How To Win A Stock Picking Contest

My father watches the Communism Channel (CNBC) all day. There was an MBA stock-picking contest. Approximately 700 teams entered. They were interviewing the winner on CNBC. My father said “Wow! That guy who won the stock-picking contest must be a super-genius!” Do you see the fallacy?

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Someone had to win the stock-picking contest. It is much more likely that the winner got lucky, rather than him being brilliant.

When I was in high school, a fellow student entered a stock-picking contest. He filled out the scantron form incorrectly, bought a different stock than the one he intended, and won.

To win a stock-picking contest, you have to take unreasonable risks. If you play it safe, diversify, and aim for a 20-30% annualized return, then you probably won’t win.

The stock-picking contest represents a call option. If you win, then you get the prize and then can put on your resume that you won, leading to better jobs. If you lose, there’s no penalty.

Therefore, if you enter a stock-picking contest, YOU SHOULD FOLLOW THE RISKIEST TRADING STRATEGY YOU CAN, taking risks you never would if you if you were investing your own money. To win a stock-picking contest, you should find the riskiest stocks you can (highest beta), pick one of them, and invest 100% in it. Based on the number of entrants, you should estimate how many standard deviations you need to beat the market by, in order to win. If the stock you picked goes up 10%+, then you should trade and invest 100% in another high-risk stock. Repeat until you achieve your target return (switch to cash) or the contest ends.

A stock picking contest is not like a running contest or other athletic contest. In a running contest, the best runner will almost always win. For a short time-period, a stock picking contest is much more like a luck contest, rather than a skill contest. It is almost guaranteed that the winner got lucky. A short-term stock-picking contest is more like a single hand of poker, where anyone can win, rather than a series of deep-stack no-limit tournaments, where the best player would have the most winnings.

A naive investor will pick a mutual fund or a hedge fund by looking at its 5 year track record. That is a bad idea. The top funds were more likely the beneficiary of luck, rather than having brilliant management. Having gotten lucky, the fund management will now advertise that to the hilt, and attract foolish investors while the fund has some mean-reversion. The winner of a stock-picking contest is much more likely to be the beneficiary of luck, rather than being skilled.

I certainly wouldn’t want someone managing my money with the same strategy he used to win a stock-picking contest. That means he’s taking unreasonable risks with my savings.

Unfortunately, that is the way to make money as a bankster. You gamble with other people’s money. If you are lucky, you keep the profits. If you are unlucky, then you declare bankruptcy and cheat your creditors (see MF Global), or get a bailout. In that sense, the stock picking contests are doing the right thing, rewarding people for taking unnecessarily big risks.

4 Responses to How To Win A Stock Picking Contest

  1. Anonymous Coward May 24, 2013 at 2:45 pm

    > ought a different stock than the one he intended, and won.

    I’m afraid I did something similar. I purchased an oil company by mistake with a similar name to a natural gas company.

    The stock went up lots. I think I quadrupled my money.

  2. In a contest where there is no real money lost, of course you should take the highest reward risk. That doesn’t mean the same trader will take the same risk with real money. A smart trader knows the difference – when to take a risk and when to play it smart.

    • I definitely don’t want someone “smart” like Jon Corzine managing my money.

      Whenever you are playing with other people’s money, the incentive is to take unnecessary risks, because you get to keep the profit when you’re right and it’s not your loss when you’re wrong.

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