(FORTUNE Magazine) – WHAT IS IT THAT MAKES SOMEONE A professional money manager? Education? Training? Or is it simply talent and desire, plus experience? And if so many professionals underperform the market, what good are they anyway? If you have ever pondered those questions, you'll probably be intrigued by Marketocracy, a website and mutual fund that, depending on how you look at it, is either revolutionary and empowering or dotty and dangerous.

Run by a money-management veteran named Ken Kam, Marketocracy is sort of like the Vanguard Group meets eBay. Kam's fund, the Marketocracy Masters 100 (MOFQX), isn't managed by investing professionals. Rather, the portfolio's picks are made by regular folks who seem to have a knack for producing above-average returns. That might make the $62 million fund eligible for some sort of investing curio shop if not for one thing: Marketocracy recently posted performance numbers for three years--a significant milestone in the world of investing--and it beat the market, up 8% on average annually, vs. 3% for the S&P 500. (The small-cap-oriented Russell 2000 rose 13% over the same period.)

Kam created his grand experiment in response to a variety of problems he encountered as the co-founder and former co-head of Firsthand Funds, where he tended several large and successful tech funds. For one thing, most professional money managers--with their requisite Wharton MBAs and two years at Fidelity--lack something Kam considers vitally important. "They have no real-life work experience," says Kam, who was an executive in the medical field before he became a money manager. "It really helps to invest in a business you understand." Even more vexing to Kam was the matter of investing styles. Typically a fund manager becomes experienced and competent investing a certain way, be it in low-P/E stocks or health-care stocks or growth stocks. "What really kept me up at night," Kam says, "was, What are you going to do when what you are good at is out of favor?"

Hiring dozens of professionals, each with his own ways and means, would be impractical. So Kam had the radical idea of selecting the best stock pickers from a group of everyday people who signed up at a central website and developed a track record running a hypothetical fund. Currently more than 70,000 investors run portfolios on Market- ocracy. Each month Kam's software selects 100 of the best portfolios--"the m100"--and models the mutual fund after their holdings, weighted by performance and consistency, meaning the higher a portfolio's score, the more dollars go to those picks. (The at-home money managers receive a small management fee when their funds are picked.)

Kam acknowledges that he is still optimizing his system for adjusting the Masters 100's portfolio. For instance, commission costs must be figured into how frequently he changes the mix. And of course looking at a hypothetical fund's past performance is always a rearview mirror. Still, Kam says his model works: "Most funds are like broken clocks. Twice a decade they're the right place to be. We like to think that our clock is never broken. We may be 15 minutes behind, but performance will still hold up."

The Marketocracy experiment is certainly provocative. To some it has "time bomb" written all over it. The thinking is this: Who knows how and why it will fail--just be sure it will. Kam's camp says that's just the sound of threatened professionals being defensive. To better understand Kam's consumer-empowered amoeba, we tracked down a handful of m100 members, spoke to them about their portfolios, and got their top picks of the moment. (Be forewarned: Many of the stocks are small caps and speculative.) No question, it's an interesting group. "It takes passion to do this," says Kam. "Our people are like sports fanatics."

»That shoe seems to fit Larry Thompson. "It's not about money. It's just something I love to do," says Thompson, m100 member, MBA candidate at the University of Michigan, and pool shark. Thompson, 27, runs two hypothetical funds, a plain-vanilla portfolio, up some 60% annually since November 2001, and a distressed-equity portfolio, up over 80% per annum since July 2002. "I got interested in the market around the age of 13 or 14," he says. "I was reading USA Today, and I went to the money section and saw people on the cover cheering. I didn't know what it was about, but I assumed that they were making a lot of money." Before taking a job on Wall Street, Thompson cleaned up in a stock-picking competition as an undergraduate at the University of Alabama at Birmingham. "I turned $100,000 to $900,000 over a period of two months in 2000. Back then I was basically gambling." But Thompson found out that in real life, the gig wasn't quite so easy: "I was convinced that I was great, so I took some of my own money and opened an account and tried to do the same thing. I got creamed."

Thompson's main strategy is simple. "I don't follow the crowd," he says. "I watch it just to see what people are doing wrong. Sometimes there are good reasons for a stock to be tanking, but sometimes it's overtanked." For instance, one of Thompson's faves is New Plan Excel Realty Trust. "This REIT owns shopping center properties," he says. "And my outlook on consumer spending is positive because I think energy costs have peaked and consumers will have more dollars to spend. The company should get a nice flow of income from renters, and right now it's yielding 6.4%."

Thompson is also big on biotech, because major pharmaceutical companies have had their troubles recently. "Drug companies are still going to have to spend on R&D to come up with new products," he says. "A simple way to do that is buy out small biotech companies with products in late-stage trials." His pick here is micro-cap Xenova Group: "It has a pipeline of six or so drugs in clinical trials, and the market is valuing the pipeline at only $10 million, which is way low." He also snapped up Praecis Pharmaceuticals because "it was selling very close to net working capital minus total liabilities." Thompson has no doubt about his abilities. "I don't consider myself an amateur," he says. In investing, that is. As for pool? "I've been in a few tournaments, but I'm not playing any serious professionals. I'm really competitive. I should be winning every game I play."

