The gold coins are weighted so they have a 60% chance of coming up heads. The silver coins are weighted evenly to give a 50% chance of tossing heads. The bronze coins are weighted to come up heads only 40% of the time.

If everyone tossed their coin 10 times, the group of 42,000 people would average 5 heads.  If we want to bet on someone to beat the average of 5 heads out of the next 10 tosses, it would be smart to bet on someone holding a gold coin because each of these people can be expected to throw 6 heads. But, there is one more twist: all the coins are painted green so you can’t tell what kind of coin anyone has. Now, let’s see if a track record has any value.

At the start, there are 14,000 people who have a gold coin, 14,000 with a silver coin, and 14,000 with a bronze coin. If you had to choose someone to bet on now, your chances of selecting someone with a gold coin are 33%. But if you wait until after the first coin toss the odds improve to 40%. Here’s why. Of the 14,000 people holding gold coins, 60% will throw heads so they will comprise 8,400 of the people still in the stadium after the first toss. Of the 14,000 who hold a silver coin, 50% will throw heads, so 7,000 of them will remain. Of the bronze coin holders, 40% will throw heads accounting for 5,600 of those remaining. After the first toss, there will be 21,000 people in the stadium, but 8.400 of them, 40%, will be holding gold coins.

With each successive toss, the odds of selecting a gold coin holder from the people who remain improve. After the 10th coin toss, there will be 100 people in the stadium. But, 85 of them will have gold coins, 14 will have silver coins and 1 will have a bronze coin. If you select randomly from among the people who threw 10 heads in a row, your chances of picking someone with a gold coin holder are now 85%.

Restricting your choices to those with a track record of throwing 10 heads in a row greatly increases your odds of selecting a gold coin holder who can then be expected to throw 6 heads in the next 10 tosses and thus beat the average of all 42,000 which will be 5.

Since many who hold gold coins will not throw 6 heads in the next 10 tosses, even though they can be expected to, there is a good argument to choose all 100 of the people who threw 10 heads in a row. The expected performance of the entire group of 100 in the next 10 tosses is 5.84. By choosing all 100, the probability of the group averaging more than 5 is higher than if you just choose a single person with a gold coin.

I don’t mean to imply that anyone should select managers based solely on their past performance. Investing is a lot harder than tossing coins. My point is simply that the thought experiment used by the article’s author to explain why a manager’s track record contains no useful information for investors does not stand up to scrutiny.

Best regards,

Ken Kam
President

Marketocracy Capital Management, LLC

Tags: Marketocracy

By Joshua Lipton, data provided by Marketocracy 04.21.08, 5:30 PM ET

The U.S. continues to deal with a range of serious economic concerns, including costlier energy and tighter credit. The response from stock-market investors last week: Who cares?

After nervously spending some time fretting over General Electric’s performance in the prior week, investors chose to put aside those jitters and instead moved back into the market. Bulls kicked their heels down in lower Manhattan, as the stock market surged on news of solid results from a slew of bellwethers, like Google and Caterpillar.

The Dow Jones industrial average shot up 4.3% for the week, to close at 12,849, the tech-heavy Nasdaq leapt 4.9% to 2,403 and the S&P 500 index rose 4.3% to 1,390.

In Pictures: 10 Guru Buys And Sells

The best-performing online investors, Marketocracy’s “M100,” were also busy buying. These market gurus looked over the indexes and decided their money was best spent in the energy sector, where they committed a lot of capital last week.

Specifically, the M100 are following crude to new heights, and acquiring drillers as a way to play persistently high oil prices, which have been climbing due to a weak dollar, global growth and speculation.

Drillers have benefited from the huge hike in the price of all that black gold. The stock price of the Oil Service HOLDRs, an exchange-traded fund that tracks the oil services industry, has skyrocketed more than 36% in the past 12 months.

Here is how our M100 played it: They pushed hard into shares of Tulsa, Okla.-based Helmerich & Payne.

The company, which has a market capitalization of about $6 billion, is an oil-and-gas driller. Big customers include BP and Marathon Oil; the company’s fleet includes 172 U.S. land rigs, 27 international land rigs and nine offshore platform rigs.

There are some risks here for investors to consider: The contract drilling business is competitive, and oil and gas prices are, of course, very volatile. But analysts covering the company also point out reasons for optimism.

They say H&P stands out from other U.S. land drillers because of heavy demand for its FlexRig drilling rigs. These are highly mobile land rigs that can be easily moved, which reduces drilling costs for producers. H&P’s revenues and earnings growth have been accelerating. Its balance sheet is in solid shape.

