Back in 1993, when I started the Firsthand Technology Value Fund and wrote the prospectus, the SEC made me put the following warning on just about every page: "The portfolio manager has no previous experience managing money."
Needless to say, this made it hard to get anyone to invest in the fund. Almost no one wanted to invest based on the prospectus. The first investors were, by and large, members of my extended family and friends of the family.
Friends and family would not ordinarily provide enough assets to launch a mutual fund, but my grandfather had a lot of friends. When he arrived in Hawaii in 1906, he started out, as many people did, in the fields picking pineapples. After some years, the owners of the plantation made him a manager, because he had made the effort to learn to speak the languages of the different immigrant groups brought in to pick pineapples.
For many of the immigrants, my grandfather was not only their manager, he was also their translator and bridge to other social networks, and thus an important source of help in their efforts to build a better life. My grandfather listened to a lot of their business ideas. He encouraged workers to pool their savings to invest in the best ones and get them started.
It was in this way that many hard working people in Hawaii got their first opportunity to get off the pineapple plantation. And it was these people who years later were the first to invest in a mutual fund where the "portfolio manager had no previous experience managing money."
At the start, the fund's minimum account size was $10,000. When people who pick pineapples for a living invest $10,000 in a mutual fund, the fund manager feels a great responsibility -- at least he should feel a great responsibility. After all, for many of them this was single largest investment of their life, aside from their homes.
Under my watch, lasting five years, their money multiplied ninefold. I don't like to toot my own horn, but it seems pertinent to mention that Lipper ranked the fund as the No.1 fund of all mutual funds for the five-year period ending in September 1999.
I cannot begin to describe the satisfaction I felt in delivering such gains to all the friends and family members who had entrusted me with their life savings.
At the end of the 1990s, I began to feel that tech stocks were no longer attractive. I could not, in good conscience, continue to manage a fund that was required to keep their money in tech stocks. So when these people gathered on March 18, 2000 to celebrate my wedding day, I told them that I had left Firsthand Funds and that it was time get out of the Technology Value Fund.
As gratifying as my tenure at Firsthand was, it also made me aware of how vulnerable a portfolio is when it is narrowly focused. I could not sleep at night because I worried about what I was going to do when the stocks in my area of expertise were not worth holding.
I don’t ever again want to put 100 percent of my portfolio into a single sector, no matter how good it looks. But, I also don’t want to diversify so much that it is nearly impossible to deliver great returns.
I think the best way to live up to the trust that investors place in me is to find great stocks whose prospects are independent. That is, the gains in each case will be driven by different factors.
But it is hard for any single investor to master independent factors in diverse industries. Picking the right oil stocks takes a different expertise than what’s needed to pick the right biotech stocks, or the right technology stocks. Developing and maintaining expertise in farflung industries is a job that no one can do all by himself.
I knew I couldn't do it by myself. That's why I started Marketocracy.