»John Czerw (pronounced "surf") is a self-described maverick. "I consider myself an innovator and an early adapter," he says. "I like to look at things with great promise. I'm not afraid to get into early-stage companies or turnarounds." Or even into that ultimate high-risk proposition, racehorses. Besides investing for Marketocracy, Czerw, 51, breeds thoroughbreds on his 20-acre ranch just outside Dallas in Flower Mound, Texas. (This after a career in mortgage finance with the likes of Fannie Mae and Freddie Mac.) His m100 virtual portfolio is up an average of 123% annually since its inception in 2002.

John described his 21st Century Marketers portfolio to me: "It's a consumer discretionary sector fund. I'm looking at any company that is bringing goods and services to market in a new way that resonates with the public." Like what, John? "Like Youbet.com, an online pure bet on parimutuel horse wagering. Today you can bet in 39 states, and now the company can do overseas business as well. [Wagering on horses] is a $100 billion business worldwide. This is a company that went through the bubble. The stock was at $20 a share; it went to $1; now it's at $5. I like that. The company has smart management and is sound financially." Another gaming-related dice roll Czerw favors is Littlefield, which develops, owns, and operates bingo halls for charities in Texas, Alabama, and South Carolina. "This is a turnaround situation," he says. "The stock is at 60 cents a share, and the current CEO has come in and bought 40% of the stock in the open market."

Czerw owns some bigger stocks too, like Aviall, which supplies parts to general-aviation companies. "Aviall has strong financials. Its earnings growth has been exceeding its revenue growth recently. The stock has also nearly tripled over the past two years."

Working for Marketocracy is not lucrative for Czerw. "Let's just say it keeps me in cigars," he says. It also keeps his competitive juices flowing. "When I first saw Marketocracy I knew I could get to the top."

»Unlike many professional money managers, the folks in the m100 are often refreshingly blunt. Here's a bombshell you would never hear from anyone working at Fidelity: "I don't personally believe in investing in mutual funds," says m100 portfolio manager Michael Kantor. "I can do better than that buying my own stocks." Unlike most m100 members, Kantor, 37, does have a background in a brokerage business of sorts. He has a degree from Wharton and worked as a broker at what he describes as a boiler-room operation in Arizona. Today he is a computer programmer doing contract work for the Army at Fort Belvoir in Arlington, Va.

Kantor calls himself a value investor--he says Ben Graham's book on investing was a major influence--and over the past several years that thinking has steered him to energy and precious-metals stocks. "I'm in a dilemma right now, though, with my oil and gas stocks," he says. "They were cheap in 2000, but now almost everything is overpriced." A few, Kantor says, are still worth buying, like Vintage Petroleum, which "has a lower P/E ratio and a higher reserves-to-market-cap ratio than its competitors. It has a business in Argentina, which became a drag when that country ran into economic troubles recently."

As for metals, Kantor prefers silver to gold these days, which makes sense after gold's incredible recent run-up. "There are studies that show we have been using more silver than we have been mining for the last decade," he says. "Eventually there may be a shortage. There are only a handful of silver companies. The two I like are Apex Silver Mines, which has a big mining project in Bolivia, and Pan American Silver." Working for the Army full-time must leave little time for investing. How does Kantor do it? "I spend an hour or two every day," he says. "Investing is my major hobby. Some people like rock climbing; I like stocks. Being in the m100 is like being on The Apprentice for me."

»Ian St. Martin sees the world from a unique perspective. A software engineer by training and the father of two small boys, St. Martin, 40, resides in Vancouver, B.C., and--atypically for a Marketocracy master--makes his living trading for his own account. His fund's annualized return from inception in May 2001: 106%. St. Martin has a system that identifies small companies that have sound fundamentals, good balance sheets, strong revenue and EPS growth, and positive outlooks. All that gets a stock on his alert list. Then, if he sees a spike in trading volume and a move to the upside, he pounces. "My biggest problem is, I sell these things too early," he says.

As for St. Martin's picks, he cautions that since his is a rather short-term trading model, the stocks may have shot to the moon (and perhaps fallen back again) by the time you read this. "I like Manchester Technologies, which has climbed 50% recently," he says. "That would scare 90% of people away from buying it. Manchester is a distributor of monitors. It's a tech intermediary." Another tech company he favors is the generically named Communications Systems, a telco gear maker. "The stock has gone from $9 to $12," he says. "I think there's a 70% to 80% chance it goes up from here." St. Martin also has his eye on staffing company Barrett Business Services: "There has been no reaction based on an increased earnings outlook. I'm guessing they keep showing earnings growth. I'm convinced the stock goes from $14 to $30."

Even if St. Martin got booted from the m100, he would still track his portfolio there. "The site has the best analytical tools that I've seen," he says. "The historical data and the screening you can do are remarkable. Every investor can benefit from that."

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