Double or Nothing
We have a swarm of people in the stock market - not out of knowledge, not out of expectation, but out of basically a gambling instinct, the hope that prices will go up.
We all want to make money from the market, but is there a formula to do so, and to do so quickly? Unfortunately, this is not a guide on how to get that 500% return with a champion stock pick; instead, it's the sharing of simple philosophies on how to invest properly, and verifying claims made in a lot of financial advice.
You might’ve seen advertisements in the papers or investment magazines that go something like this - "Invest like a pro, earn a 334% return in 1 month!" or "This housewife turned to day-trading and made MILLIONS!". How often do you read about a champion-stock-picker who won a contest, and followed up to dig deeper into what stocks they bought? A few years ago, Channel News Asia (CNA) held a stock trading contest that may prove insightful to how you approach your own investments. Winning competitions and making money? As Singaporeans, we almost felt compelled to take a closer look.
Cue Dr. Moshe Milevsky, a finance professor from the Schulich School of Business at York University in Toronto. Having written numerous books about pension investing, nest-egg building, and retirement investing, what would an academic who advocates long-term planning know about outsized returns? As it turns out, quite a lot. Milevsky won Canada's famous stock picking contest (held by the national newspaper) multiple times - in 2002, 2003 and 2004. While there is an element of luck and chance, there was also a method to his success. In fact, he wrote a paper on this with another professor from the Mathematics department. Milevsky noted that to save or invest for long-term goals, you would need to utilise asset class expectations of return, and defer to modern portfolio theory; you would also need reliable sources of returns. However, in order to win short-term competitions, trading crazily to make millions, and then trumpet your achievements to a legion of followers, and getting them to sign up for your trading class, you would need a very different approach.
In his research, he states that you would need to find the most volatile of stocks, as well as stocks which were totally uncorrelated to the market (meaning that they moved exactly in the opposite way to the rest of the stocks). And that by doing so, you would have a 50/50 chance - the best odds you could possibly get from a stock which would either be drastically better or horrendously worse than the average market return. In essence, you would pick a stock which would either soar to win you the competition and adoration, or completely implode, and leave you in dead last place.
His picks on obscure companies granted him returns of +108.3%, +117.3% and +179% in the years he participated. When interviewed, Milevsky said that these unknown but volatile stocks were able to get you 100% returns extremely quickly, but also had the great ability to lose all your money in a flash. For instance, his winning stock pick in 2003 lost over -60% in the immediate 3 months after the contest. He also added that to win such contests, you cannot pick stable and solid companies, as their share prices do not move in such a manner.
So, the lesson we learn from all of this is that getting ‘insane’ returns, or the practices that allow the winning of such contests do not dovetail nicely with proper wealth management and portfolio construction.
Before you get all starry-eyed and sucked in by listening to how much money someone made, always remember to ask about those picks that lost money. Even the great Warren Buffett has chosen stocks that did not turn out the way he expected. Milevsky showed that getting a return in a short timeframe was possible, but given time, such picks will most likely perform horribly. Whenever you are faced with ads touting mega-returns, consider how it may have performed the year, 2 years, or even 10 years before.
Adverts that tout quick returns often avoid elaborating on the risks that come with it. Like Milevsky concluded in his paper - investing is all about balancing risk and return. Ironically, winning investing/stock-picking contests requires you to ignore this balance in favour of 100% return. It is by no means a recommended practice when it comes to actual money in reality. Like the saying ‘double or nothing’ implies - to win double, you must be prepared to get nothing.