Last week, Calyon Securities initiated coverage of H&P with an “Add” rating and $60 price target. Analyst Mark Urness told clients HP has been able to defy the softening U.S. land-drilling market by offering superior rigs that are the newest, safest and most innovative in the industry.

He also sees international markets as providing yet another growth driver for the company.

“International markets have good longer-term growth potential for HP, as international operators are beginning to realize the advantages of new drilling technologies,” Urness wrote.

The stock of H&P has proved to be a real investor-pleaser, surging 77% in the past year. The M100 clearly thinks this stock can run even higher. The company is expected to release second-quarter results May 1; our gurus carved out a stake ahead of that report.

The M100 played the oil services sector by also snatching shares of international offshore oil and gas company ATP Oil & Gas and Calgary-based oil and natural gas company Connacher Oil and Gas.

On the sell side, the M100 checked out of Diebold, which makes automated teller and voting machines.

Last month, Diebold rejected a $3 billion hostile takeover bid from United Technologies. “The board strongly believes UTC’s proposal significantly undervalues the company and fails to reflect Diebold’s strengths and significant upside potential,” said Diebold Chairman John Lauer.

Lauer said UTC’s proposal is an opportunistic attempt to buy Diebold at a time when shareholders don’t have sufficient data to evaluate the offer. Diebold hasn’t filed financial statements over the past year because of an accounting investigation by the Securities and Exchange Commission. (See: “Diebold Plays Coy.”)

Diebold’s stock has slid over the past year. It’s now trading at around $38, well below its July 2007 high of $54. Last week, the company said it will release its 2008 first-quarter preliminary revenue estimates April 30.

But the gurus aren’t waiting around for the report–they decided now was the time to sell the stock.

Our M100 also sold a few other names last week that they believe no longer deserve their capital, including consumer products company Colgate-Palmolive, recreational vehicle maker Thor Industries and insurance holding company WR Berkley.

Guru Buys:

Helmerich & Payne

ATP Oil & Gas

Connacher Oil and Gas

Thomson Reuters Corporation

PowerShares DB Agriculture

Guru Sells:

Diebold

Colgate-Palmolive

Thor Industries

WR Berkley

Savient Pharmaceuticals

In Pictures: 10 Guru Buys And Sells

Marketocracy.com tracks more than 60,000 online stock portfolios. Of those, the top 100 performing portfolios, the M100, are used to create a real-life mutual fund, the Masters 100 Fund, which is managed by founder Ken Kam. Each week, Guru Picks analyzes the buys and sells of the M100. Click here for more information about Marketocracy.com and its money-management services.

Tags: Marketocracy

Joshua Lipton of Forbes.com writes:

Industrial stocks were hammered last week after General Electric undershot analyst expectations, but the sharp sell-off provided a buying opportunity for those investors shopping around for attractive places to buy into the sector.

General Electric missed forecasts with its first-quarter earnings and was quickly punished for those results. The stock tumbled 12.8%, to $32.05, its worst decline since the stock market crash of 1987.

Investors are worried about the implications for other industrial stocks. As the U.S. economy was sputtering, investors believed that international exposure of multinational conglomerates like GE would protect them from a stumbling domestic market.

Now stock market investors are concerned that these industrials might not be as secure as they first thought.

GE wasn’t the only industrial to get pummeled by jittery investors. Other names like United Technologies, 3M, Cummins and Tyco all received a whacking heading into the weekend.

The Industrial Select Sector SPDR shed 3.9% on Friday.

In Pictures: Five Buys, Five Sells

Another industrial loser last week was Oshkosh Corp., which slipped 2.4% to $35.37 on Friday. (The stock gave up about 6% on the week). But here, the best-performing online investors, Marketocracy’s M100, figured there was a buying opportunity.

Oshkosh is a leading manufacturer of specialty vehicles, including fire trucks, military trucks and concrete-mixer trucks. The company has a market capitalization of about $2.6 billion.

Bears on the stock have their criticisms. They write that Oshkosh has a lot of customers in cyclical industries, like construction. They also point out that about 25% of the company’s sales are to Uncle Sam, mostly to the defense department. It’s unclear which presidential candidate will be moving into the White House next and what that new administration’s plans are for defense spending.

The stock of Oshkosh hasn’t been a crowd pleaser. Over the past 12 months, it has gone down about 34%. Over the past six months, it has slipped about 43%.

But there are reasons for hope here, analysts say. They point to the company’s strong profitability, as well as its high stability in earnings and dividend growth.

