Stock Picking Contests Are Stupid

Why do stock-market contests continue to exist? I even had them in my high school Economics class, as if they were a useful learning tool. The goal is always to have the most money within just a few months. Since it’s always done with fake money, there is no punishment (like say, poverty?) if you lose everything. Only the top 0.01% win, and the rest lose. How is this applicable to real life at all?

I was reminded by how much I dislike such fake contests when I read about how CNBC’s Million Dollar Portfolio Challenge ended with a whimper. A quiet announcement revealed that waitress who’d never owned any stock before beat out 377,000 other participants to win the $1 million prize. But what got the most attention was the fact that people figured out a loophole in the system (being able to trade after the markets had closed) and cheated their way to great gains.

What have I actually learned? First,such short-term stock picking contests are about luck, not skill. A slot machine pull would be both faster and easier. Second, there will always be people trying to cheat the system, and many will get away with it. I find it very hard to believe that the SEC catches the majority of insider trading or other short-term manipulations of the market (you know, like Mad Money guy Jim Cramer used to do.)

I continue to ignore short-term variations of the real stock market as a result, and I often urge my family and friends to do the same. It feels like a lost cause though, as watching stock market gyrations has become America’s new favorite pastime and water-cooler material.

Added: The Motley Fool also has a nicely written article on what they term the CNBC’s “Portfolio Challenge” Fallacy.

Comments

  1. My high school economics class played the stock market game. Winning the game is about luck. But still I think stock games are a useful way for first time investors to get a general lesson on stocks.

  2. I remember doing something once during a summer school math class! Even at that point, I realized that this exercise was pointless, so I invested all fake $50K in some random penny stock. I, of course, won by sheer luck and was counting on the stock’s incredible volatility. On the other hand, a friend invested his fake $50K in some solid company that had great dividends (which of course didn’t matter in this game) thinking that he could count on its continual growth. He, of course, was wrong, because he was thinking about real life and not some contrived stock picking game.

  3. I agree with you on the contests for adults as they promote short term trading and involve a large degree of luck.

    I would argue that a stock contest for students has some valuable lessons. This could be a valuable teaching tool is used properly. I still remember a contest I had in seventh grade which first got me interested in investing.

  4. Yeah, these things have always struck me as stupid because they reinforce the wrong aspects of the stock market for the individual investor.

    I remember finding a loophole for another one of these games that let you buy a stock at the closing price, meaning if you saw that it spiked after-market, you could buy it for the closing price and circumvent reality. Stupid games…

  5. I do think alot of the stock market is luck because of all the insider trading, but part of it is also skill, so you pick mostly stock that have a good growing company.

  6. They must teach you something. I personally wish I’d paid more attention to them before. Right now I do have some money and I’d like to get into the stock game, but I know absolutely nothing.

  7. A friend of mine also legitimately tried to play the CNBC game, but told me he kept getting beat out by people who would create dozens to hundreds of profiles each, filling their entire portfolios with just one stock, and betting on the upswings over that time period would be big for just one company. He tried contacting CNBC about that loophole, but they told him it didn’t break any rules.

  8. Short term gains and speculation is indeed the favorite pastime of americans. I can see that everywhere and in my company. The price swings in the heavily traded stocks within a lateral range week after week is often a indication of this. However, if you understand the stock well, there is a easy profit for the taking (eg $50-100) by resorting to such speculative practices and minimal risks.

  9. sounds like a good couple days for waitresses, considering another waitress got a $10,000 tip to go to college.

  10. Siggyboss says:

    You made some good points. Still, it’s exciting and will perk the interest of the audience. Also, the short-time frame of day-trading and risking most of your assets would suit a young investor. Yet, the model all falls to pieces with fake money and/or fake prizes. I wonder how things would turn out if it had some weight to it?

    One of my MBA classes had the same game for a quarter, and your performance affected your grade: you could only benefit, but lose ground in a curved class. He also let us choose stocks, bonds, and cash generating interest. The explanation for the trades was also considered. Like a hedge fund, if you were in trouble near the end you through caution to the wind. I learned a lot.

  11. People play fantasy football, why not fantasy stocks? Whatever floats their boats. That said, I don’t compete in these things personally.

    However, I’ve found much entertainment on the Vanguard Diehards forums whenever penny-stock enthusiast “Munchkin Man” posts about his friendly contest with the Diehards. (His penny-stock portfolio versus various Vanguard mutual fund portfolios over one year.)

    And, as a good sport, he has acknowledged losing to just about every Vanguard portfolio presented to him as competition. There’s a valuable lesson in that friendly competition!

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