Original Publication Date: April 14, 2016

Key takeaways:

• The typical stock picking contest, while often promoted as a test of skill, takes place over too short a time period for the effects of skill to overcome those of luck. Real-world investing is a process that unfolds over decades, not months or single years.
• Numerous business schools promote versions of the stock picking contest which are either pitch competitions which inevitably consider presentation skill over idea merit, or suffer the same timeframe shortcomings as a typical stock picking contest.
• My proposed contest model would teach longer term thinking around investment selection and potentially increase attendance at class reunions.

We humans sure love contests! For millennia we have entertained ourselves with contests based on luck, skill, or some combination of both. Luck-based contests such as lotteries and sweepstakes provide entertainment but say little about the winners’ merit. In pure skill or talent-based contests, such as racing in all its forms (100 meter dash, 200 meter butterfly, the Indianapolis 500), winners are determined by a single objective criterion - fastest to finish. Most contests that gain our attention and interest, however, include some combination of luck and skill, such as singing and dancing competitions where talent is important but winners are determined by judges’ scoring or a form of voting rather than an objective criterion like fastest time. (There is an interesting derivative argument a group of my friends has had over many years around what defines a sport versus an athletic competition, the conclusion of which is available here.)

This brings me to the subject of one of the more popular contest types that have grown in popularity alongside investing, the stock picking contest. While stock picking contests and their kin, such as guessing the closing value of the Dow Jones Industrial Average at year end, have been around as long as there have been stock markets, the golden age of the stock picking contest appears to have been from the late 1990s until the 2008-09 financial crisis. This 1999 Wall Street Journal article entitled “Stock Picking Contests Help Teach Novices About Investing” describes typical contests involving the management of a virtual portfolio of a hypothetical dollar amount, such as $100,000, for a given time period, typically one month. I doubt it is coincidental that the dawn of the Internet age and the late-90s dot-com bubble occurred at the same time as the surge in interest in online stock picking contests. CNBC for years held a “Million Dollar Portfolio Challenge” that encouraged contestants to maximize trading gains over a five week period using stock and currency markets. A Google search has led me to conclude that CNBC stopped sponsoring this contest after 2011.

My last note discussed how our culture favors winners and championships. The reason most contests, competitions and tournaments happen over a short time horizon is that humans have a short attention span and easily lose interest in events that do not reach relatively quick conclusions. Short-term results in investing, however, often owe more to randomness, or luck, than to skill. In 2007, James Altucher wrote an article for Thestreet.com called “How to Win a Stock Picking Contest” that to me sums up all that is wrong with this type of game. He says, “Simply put, you want stocks that are most likely to make quick moves in short periods of time, because most contests don’t last for more than a couple of months.” Because investment horizons span decades or longer, the only way a stock picking contest strategy could work as an investing strategy is if it could be successfully, consistently repeated hundreds of times. Any break of a long string of success would likely derail the entire strategy - losing 50% or more of a portfolio in a single year could wipe out many years of success.

Still popular with some business school investment programs are “stock picking contests” that provide students with the opportunity to analyze and present their ideas to panels of judges. Cornell’s business school has one; Ivey Business School in Canada has one; as do business schools at The University of Michigan and Columbia. The CFA Institute also has its Research Challenge. These contests give students a great opportunity to learn and apply the tools of investment analysis in pitching their ideas to panels of judges usually comprised of well-known investment professionals connected with the respective schools or organizations. Winners are often rewarded financially, and always rewarded with bragging rights and an enviable line on their resume. However, it is important to think about what is actually being judged and rewarded. On the day of the competition, nobody knows how well the ideas being pitched will actually perform over the coming years and decades. What is actually being rewarded by the judges - the best idea, or the best presented idea? What is being tested - investment skill or presentation skill? While both play important roles in one’s life and career, one should not be confused for the other.

When one designs a learning exercise, the most important element is to consider the learning objective first. What would a stock picking contest designed to teach investment students the elements of investment analysis and long-term stock selection look like? If in a university setting, how could it be built to accommodate the constraints of courses that last for only a few months? I will not attempt to cover every nuance here, but I think the bones of a contest structure should include the following:

• There must be some element of results-based orientation that would necessitate the contest extending into the long term or the very long term, well beyond the confines of a single semester or a single year.
• If there is a semester-length or tournament-style component to the contest, the contest organizers should strive to separate the subjective components - the analysis and presentation of the analysis - from the objective component - the long-term performance of the investment idea promoted by the contestants.

Anyone who has written and received a grade for a college-level English paper understands that there will always be some level of subjectivity in evaluating advanced work. However, I have seen time and again how a contest mentality in an investment analysis setting not only encourages the best talkers over the best analysts, but also how excellent analysts who may be less verbally adept can find themselves unable to match barbs with well-crafted arguments from respected colleagues. These analysts may find their ideas ignored and may even wrongly lose self-confidence.

My proposal for a university investment class-based stock picking contest would not be particularly ready for TV or even an auditorium audience, but it would contain elements that are sorely lacking today that could teach important lessons to those genuinely interested in how the investing process really works. This contest’s rules would be as follows:

1. You start with a virtual account of $100,000.
2. You can choose one stock.
3. You may sell your entire position after five years, and deducting income taxes at the highest capital gains rate for the state and country in which your university is based in the year of the sale, invest what’s left in one new stock. You also have the option to continue holding your original position with no tax penalty.
4. Dividends if any will earn money market interest rates in the currency in which they are paid. The interest will be fully taxed at the maximum marginal rates for interest income.
5. You will have the same option to hold or reinvest in year ten and every fifth year thereafter.
6. The contest ends thirty years from the last day of the class.

This model would not be easy for many institutions to pull off. The first and most important thing required would be some sense of continuity at the institution. (This, unsurprisingly, is also a character trait of a worthwhile long-term investment.) Credible institutional support would have to be part of a contest structure that that I propose. This contest model could easily be paired with a pitch competition, which undeniably teaches useful skills and provides valuable experience to contestants. Winning the pitch competition, however, would not equate to winning the contest. The end of the pitch competition, in effect, would mark the beginning of the contest. I believe the discipline of holding a single stock for a minimum of five years as a contest rule would serve as a focusing factor and would also help to mitigate the role of short term factors. “Owning” a stock for five years, unable to sell, and having your (presumably competitive) classmates also know you own that stock might be as close to having skin in the game as you can get in a classroom environment. Moreover, because this contest would go on for thirty years at the outset, and be limited to a single investment idea, students would be highly motivated to put all their effort into researching the long-term merits of that one idea. This wouldn’t be a beauty contest. Thinking about taxes is something I have never heard of in the context of a traditional stock-picking contest, but it would add a serious switching cost that real life investors face all the time. What might be lost in the spectator sport element of the actual contest could be gained through the contest sponsors organizing reunion events every five years where teams would have the ability to make their switch or hold decisions.

If you teach finance or are or have been involved in stock picking competitions, I would love to know what you think. Have you heard of such a long-term contest? Do you think the current “stock pitch” model adds enough value in its current form? Have you participated in stock picking contests before? What did you like or dislike about them?