I rarely comment on investments here. There are too many SEC rules that could get me in hot water. Still, I thought the above chart is a fine commentary on why most individuals and many professionals make for lousy investors. They are always chasing yesterday’s winner.

The graphs breaks the U.S. stock market into size quintiles with quintile 1 being the smallest U.S. companies (as measured by market capitalization) and quintile 5 being the biggest U.S. companies.

Then for each quintile, I plotted the price earnings ratio based on estimated earnings over the next twelve months. The price earnings ratio represents what investors are willing to pay for one dollar worth of earnings.

Back in March 2000 when we were living in a new paradigm and the Internet was going to solve all the world’s problems, investors were willing to pay $40 for each dollar of earnings for the biggest companies in the U.S. The twisted logic at the time was the biggest companies had the resources to take advantage of the new paradigm including the ability to use their expensive stock to make acquisitions. Meanwhile, small companies were unloved one trick ponies who couldn’t compete with the big boys.

Of course, the conventional wisdom was wrong and large company stocks have underperformed small cap stocks for the past seven years.

Now the unloved stocks are the biggest companies in the U.S., which are 67% cheaper than they were in 2000 while the smallest stocks are 11% more expensive.

It is only a matter of time before the present trend reverses and the biggest companies will outperform smaller ones.

Disintermediation has been happening for years with the advent of the Internet, both in the for profit and not-for-profit sectors.

Two of my favorite disintermediation sites are Prosper.com and Kiva.org.

Prosper allows you to make loans directly to individuals, cutting out the bank. Interest rates are set using a Dutch auction. I’ve been making loans for about six months now. While many of the loan requests are for debt consolidation, the most interesting requests for me are from entrepreneurs. Most people starting a business will never get access to venture capital, or know angel investors who can invest in their budding enterprises. That’s why so many people fund new businesses with credit cards.

Prosper provides a new funding source. Examples of businesses I have lent to include Trust Love, started by a woman who is marketing her original character creations, a baton teacher who needed transportation to get to the after-school programs she leads, and a guy who is expanding his Internet café and video game arcade. These are high risk loans so the key is to spread small amounts among many opportunities. That’s the beauty of Prosper. Dividing a $3,000 loan among 60 lenders is the same thing Wall Street has been doing for years in securitizing and packaging credit card debt, auto loans, mortgages, etc. Only this is on a much smaller scale.

While you earn interest on loans issued through Prosper, loans made through Kiva don’t earn interest. These are microfinance loans to individuals in developing countries. Kiva partners with local microfinance organizations in various countries who screen applicants. Borrower are typically entrepreneurs needing a short-term loan to expand their businesses. It is a wonderful tool for fighting poverty.

We call presentations like I did in North Carolina beauty pageants. Four firms each get forty-five minutes to present to a Committee, generally made up of older men who have donated large sums to the school. I’ve given up predicting how these things will turn out. When you think it went well, you lose and when you think it went poorly, you win.

On my flight home, I sat next to Anthony Muñoz, former Cincinnati Bengal and inductee into the Pro Football Hall of Fame. I’m not a celebrity watcher so I didn’t recognize him at first. I only noticed after I got situated in my customary window seat the guy next to me didn’t appear to be your typical boring middle-aged sales rep. For one thing, his calves were as big as my thighs and his left pinkie was bent in a right angle. It was only after I gave him a battery for his dead Bose headset and we got to chatting that I realized who he was.

While I admired Anthony during his playing days for my hometown team, what I most admire him for is consistently giving back to the community. He has found his true calling.

Frances Hesselbein is quoted in Success Built to Last as saying, “[there is] a powerful synergy when you combine service to others with a passion for your own mission, your own work. We are called to do what we do, and when we respond to that invitation, it is never a job. When we are called to serve and we respond, it is joy and fulfillment. The key to fulfillment is service and the key to leadership is not how to do, but rather how to be. Serving others is part of the ‘how to be’ character of a great leader.”

By that definition, Anthony Muñoz is a great leader.

On another topic, I relaunched my banking career today. I became a reluctant banker four years ago when we sold our investment firm to a bank in order to facilitate the departure of our founding partner, who was terminally ill. But last year my banking days ended when we bought back our company and took it private.

