Stock Picker, 20, a Genius? Perhaps in His Own Eyes

The more I talk to Chris Lahiji, the more I keep coming around to the following question: Is he a danger only to himself, or to other people as well?

The question comes up because Lahiji, a 20-year-old student at Santa Monica College who recently won himself some national publicity as a youthful stock market enthusiast, has begun to tout shares in a tiny, broken-down mutual fund that has offered him a job apparently on condition that he bring along some new investment money.

As Lahiji wrote on his Web site last week, anticipating his appointment as the fund’s manager: “I do not know how long it will take before we become the talk of the national media.”

At least he’s modest.

Lahiji claims already to have attracted more than $1.5 million in pledged investments for his prospective employer, the Frontier Equity fund, from among followers of his investment Web site, although at least $800,000 of that appears to have been pledged by residents of some of the 40 states from which the fund is not legally permitted to accept money at this time. He says he’s ready to invest all of his own money and most of his parents’ $50,000 retirement account in the fund.

“Is that wise?” I asked him last week.

“No,” he replied airily. “It’s stupid. But this is about putting my money where my mouth is.”

Lahiji, obviously, has a rather elevated opinion of himself, which must resonate among investors seeking answers for the dismal markets of recent years. These being credulous times, I have no doubt that this column -- which will examine Lahiji’s record skeptically, as may already be clear -- will generate numerous calls and letters from prospective investors asking how they, too, can join the bandwagon.

I dropped in to see Lahiji last week largely at his own request. He had peppered the Los Angeles Times with a series of e-mails expressing irritation that his hometown newspaper had ignored his growing fame, which was rooted in brief appearances on investment talk shows on radio and CNN and PBS.

“It is disappointing to me that my own newspaper has yet to acknowledge my presence in the financial world,” he wrote.

An engaging, if hyperactive, young man, Lahiji greeted me at his parents’ Santa Monica home in jeans and bare feet and escorted me to an upstairs bedroom equipped with a laptop on a wireless network. Then he began telling me his life story, which started with him getting his own father into a money-losing investment in Fila at the age of 10, and includes years spent in monastic isolation poring over the arcana of company annual reports.

To him this bespeaks a quest to be recognized as an investment virtuoso by people who dismiss him merely because of his age; he seemed preoccupied with the goal of being named the “youngest mutual fund manager in history.”

To me, Lahiji’s modest renown is more a story of nitwits in the business press blithely buying into a publicity stunt, and of investors so demoralized by the lying and cheating of established Wall Street firms that they’ll clutch at straws, as long as they come from an unconventional source, the way voters gravitate toward politicians who run for office as Washington outsiders.

There’s no point denying that Lahiji has demonstrated a certain stock-picking talent. Some of his selections have racked up impressive short-term gains, occasionally by being acquired by established companies, and he’s smart enough to know that the best potential lies in stocks that aren’t widely followed.

No one who knows him faults the sheer energy he devotes to the study of individual companies. “He eats this stuff for breakfast, lunch and dinner,” says Mark Keeley , manager of the Keeley Small Cap Value Fund. Keeley says he generally finds Lahiji’s analyses to be incisive and direct, but he’s also uneasy at Lahiji’s inexperience and his determination to win public acclaim while still wet behind the ears. “I’ve told him this is not a race,” he says. “I’ve tried to impress upon him that this is a great business and you can have a lot of longevity, if you do things the right way.”

Lahiji first came to public notice by claiming to have read through more than 12,000 corporate annual reports as a means of ferreting out small companies that had been overlooked by Wall Street’s herd mentality.

During the spring, this claim was aired in short items in Barron’s and Business Week. These were harmless enough, but then came radio and, especially, television, with its tendency to take everyone at his or her own level of self-esteem.