Oshkosh bulls write that it has the No. 1 market share in many of its product categories. Competition in fire trucks, which represent about 9% of the company’s sales, is weakening, analysts say.

Back in February, Oshkosh issued second-quarter guidance, which undershot Wall Street estimates. (Oshkosh will report Q2 results May 1.) But, looking ahead, the company reaffirmed full-year guidance, saying it’s still looking for 2008 earnings per share in the range of $4.15 to $4.35, compared with EPS of $3.58 in 2007.

So, basically, Oshkosh is telling Wall Street that the road traveled by its rumbling vehicles might be bumpy in the second quarter. But it’s looking for a smoother ride for the full year.

“Oshkosh is meeting weak market conditions head-on by investing in global initiatives to improve distribution in key international growth markets and reducing costs across all businesses,” said CEO Robert Bohn. “This permits us to maintain our positive outlook for fiscal 2008.”

Our M100 are always looking for a bargain before they commit capital. Oshkosh would now appear to provide one. Compared with the competition, Oshkosh is run more profitably and it’s cheaper (and will continue to be less expensive in the future). In fact, the company now has a very attractive price-to-earnings-growth ratio of just 0.38. Anything less than one is considered cheap.

Looking ahead, analysts expect a lot more growth out of this company. Over the next five years, professional stock watchers think Oshkosh will grow, per annum, at 21.33%, far ahead of how much they see the rest of the industry growing.

The M100 liked what they saw, figured it was a steal and moved in–aggressively.

Other big buys last week for our gurus included health insurer Aetna and insurance company HCC Insurance Holdings. They also liked the look of lawn mower maker Toro.

Analysts partial to Toro emphasize its solid history of growth and margin improvement and its low level of debt.

Last week, Standard & Poor’s Ratings Services revised its outlook on Bloomington, Minn.-based Toro to positive from stable. S&P also affirmed all of its ratings on the company, including its BBB corporate credit rating.

The outlook revision reflected the company’s improved business risk profile as it has expanded its more profitable and stable professional segment, S&P said. The M100 moved in.

In Pictures: Five Buys, Five Sells

But the gurus weren’t just busy buying last week. They also decided it was time to bail out on a few names, including Brady Corp., a Milwaukee-based company that makes labels and signs.

The stock, year-to-date, is off about 8%. It’s also a bit more expensive on expected growth, compared with its competitors. The gurus jumped out.

They also bailed on toy maker RC2 and satellite communications company Globalstar.

The M100 are now feeling a bit more bullish on health care, it looks like. They sold completely out of UltraShort Health Care ProShares, an exchange-traded fund that moves double in the opposite direction of the Dow Jones U.S. Health Care Index.

Health care stocks haven’t been treated kindly by investors. Year-to-date, the Health Care Select Sector SPDR is down more than 10%. In the past three months, it has gone down more than 13%.

But there are reasons for optimism here, one could argue.

There has historically been little relationship between dips in gross domestic product during recessions and health care spending. Also, as the first quarter drew to a close, the health care sector as a whole had become slightly undervalued, according to some analysts. (See: “Gurus Heal Portfolios with Health Insurers.”)

In Pictures: Five Buys, Five Sells

Guru Buys

Oshkosh (nyse: OSK)

Aetna (nyse: AET)

HCC Insurance Holdings (nyse: HCC)

Toro (nyse: TTC)

Xinyuan Real Estate Co.

Gurus Sells

Brady Corp. (nyse: BRC)

RC2 (nasdaq: RCRC)

Globalstar (nasdaq: GSAT)

UltraShort Health Care ProShares (amex: RXD)

WuXi PharmaTech

Tags: Marketocracy

Timothy @ Marketocracy writes:

I am reading a book, A History of Venice, by John Julius Norwich, that I can recommend without reservation. As I read, I am struck by the parallel between Venice, the powerful republic that dominated Mediterranean trade for over 500 years, and Google. Both Venice and Google have a subtle yet critical advantage over their competitors. In both cases, this advantage matters far more in any analysis of future prospects than the latest news of ships arriving laden with goods from the Levant, or paid clicks per month.

In the case of Venice the great advantage was the defensibility of the Venetian lagoon. It seems strange to me that a lagoon could be a better protective shield than a strong wall or mountain redoubt, yet this was the case. The shifting sands of the lagoon bottom made navigation through this body of water very difficult. When the Venetians knew an invading army was approaching, they would remove the navigational markers they used to guide themselves, and make their lagoon unnavigable to others. They could still sail in and out from memory. As a result they were able to survive unscathed as invading armies sacked all the other northern Italian cities. It cannot be coincidental that pluralistic political systems evolve in easily defended places like the British Isles and North America, and so it is unsurprising that the Venetians developed an intricate system of republican government that served them well for over 1,000 years, providing a man created advantage to match the natural advantage provided by the Venetian lagoon.

