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My mission is to run an investment firm where managers are selected for their skill not their pedigree. -Ken Kam

Don't Try To Beat The Market

I know it sounds wrong but you read that right. When you are learning to invest, it is a bad idea to try to beat the market. Here's why.

Stock prices already reflect the collective knowledge of all market participants. To beat the market you need to have knowledge that is not already reflected in stock prices. Sounds daunting, right? It is, but there is more to the story.

If you have knowledge that is not already reflected in stock prices, it most likely comes from your firsthand experiences. As you go about your normal working day, you accumulate a body of knowledge and build a network of contacts that cannot be matched by a Wall Street money manager.

Most Wall Street money managers were recruited to be analysts right out of business school, before they had any real work experience. Their main advantage is that they have the ear of the CEOs of many companies.

The problem is that CEOs are often not the best sources of information about what is actually happening at their companies. Often, its the people who recruit talent, close sales, design new products, manufacture things, etc. who are the real experts and Wall Street money managers hardly ever talk to any of them.

To give you an example, when I was managing the medical portion of Firsthand's Technology Value Fund, I often saw that the people who where the first to know which medical devices were going to be successful were nurses. You see, a doctor will never admit that a medical device is too difficult to use. But the nurses who set up the operating rooms make it their business to know which devices each doctor prefers to use.

In those days, the nurses would write down each doctors' medical device preferences on index cards so the doctors always had their operating rooms set up to their liking. When you look through the index cards and you see the nurses' handwritten notes not to ever put this or that device out on the table for a long list of doctors, you can bet that product was headed for failure. I still find it funny that many Wall Street firms pay doctors to advise them on medical devices, but I am not aware of any that pay nurses for their opinions.

If you have knowledge that can give you an investment advantage, it is probably going to come from your firsthand experience. However, your firsthand experience does not cover the entire spectrum of industry sectors that comprise the market; no one's does. To beat the market you will have to make investments in industries where you may not have an advantage. This is crazy.

Instead, make a list of stocks for which your firsthand experiences could give you an advantage. Then set up one virtual portfolio to hold an equal amount of each stock on your list. This portfolio will be your benchmark.

Set up a second portfolio to hold your best ideas from the same list of stocks. Don't buy them all. Just buy the one's you think are better bets than the others. If you are right, your best ideas portfolio will outperform your benchmark portfolio and show you that your judgements about which stocks were the better bets have added value. At that point, its time to start investing a portion of your real money.