You, Too, Can Be a Stock Analyst

Ever think you could pick stocks as well as the fund managers who appear on financial TV shows?

A new crop of Web sites has sprung up to give you a shot. No, I'm not talking about the online ghetto of financial chat sites that are filled with rumors, hype, threats and bad grammar.

These sites let anyone post stock picks. The catch is: Your picks are automatically tracked and ranked along with those from other community members. (TSC visited a few of these sites in a previous story.) At the best of these sites, you can use search functions to pull up the portfolios of the communities' top-performing amateur analysts. You can even receive email alerts when the amateur analysts you follow make trades. One site doles out cash awards to its best stock pickers. And as you'll see, some mutual funds are being set up like Web community sites, where astute amateur analysts actually help pick the funds' holdings.

Gonzo Trader

ClearStation was the first site to track its members' stock picks. And it gets the award for putting a semi-crazed, gonzo face on what might otherwise be a very dry business of ranking amateur stock analysts.

The site was launched back in 1998 by computer-programmer-turned-trader Douglas Fairclough, who goes by the Web handle Kensey. Fairclough describes himself as a cross between Jim Morrison and Hunter S. Thompson. No doubt if he had been a member of those artists' generation, he might have plunged into writing the Great American Novel or a screenplay. Instead, Fairclough created the Great American Web Site over an 18-month period while he sequestered himself in his San Francisco basement apartment. Less than a year later, he and his partners sold ClearStation to online brokerage E*Trade (EGRP Quote) for a reported $23 million.

So far, E*Trade hasn't moved to quash ClearStation's wild-haired spirit. As evidence, an online tour of the site is called "Introduction to Spanking Wall Street." Also, when you register, you receive frequent emails from Fairclough himself (under his nom de Web, Kensey). These emails contain his market predictions, written sometimes in near-poetic rants that might well have emanated from Morrison or Thompson. A recent example (the punctuation is his):

how do selling panics like the one we are seeing in chips end? answer : they just do. there is no warning. the market just ups and turns around. for sure the trading desks at DLJ and Salomon will be active. gradually, talking heads on CNBC talk!! about an 'over-reaction' to a published industry figure. remember, these people don't indicate where things are going to go, they just react and put a smile behind what is taking place.

But I digress. At the heart of ClearStation's philosophy is something called "3-point investing." Each day the site posts a list of computer-generated picks that are based on technical and fundamental indicators as well as the consensus recommendations of community members. Indeed, the real stars of this site are its 170,000 amateur stock pickers. Anyone who registers can join in and compare himself or herself to other members -- like "sun," who racked up a winning-trade average of 67.5%, according to stats on the site.

Click on sun's name and you get to see his entire list of recommended stocks. Click on any of these stocks and you get sun's own rationale behind the pick. Here, for example, are some of sun's recent thoughts about JDS Uniphase (JDSU Quote): "So young, so strong, so beautiful. The market's getting smacked and JDSU is marching toward its all time high."

If you agree with sun's thoughts about JDS Uniphase and the other stocks he's picked, you can "subscribe" to his portfolio, and you'll be notified by email each time sun makes a trade.

Money Talks

Rival iexchange.com couldn't be more different in personality. Where ClearStation comes off at times like a hangout for neo-beat poets, iexchange.com is utterly pragmatic and utilitarian. It was hatched out of idealab!, a Web incubator that also created GoTo.com, eToys, WeddingChannel.com and CarsDirect.com. iexchange.com lets you post your stock recommendations. You also can write up a report on why you like a particular stock and sell that report for cash. The typical price is $3 to $5, though many of the reports are free. You split the revenues 50-50 with iexchange.com.

Before you buy a report, you can check out the author's stock-picking track record and his or her credentials. One of the most popular stock pickers at iexchange.com goes by the Web handle "yogi." In the real world, yogi is a former business owner who recently lost his vision. yogi's picks have returned an average of about 125%, according to stats posted on the site.

That kind of transparency and accountability are at the heart of what makes ClearStation and iexchange.com successful. True enough, you can window-shop through thousands of professionally prepared analyst reports at a Web site like Multex.com. And granted, the writing will undoubtedly appear more authoritative than anything sun is likely to produce. But when you plunk down $10 to $70 (typical prices) to buy these reports you won't get any idea of the analyst's track record. And if the report was published by, say, a brokerage or investment bank, you won't know what political machinations lay behind its conclusions. In contrast, iexchange.com and ClearStation tell you upfront how each of its analysts has performed.

If you put thousands of people together and direct them to pick stocks, the law of averages says a few are bound to produce stellar returns. But something more appears to be at work here. At iexchange.com and ClearStation, it's not uncommon to find amateur analysts who have racked up triple-digit average returns. Of course, when you see percentages like this, keep in mind that they could be inflated by one or two lucky picks. So further research is advised.

Still, these admirable returns are produced by people who likely bet their own money when making recommendations -- and not from some detached analyst who wants to leave work early that day.

Democratizing Mutual Funds

At any rate, this idea that amateurs collectively can outperform the pros has lately spread to mutual funds. StockJungle.com has set itself up as community site similar to ClearStation and iexchange.com. Pick your stocks at StockJungle.com and receive $50 for every day that your portfolio's performance ranks in the top five among all community members. StockJungle.com has gone a bold step further with its Community Intelligence mutual fund. Shareholders vote on which stocks the fund should buy and sell. Number-crunching computers collectively weigh these recommendations along with technical and fundamental criteria -- making StockJungle.com a sort of online investment club with some computerized quantitative analysis thrown in. The fund's managers make final decisions on what to buy and sell. As of early this week, the fund, which has holdings in everything from banks to biotech stocks, was up nearly 48% since it was launched last November.

Stockjungle.com recently spawned a competitor, MutualMinds.com. Its Investor Insight mutual fund is currently awaiting Securities and Exchange Commission approval. What's next? If funds allowing investor input perform well, we'll see more imitators, of course, and maybe after that, Web-based, company-sponsored 401(k) plans that invest based on employee suggestions.