In the case of Google the great advantage is that Google has ensconced itself at the top of the web. Having done so, they are now impregnable, yet able to threaten all other web enterprises. A search engine is the top point from which the entire web can be seen. From this high vantage point the user descends to a particular website that is spotted in his search, and may descend further to a particular page in order to purchase, for example, a pot or pan. Having taken the high ground, Google has the resources to continually invest in their search engine, to provide the type of search experience that users want. Why would I ever try another search engine? I know Google. I know it works. I know it works quickly. I know how to use it. To try another search engine would be to take a risk I do not want to take. A Google toolbar is on, at least, tens of millions of computers. That is a huge intangible asset and a huge advantage that no competitor can hope to trump.

The Google position at the top of the web provides an advantage of visibility for any service Google may wish to introduce. To find an example of this I just went to Google and typed in “The Grapes of Wrath.” Not to disappoint, the first hit in the Google list was for Google Books, a service with which I was not previously familiar. Not surprisingly, when I went to Google Books I was given the opportunity to purchase this book from several different web sources. Book sellers tremble. Google is in a position to take its cut. Google did not have to run a hundred million dollar advertising campaign to make me aware of Google Books. They only had to make it pop up first when I did a search for a particular book title. THAT IS AN ADVANTAGE.

The web is still growing. More people are getting web access or upgrading to high speed access. More people are taking the plunge to order items on line. More people from around the world are starting to use the web. This translates to built in growth for Google even without the constant rollout of new initiatives. But new initiatives will be rolled out, because just as the sanctuary of the Venetian lagoon fostered an innovative and effective system of government, so the web supremacy of Google is fostering an innovative and effective corporate culture. The best and the brightest want to work with the best and the brightest-at Google.

The famous contemporary poet, Billy Collins, said that a reader should not tie a poem to a chair and try to force a confession out of it. In like manner, the financial analyst who wants to bring Google into his world of measurable quantities, like paid clicks per month, completely misses the point. Get your damn calipers off of Google. That bears repeating: Get your damn calipers off of Google. That was so much fun I think I’ll do it again: Get your damn calipers off of Google. Don’t try to grab Google and pull and tug into your room of financial figures. Go to its peak of delicious possibility. You will understand Google far better if you do.

Now if you are a day trader, feel free to disregard every single word I have written. None of this will make a difference day to day or week to week or even month to month. But true investing is the art of seeing reality as it really is, and profiting from it. To do that, one must be a little patient, because fools will tug the stock price up and down for silly, insubstantial reasons. But if you buy some Google stock and wait for a year or two, I make bold to predict, you will not be disappointed.

Tags: Marketocracy

“Cowboy Dickrdoo” writes at the Strategy Lab Open:

It not tax day it’s Marketocracy Masters 100 day. It’s been three years since MOFQX made the 250 stocks in lieu of 1000 stocks change and revamped it’s M100 selection process and/or criteria and/or weighting. Since that time MOFQX has done very well.

From April 15, 2005 to April 15, 2008 without taking fees in consideration:

MOFQX +47.90%
Mid-Cap Stocks +33.08%
Total Market +27.48%
Large Cap Stock +26.58%
Small Cap Stocks +22.74%

MOFQX is general fund that is categorized as a Mid Cap Blend Fund and over past three years MOFQX has beaten the total market on 3.58% annualized basis taking fee into consideration over the past 3 years. The Marketocracy Masters 100 Fund has beat around 90% of it’s Mid-Cap Blend Fund competitors and probably about 95% or more of all the mutual funds. The present M100 has a prior 3 year average of 97.7% with a standard deviation of 4.5% so if the MOFQX beats 95% of all the other funds over the next 3 years that will only be par for the course. More importantly there is a 99% chance that MOFQX out perform 84% of the other mutual funds. Par for the course for other mutual funds is 50% and there is 1% chance that another mutual fund will under perform 99% of the other mutual funds. MOFQX performance over the past three years was no fluke and nor will it next 3 years performance be one.

At present Marketocracy Masters 100 is only a 3 star fund but in the next few years it going to be a 5 star fund worth buying when it was only a 3 star fund. The intuitive odds are stacked in MOFQX’s favor.

