The Most Dangerous Game

I used to think that professional football – the American version  -- was the most dangerous game in the country.  That is, until I noticed a resurgence of a game that causes more lifelong damage: the stock picking and for young people.  Am I a curmudgeon for disliking these popular contests?  I don’t think so.

You may have read that recently a group of sixth-graders from North Dakota “beat” some of the best college business students in the country in a 4-month stock-picking contest sponsored by Motif Investing.  College students from prestigious universities including Cornell, Columbia and USC were given the opportunity to build baskets of stocks that they believed would create the largest return in 120 days.  Unfortunately, they were all humiliated by a group of 12 year olds from North Dakota.  This all seems like harmless fun, but is it really?

In my 25 years as a financial journalist and investment advisor, I have seen the dangers of these types of contests first hand.  Witness:

Nearly every investor I meet thinks investing IS picking stocks.  To make money, they believe; you must pick the winning companies.  Never mind that decades of academic research clearly show that stock picking is an exercise in futility.  Never mind that even the “experts” make less than index funds.  Never mind that people have lost huge amounts of retirement money betting on individual companies.  The initiation that most people have to the stock market is that they have to pick stocks.  It’s wrong and many people spend a lifetime being deprogrammed from this costly habit

The typical stock picking game runs three or four months.  If you think that picking winning stocks for a quarter of the year is a good game maybe a baseball game should end after half an inning.  Or a football game that runs 5 minutes?  Respected academics that have studied market behavior will tell you that any numbers less than 10 years are “noise.”  I could live with the brevity of the contest, perhaps, but what it really teaches young people is that such a short period of performance is meaningful, which it most certainly is not.  And many of those participants keep this belief the rest of their lives leading to exceptionally poor investor behavior.

How many portfolios of middle class Americans have individual stocks in them?  Millions?  That’s a guess but probably a good one, based on looking at hundreds of portfolios over many years.  How many middle class investors should have individual stocks?  Zero.  Owing companies one at a time is a huge amount of risk ( just ask the thousands of small investors that owned World Com, Enron, Washington Mutual, etc.).  Why do investors own individual stocks?  It is because owning stocks will help you “beat the market?”  Why do you want to beat the market? Because that’s what they learned  (as a young person) IS investing!

At least one of the young investors in the recent contest got it right.  One of the sixth graders’ explanations hit the nail on the head.  “It was sheer luck,” he said.  That was the last line in an article about the contest, but it should have been the first.