Investing: The Net Wisdom of Peers

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"It's a process of asking the right questions of the right people," says Kam. "People on Wall Street aren't the right people because they rarely have the experience to ask the right questions."

Kam and Taguchi believe it takes at least five years of tracking a person's trading decisions to be able to discern their skill level. But after a year and a half, they felt confident enough in the collective wisdom of a select group to pick the top 100 out of about 40,000 members to serve as model portfolio managers for the mutual fund they set up. Six years later, the Marketocracy Masters 100 Fund (MOFQX) has roughly $45 million under management and, since inception, has returned 92.42%, compared with a 53.37% return by the Standard & Poor's 500-stock index, including dividends, over the same period.

Wisdom of Crowds vs. the Individual

One bone of contention among the next-generation investing communities is whether the financial rewards of following a single individual match those of tapping into the collective wisdom of the crowd. Cake believes in taking what seem to be the best practices among groups of like-minded investors and showing members how they compare to others who are doing better than they are, both as individuals and in the aggregate, says Carpenter. It's not a herd mentality that Cake enables members to tap into, but the collective wisdom of the few who resemble them and consistently outperform the markets over time, Carpenter says.

To identify such model investors, Cake has a feature that gathers up to 10 years of back data from the trading accounts members have opened at 11 of the top brokerage firms. Data extending over that long a time span are more convincing than the three months' worth of back data that most other sites import, Carpenter says.

For Covestor's Tahta, it's the idiosyncratic thinking of individuals with insights into particular sectors that's paramount. He cites one member, a doctor in Wisconsin, who has a unique understanding of relative strengths and weaknesses among medical equipment makers. Given all the factors that inform investment decisions, such as goals and risk tolerance, he believes it's a waste to limit this information to a single investor's account when it could help others with the same basic approach.

Marketocracy believes it's beneficial to be able to access the group's aggregate wisdom and that of individuals at different times for different reasons. Their model portfolio managers, a rotating group of the top 100 performers, tend to know the right questions to ask, based on their trading experience in certain sectors. But they often turn out not to be the people with the right answers, says Kam.

"Through our forums, increasingly what we're finding is that you want to let everybody post [comments], because the person who has the answer might have a poor portfolio overall but may have the key piece of information that will make a great investor have conviction in the stock idea," he says.

High-Quality Discussion

It's likely that even without the functional bells and whistles, online communities would attract investors based solely on the quality of the discussions—a welcome refuge from the junk many say is clogging the message boards on financial portals at Yahoo.com (YHOO) and AOL.com (TWX). ValueForum even allows members to vote to dispatch off-topic posts to a separate discussion board called the "Coffee Shop" so that the main discussion threads stay focused on investing matters.

Online investing communities have also begun to extend their reach beyond the virtual into the physical world. Take InvestFest, an annual conference organized for and by ValueForum members. Now in its third year, the conference offers presentations not only by members who specialize in certain investing topics, but also by industry professionals such as investment newsletter editors and occasionally a company chief financial officer. Cake is also envisioning local investor cocktail parties around the country in the future.

Many people tout the Internet, and message boards in particular, as tools that are democratizing the flow of information. But for Kam and Taguchi, research by social network is more about meritocracy than democracy. It's about weighting people's voices by their track records and giving commensurate attention to the most talented. Says Kam: "Other social networking sites looking to make a play in investing are interesting and share the same goals as us, but it's going to be years before they have anything substantial to prove to investors that they can add value."

Bogoslaw is a reporter for BusinessWeek's Investing channel .