Tags: Marketocracy

When is the best time to buy a stock? Before you decide, wouldn’t you want to know what the best investors are doing? Marketocracy is the only research company that delivers stock alerts based on the comparative trading activity between the best investors and the rest.

TMFDeej writes on his Motley Fool CAPS blog:

According to a recent article in Forbes, tons of the best investors that its Marketocracy’s M100 newsletter tracks the purchases of are “aggressively” buying shares of Philip Morris International (PM), putting more money into it than any other stock right now. I have been closely following this stock since I did a full write up on it back in November, PMI / Altria: Poised to Smoke the Market, and I own shares of both PM and MO in real life and in CAPS. Things are progressing as planned, since I did my extensive write-up on the company so I don’t have a lot of new information to add right now. If you don’t mind investing in a company that sells tobacco products definitely make sure to check PM out. I stongly believe that it will outperform the major indicies over the next several years.

The Forbes article, by Joshua Lipton: (link to original)

Another week, another slew of scary-sounding economic data.

Last week, the U.S. government released a dismal docket of economic news: The labor market weakened, construction spending declined and vehicle sales softened. Fed officials spoke of continued downside risks and even the chance of gross domestic product decline. The added worry is how a stumbling U.S. economy will then impact the rest of the world.

Stock market investors are trying to figure out how to put their money to work in such a wobbly world. One answer when times are tough: consumer staples. These are the products people will keep right on buying regardless of how bad the economy gets. Along with shampoo, toilet paper and toothpaste, there’s another product category that’s basically insulated from the economic cycle–cigarettes.

In Pictures: Five Buys, Five Sells

That’s what the best-performing online investors, Marketocracy’s M100, bet on last week. These market gurus decided to push very aggressively into cigarette makerPhilip Morris International, committing way more capital to that company than any other pick.

Last week, Philip Morris began trading on the New York Stock Exchange after completing its spin-off from Altria Group. The M100 believe that the Marlboro Man can make them some handsome profits as he ropes in more fans in international and emerging markets.

Philip Morris International is the second-largest seller of cigarettes in the world. The company now operates in more than 160 countries, with a leading market share in the European Union. It also has a sizable presence in Asia, Latin America, Eastern Europe, the Middle East and Africa.

Analysts note that the company is now working hard to gain market share in China, India, Bangladesh and Vietnam–four markets that account for 40% of the world’s cigarette consumption.

There are potential problems for Philip Morris, analysts say. The company faces stiff competition from rivals like British American Tobacco and Japan Tobacco. Lawsuits and tobacco restrictions are on the rise.

But fans of the company emphasize the company’s global cigarette franchise, real potential growth in new markets, and robust free-cash flows.

“We believe the strength of the company’s cigarette portfolio, the scale of its operations, and the firm’s ability to build share through new market entries and acquisitions will make Philip Morris a force to be reckoned with on the global tobacco scene,” wrote Morningstar analyst Greggory Warren in a recent research note.

In the next five years, analysts estimate that the company will grow at 11.67% per year, which is more than its industry. The company has manageable debt and it’s awesomely profitable, with operating margins of nearly 40% over the past 12 months.

The M100 are believers, and they moved in to carve out a big stake in the company.

Other buys for the M100 included gas and electric utility Dominion Resources, automotive safety systems maker Autoliv and satellite radio service company XM Satellite Radio.

They also found a few home builders they’re now nibbling at, including Standard Pacific, M/I Homes and Hovnanian Enterprises.

Wading into the home builders might seem like an aggressive move given all the bad press surrounding the sector. But for contrarians, the surge in negativity has bullish implications. Also, the Federal Open Market Committee continues to steadily lower interest rates and pump in huge amounts of capital into the financial markets, which should improve lending and strengthen struggling financials and home builders.

The effects are starting to take hold on Wall Street, some pros contend, as the housing sector is one of the top performers in terms of relative strength.

On a year-to-date basis, the Select Sector S&P Homebuilders SPDR has gained roughly 22%, outpacing the S&P 500 Index’s loss of 6% for the same time frame. (See: “Homebuilder Rally Is For Real.”)

The question for our M100 was also what to purge from their portfolios last week. The gurus ditched a host of names, including cable operator Comcast, coal-mine operator Massey Energy, biotechnology company Millennium Pharmaceuticals, education company DeVry and Dillard’s.

Last week, shares of Dillard’s rallied after the department-store chain announced it reached a settlement with Barington Capital Group and its affiliate, Clinton Group, which own 5.4% of the company, by agreeing to nominate four new directors, thereby avoiding a proxy fight at the upcoming annual stockholder meeting.