Geoff Colvin of the PBS show “Wall Street Week” asked Lahiji for his stock picks and let him yammer on about his desire to “become the next big name in Wall Street.” Typically, radio and TV interviewers absorbed Lahiji’s claims of stock-picking prowess at face value, which drove visitors to his Web site and its centerpiece, the “Lahiji Tiny Fund.” Lahiji says this would-be portfolio of 150 micro-cap stocks (that is, market capitalizations generally lower than $50 million each) has racked up a return of more than 100% since its “inception” in November. But that’s manifestly misleading.

For one thing, since the “fund” hasn’t actually made any purchases or sales, the stated return doesn’t account for the expenses inherent in any real-world investment, such as brokerage commissions and taxes. It doesn’t factor in the extent to which any sizable trade in these light-volume stocks would move the market, making it harder to buy significant shares at the lowest price. Nor does it account for the difficulty of selling at a fair price if the fund needed to dump shares quickly. But then Lahiji hasn’t dropped any stocks from the fund, so its record doesn’t say anything about whether he knows when to sell, along with when to buy. It’s also worth noting that the fund is concentrated in one of the most volatile sectors of the stock market, and one which happens to be enjoying a huge vogue at the moment. But such vogues never last, whether they involve micro-caps or blue chips.

Had the Lahiji story ended with his imaginary fund and a few Internet followers, there wouldn’t be much more to say. But at some point earlier this year, Lahiji and the Frontier Equity Fund found each another.

Up to now, Wisconsin-based Frontier Equity has been a laughingstock of the market -- the worst-performing mutual fund in the country. Year to date it has lost 42%, and that follows losses in the previous three years of 54%, 30% and 51%. When its rather distracted founder and manager died earlier this year, the fund and its license were acquired by an investment partnership owned by Joel Blumenschein, a Milwaukee-area broker. By then it had only about $50,000 in assets left, and $40,000 in annual expenses. According to its prospectus, it also carries a front-end sales charge, or “load,” of 8%, which is egregious for any mutual fund, let alone the worst fund in the market.

Blumenschein says he sees nothing wrong in giving the untested Lahiji a chance at managing money under professional supervision. He paints the relationship with Lahiji as a win-win. “Chris said he’d like the people following his site to have a vehicle to invest in,” he told me. “I said what we need are assets.”

He acknowledges that he has never met Lahiji face to face, and there are signs that he’s not fully aware of the downside of employing someone with such inexperience.

When I asked Blumenschein whether Frontier Equity would be an appropriate investment for a retired couple with $50,000, he replied that it would, as long as they didn’t invest more than 10% of that sum. When I asked if he was aware that Lahiji was planning to invest almost all his parents’ money, he paused pregnantly.

“I may have to talk to him about that,” he said.

Meanwhile, Lahiji has been telling prospective investors that Blumenschein will waive the 8% fee, but it’s unclear whether he’s authorized to make that commitment, since he is not yet an employee of Frontier Equity, or whether Blumenschein has even made it in writing. (Blumenschein didn’t return the call I made to nail down the issue.)

What makes Lahiji’s story disquieting is not his brashness. It’s the reluctance of people in and around the stock market to learn the lessons of history.

Lahiji’s followers in the press and elsewhere seem oblivious to the ruthlessness of market cycles, which make demigods of stock pickers whose approach happens to coincide with prevailing conditions, and dupes of those who overstay their welcome. Joe Granville, Elaine Garzarelli, Bob Prechter and countless others all got famous for the brief periods in which their analytical principles matched the market’s own mind-set, and they all ended up reviled and ridiculed after the fundamental investing principles they claimed to have unearthed on their clients’ behalf turned out not to be so fundamental after all.

Few of these people, if any, displayed more circumspection than Lahiji about their God-given analytical gifts. It took time and events to puncture their self-delusions. At the ripe old age of 20, Chris Lahiji seems to think he’s immune to the same fate. But a wealth of experience still lies before him.

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Golden State appears every Monday and Thursday. Michael Hiltzik can be reached at golden.state@latimes.com.