I’ve been frequenting a website called Prosper that allows you to lend money to individuals. It’s sort of like microlending for the masses. I’m intrigued by the concept because it’s a perfect example of disintermediation coupled with the tipping point. Since most people loan in increments of $50 to $75, only a small percentage of the loans get fully funded. The mystery is why do the loans that get funded actually get funded.

I made my first loan to a construction worker with no credit history. I am going in with the same attitude I use when buying individual stocks⎯that I am going to lose it all. Then if I actually get repaid, it’s a bonus.

For example, several years ago I guy tried to get me to sell noni juice. I don’t even remember the name of the company. What I do remember is the talk I listened to from the company’s founder. He was very upfront. He said multilevel marketing only works if the product costs little to produce but has some ethereal or mystical quality for which people are willing to pay a premium. In other words, the product must have extremely high gross margins in order to compensate all the reps up and down the pyramid. I spent a few hours analyzing the noni juice line and determined a liter of juice that retailed for $29.95 cost no more $2 or $3 to produce. Which means at least 80% of the sale price went to paying independent reps.

One of the original multilevel marketing companies was Amway. They now go by Quixtar. While this is a legitimate enterprise, I have never understood their recruiting approach. Here is a company with ample brand equity, yet whose reps will never tell you the name of the company they represet unless they are sitting in your living room. They always talk about a “business” opportunity or a part-time “business.” In fact, if anyone ever approaches you about a “business” but seems to go out of their way not to tell you the name of the business, you can almost guarantee its Quixtar.

As long as I am on the subject of multiple streams of income, LaPriel and I have developed a new business opportunity for all you looking for some residual income. It is a special seasoning package guaranteed to help you lose weight. We have spent years perfecting the secret formula for this meal replacement.

The concept is simple. Twice a day instead of your regular meal, eat a cup of beans sprinkled with this special seasoning. Due to a patented chemical reaction, you’ll feel full, fulfilled and the weight will just fall off. Each package is all-natural and sells for $1.95. That’s less then $4 per day plus the cost of beans. Its proven. Guaranteed.

Just finished Lee Eisenberg’s book THE NUMBER. The number he speaks of is the amount one needs to save for retirement. The subtitle of the book is “A Completely Different Way to Think About the Rest of Your Life.” I can’t say after reading it I think any differently. Perhaps if I wasn’t saving enough for retirement and had no idea what my “number” was or my life goal was to retire at age sixty in order to play golf seven days a week, it would have been more eye opening. I’ve played golf once in the last ten years, and while I like the game, I can’t envision dedicating 40 years of retirement to perfecting my swing.

While most of my investment work is with institutions, I do occasionally dole out advice to individuals if asked. Recently in San Antonio, a lovely 80 year-old woman came up to me after a luncheon I had spoken at. A broker was pushing her to switch a boatload of money from Vanguard to another fund company, and she was confused as to whether to purchase A shares with their upfront commission or C shares with the higher expense ratio and deferred commission. I had to laugh. She was essentially asking whether she should trade in her current portfolio, which she is paying 0.2 cents on the dollar in fees, for an investment pool that costs five to ten times as much and will underperform where she is at currently, even before taking into account the taxes she will incur by switching. I told her to leave the money at Vanguard. She replied her husband thought the broker was a nice man, and they had already decided to move the funds. I wanted to wring the broker’s neck.

At least this couple seemed relatively well off, so the $25,000 they were about to pay in commissions, fees and taxes probably won’t send them to the poorhouse. Unfortunately, the vast majority of Americans will not fair as well. For them, the rest of their lives will pretty much be the same as their current lives: work.

Most Americans save way too little, and pay way too much for lousy investment advice. Plus they have no idea of the demographic time bomb that will hit with in about twenty years when marginal tax rates are pushed up to 50% to 60% in order to pay for social security, medicare and interest on the national debt. Nothing like paying 50 cents on the dollar in taxes on 401K and IRA distributions because our current Congress and President don’t have the guts to fix the fiscal mess both political parties have gotten us into by overspending and overpromising. Somehow Wall Street and financial planners never mention that down the road half of retirees’ nest eggs will go toward taxes, essentially paying interest on debt incurred to pay social security benefits for their parents.