The agreement comes a week after Barington asked Dillard’s for access to financial records, minutes from board meetings and details about its executives’ perks, including non-cash compensations. (See: “Dillard’s Secures Peace Before The Show.”)

Shares of Dillard’s popped more than 31% on the news.

But not everybody is convinced this pick is a sound choice. Analysts covering the stock argue that the company has showcased inconsistent results. Dillard’s is also now facing increasing competition from rivals like Macy’s. Also, its stores are concentrated in markets with especially challenged retail conditions right now, like Florida.

The final nails in the coffin? Compared with its industry peers, Dillard’s is way less profitable and far more expensive, both now and looking ahead.

The M100 decided it was smarter to dress up their portfolios with better picks. They booked profit and moved on.

In Pictures: Five Buys, Five Sells

Guru Buys:
Philip Morris International
Dominion Resources
Autoliv
XM Satellite Radio
Hovnanian

Guru Sells:
Comcast Massey
Energy
Millennium Pharmaceuticals
DeVry
Dillard’s

Tags: Marketocracy

Canada’s The Globe and Mail highlights Larry MacDonald, a retired investment advisor, who communicates his investment strategy by maintaining a virtual portfolio at Marketocracy.com:

RANDOLPH McDUFF

AGE: 43

OCCUPATION: Retired investment adviser

PORTFOLIO: International stocks, including MasterCard, Novo Nordisk, Aeroports De Paris, Beijing Capital Airport, Bayer AG, Canon Inc., Guangshen Railway, Saputo Inc., Butterfield Bank, and Keytech Inc.

INVESTMENT RESULTS

Mr. McDuff”s investment strategy is working exceptionally well, as highlighted by a virtual portfolio he is running on marketocracy.com. Called the RMG Value Catalyst Fund, it has returned 37.5 per cent on an annualized basis from inception in late July of 2000 to early March of 2008.

This puts his portfolio in the top 10 of the 50,000-plus portfolios tracked on marketocracy.com, and way ahead of the S&P 500 index’s annualized return of zero per cent over the same period. His second virtual portfolio, RMG Value Oriented Growth Fund, is also in the top 10 with an annualized return of 24.8 per cent over the same period.

HOW HE GOT STARTED

When Mr. McDuff was 13 years old, an uncle suggested he invest in the stock market. “I didn’t know the first thing about investing, so I started reading The Globe and Mail on Saturdays, at my public library, to get a bit of an education,” Mr. McDuff says.

After graduating from the University of Manitoba in 1986 with a bachelor’s degree in economics, Mr. Duff became an investment adviser. Fourteen years later, still in his mid-thirties, he had accumulated enough capital to take early retirement and pursue his goal of building wealth at a faster pace, using his own research.

INVESTING STRATEGY

Mr. McDuff, who lives in Winnipeg, focuses on global companies. Coverage by brokerage and institutional analysts of many international companies is non-existent or poor, so good companies can often be found trading at modest valuations. Also, companies with ample free cash flow are sometimes ignored by the professional investment community because they don’t need the help of investment dealers to raise funds.

His preferred investments have sizable barriers to entry (e.g. monopolies or oligopolies), fortress-like balance sheets, and catalysts that can accelerate cash flow and attract research coverage. The companies also have modest valuations according the “forward EV/EBITDA” ratio. Specifically, their projected enterprise value (debt plus equity) stands 10 times or less to projected EBITDA (and are below levels for peers).

BEST MOVE

“I’m most pleased with an investment in Aeroports De Paris, which is up 100 per cent in the past 18 months,” reported Mr. McDuff recently. Traffic is growing for the airport as more East European countries join the Europe Union. Rental income should trend upward due to an expansion of airport retail space and development of the company’s tracts of commercial land in the south of Paris.

WORST MOVE

Within the past two years, Mr. McDuff lost 20 per cent on his holding in UnitedHealthcare. He normally sells an investment “when the business model deteriorates,” but he gave management the benefit of the doubt and it did not come through as expected.

Tags: Marketocracy

Joshua Lipton of Forbes.com writes:

Financial companies have fumbled on big, bad bets that continue to make headlines for all the wrong reasons. Those news-making errors have sent a lot of investors running for cover over the past 12 months, as they’ve stayed spooked by poor earnings and worrying forecasts. But other stock market watchers have decided to play the sector very differently: They want to profit from the panic.

That was the decision made last week by the best-performing online investors, Marketocracy’s M100. These gurus saw that the financials, as a sector, continue to get hammered, perhaps beyond the point at which it makes sense. The Financial Select Sector SPDR (amex: XLF), an exchange-traded fund that tracks a broad swath of financial stocks in the S&P 500, is down about 25% in the past year.

In Pictures: Five Buys, Five Sells

But last week, the M100 saw that U.S. policymakers are making moves to help out this beaten-down sector. Fed Chairman Ben Bernanke and the gang slashed another 75 basis points off the federal funds rate, cut a full percentage point off the discount rate, expanded access to the New York Fed’s discount window beyond commercial banks, and accepted $30 billion worth of Bear Stearns illiquid assets to facilitate its takeover by JPMorgan Chase. (See “Street Soars Into Break.”)

Those moves by U.S. central bankers looked smart and appropriate to the M100, who figured that all of these bold policy measures would help lift the confidence of the market and provide a pop for the financials. So the gurus piled aggressively into Ultra Financials ProShares (amex: UYG), an ETF that seeks investment results corresponding to twice the daily performance of the Dow Jones U.S. Financials index.

That move was a good bet. On Monday, the UYG popped 6% to $35.06. Other big dogs in the financials sector also leaped out of their leashes. In the past five days, Goldman Sachs has jumped 16% to $182.23, and Citigroup has surged 21% to $24.02.

Besides the ETF, the M100 also bought into a financial firm directly: Credit Suisse Group.

Last week, the stock of the financial services conglomerate tanked as details of write-downs it warned of in February proved to be worse than expected, and a profit warning suggested that Credit Suisse would book a loss in the first quarter. (See “Credit Suisse Crumbles.”)

But analysts following the stock point to some reasons for optimism here: Credit Suisse, they say, has one of the top private-banking franchises in the world and a lucrative alternative-asset-management business.

Also, compared with its industry peers, Credit Suisse has better operating margins, and it is way cheaper, on a trailing 12-month basis. The M100 last week took advantage of the pullback and carved out a stake. That looked to be a wise play: Credit Suisse surged 4.5% to $51.73 on Monday.

In Pictures: Five Buys, Five Sells

The M100 also played the pain in the market a different way last week: They shorted the consumer.

Specifically, the gurus moved very aggressively into UltraShort Consumer Goods ProShares (amex: SZK). This little ETF moves double in the opposite direction of the Dow Jones U.S. Consumer Goods index. That index tracks the performance of consumer spending in the goods industry of the U.S. equity market. The component companies in the index include everything from automakers to brewers and cosmetics companies.

Reuters, relying on S&P 500 forecasts from Wall Street strategists and industry analysts, finds that for the first quarter of 2008, earnings are projected to fall 5.5%. One of the worst performers, according to Reuters’ estimates, will be the consumer cyclical sector.

Other buys for the M100 included software maker SAP, oilfield services firm Smith International and marine and rail leasing company GATX .

The M100 also bought into Manpower. Bulls on that staffing company write that Manpower, given its size (it’s the second-largest staffing company in the world), can provide workers for nearly any industry in most countries. They also point out that the company is very well diversified geographically, which protects it against local economic downturns.

The M100 also liked the fact that Manpower is nice and cheap, with a price-to-earnings-growth ratio of just 0.73. The gurus decided it was time to stake out a position.

One the sell side, the M100 no longer felt comfortable owning supermarket operator Kroger and military contractor ITT.

They also bailed on Canadian National Railway. Compared with competitors, the rail company is a bit pricier, relative to its expected growth. Analysts covering the stock do point to the company’s strong profitability, cash flow generation, balance sheet and diverse customer base. But they also note its exposure to economic cycles and fuel prices.

CNI has dropped about 7% in the past four weeks. The M100 decided it was time to take profit.

In Pictures: Five Buys, Five Sells

Guru Buys

Ultra Financials ProShares

Credit Suisse

UltraShort Consumer Goods ProShares

SAP

Manpower

Guru Sells

Kroger

ITT

Canadian National Railway

Reliant Energy

Tredegar

Marketocracy.com tracks more than 60,000 online stock portfolios. Of those, the top 100 performing portfolios, the M100, are used to create a real-life mutual fund, the Masters 100 Fund, which is managed by founder Ken Kam. Each week, Guru Picks analyzes the buys and sells of the M100. Click here for more information about Marketocracy.com and its money management services.

Tags: Marketocracy

Joshua Lipton, data from Marketocracy 03.18.08, 1:12 PM ET

The March Federal Open Market Committee meeting is finally here, and central bankers are deciding how best to respond to choppy financial markets and eroding credit conditions. The Federal Reserve is expected to lower its federal-funds rate target Tuesday as policymakers try and contain this ongoing credit crunch.

But in this weakened economy and spooked stock market, a lot of investors aren’t looking for a home run; they just want a smart, defensive play that can deliver dependable results and steady income. One answer for a lot of investors is to move to high-dividend-yielding stocks.

That’s one way the best-performing online investors, Marketocracy’s M100, chose to play the market last week. Their pick: Consolidated Edison, which they like for its meaty, 5.7% yield (well above industry average), solid balance sheet and A credit rating from Standard & Poor’s.

In Pictures: Five Buys, Five Sells

Con Ed is a holding company for two regulated utilities that deliver steam, natural gas and electricity to customers in New York and parts of New Jersey and Pennsylvania. The company has a market capitalization of about $11 billion.

Analysts covering the stock write that reliable earnings and dividends make this utility a dependable income-producing investment. In fact, market pros note that the company has increased dividends consecutively each year for more than three decades.

Investors like Con Ed as a go-to defensive play. Utilities, like consumer staple and health care stocks, are considered generally recession-proof investments. After all, regardless of what happens in the broader economy, you’ll still need to turn your lights on.

There are risks here for investors to think about, including any kind of serious economic weakening in the markets that Con Ed serves or the emergence of an unfavorable regulatory environment, analysts say.

But, right now, the M100 thought this company looked like a smart place to commit capital. Compared with its industry peers, Con Ed is run more efficiently and is cheaper, based on last year’s earnings. The M100 moved in.

Another company the gurus piled into last week was the Bank of the Ozarks of Little Rock, Ark.

In 2007, the bank, which has a market cap of about $350 million, reported a net income of $31.75 million, a 0.2% increase from the net income of 2006. Earnings per share were $1.89 for both 2007 and 2006. That’s a pretty decent performance during a time when many banks are reporting scary, headline-making losses.

The M100 know that regional banks tend to perform better when the Fed is cutting rates, because that allows them to borrow lower and lend a bit higher. Also, their profits and losses aren’t determined by trading desks but by the day-to-day regular mechanics of tried-and-true banking, lending money to folks looking for a new car or home.

In Pictures: Five Buys, Five Sells

The Bank of Ozarks’ stock is down about 25% in the past 12 months, but that’s less than the fall most regional banks have suffered. Also, the Bank of Ozarks is run much more efficiently than its industry peers are, and it’s nice and cheap, with a price-to-earnings-growth ratio of just 0.55.

The M100 were also busy last week parachuting out of some investments, including SiRF Technology Holdings, H & R Block and a company that made history for all the wrong reasons: Bear Stearns.

Last week, the M100 completely unwound their positions in Bear Stearns after JPMorgan Chase threw a lifeline to the troubled company, which was reeling from a customer run on its money.

On Sunday, JPMorgan bought Bear Stearns at the fire-sale price of $2 a share, or $236.2 million. At the end of last week’s trading, Bear was worth $3.5 billion; one day earlier, it was $6.7 billion. (See “Bear Throws In Towel.”)

The news about Bear Stearns scared a lot of investors, who might now be worried that the problems plaguing the U.S. economy are deeper and more serious than they thought. That concern, coupled with the desire of investors to take some profit from a record run, sent oil prices lower Monday morning.

Oil has continued a relentless climb as investors are trying to find a safe haven in oil as the dollar falls to new lows and speculation continues that central bankers are going to keep cutting interest rates. (See “Oil and Gas Both Hit New Records.”)

Over the past year, the chart of the United States Oil Fund (USO), an exchange-traded fund that tracks the price of crude, screams from lower left to upper right. The stock price has surged nearly 80% in the past 12 months, about 14% in just the past four weeks.

The M100 expected to see some pullback from that heady climb, which was a smart move. On Monday morning, the USO did slip, as investors decided it was time to take cash off the trading table.

Guru Buys

Consolidated Edison

Bank of Ozarks

Baxter International

Associated Banc-Corp

Movado Group

Guru Sells

SiRF Technology Holdings

H & R Block

Bear Stearns

QUALCOM

International Game Technology

In Pictures: Five Buys, Five Sells

Marketocracy.com tracks more than 60,000 online stock portfolios. Of those, the top 100 performing portfolios, the M100, are used to create a real-life mutual fund, the Masters 100 Fund, which is managed by founder Ken Kam. Each week, Guru Picks analyzes the buys and sells of the M100. Click here for more information about Marketocracy.com and its money management services.

– Forbes

Tags: Marketocracy