Probabilistic Investing: Or How to Win the Globe and Mail's Stock Picking Contest (50% of the Time)
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Résumé
Abstract For the past nine years the Globe and Mail (Canada's oldest national daily) newspaper has held an annual stock picking contest. In 2002, 2003, and then again in 2004, a finance professor won this contest. Motivated and inspired by the contest, this article shows that a rational player can increase the odds of winning an investment contest to a 50/50 chance by selecting a stock that (1) is highly volatile, and (2) negatively correlated with the other selections, or (3) exhibits a negative empirical beta. We conclude by arguing that picking stocks to win an investment game or contest is quite different from selecting securities for a personal investment portfolio. © 2005 Academy of Financial Services. All rights reserved. Jel classifications: D14; G11 Keywords: Personal finance; Investment decisions; Portfolio management 1. Introduction For the past nine years, the Globe and Mail (Canada's oldest national daily) newspaper has held an annual stock picking contest entitled My One and Only. In this competition, which starts on January 1 of each year, a variety of financial commentators, money managers, and academics are asked to select one stock (from the universe of stocks trading above $1) of any public company quoted on the Toronto Stock Exchange (TSE). In addition to human participants, a completely random selection is added to the competition as well, usually chosen by a child or a mechanical toy. The performance of all entries are tracked daily on a popular web site and reported on quarterly in the printed version of the newspaper. The formal winner of the contest is the sole individual with the best performing stock at the end of the year, based on the last day of trading for the year. The final results of the contest are announced with much fanfare and publicity on the front page of the Report on Business section in the first week of the subsequent year. Aside from the extensive publicity (negative or positive) from being part of the game, the winner's only reward is a coffee mug, compliments of the Globe and MaU. There are no financial rewards or penalties for placing second, third, or dead last In 2002, 2003, and men again in 2004, a finance professor at one of Canada's leading business schools (and one of the authors of this article) won the contest by beating all other participants, as well as the TSE market index by a wide margin. And, although it is easy to dismiss such results as completely attributable to luck, the main thesis of this article is mat there is, in fact, a well-developed theory behind optimal behavior in such a contest A rational and cognizant player can substantially increase the odds of winning the investment contait by playing the game optimally. We will review this theory in detail and stress the practical insight that picking stocks to win an investment game is quite different from selecting securities for a personal investment portfolio. In other words, motivated by this investment contest and the surrounding public interest, our article takes the opportunity to review the theory of probabilistic investment games and provide some anecdotal evidence as well as rigorous insights into the best way to win the Globe and Mail's stock picking contest We show that a rational player can increase the odds of winning the investment contest (to a 50/50 chance) by selecting a stock that (1) is highly volatile, and (2) negatively correlated with the other selections, or (3) exhibits a negative empirical beta. And, although the first ingredient might be intuitively obvious, the second and third are not Our main practical objective, however, is to illustrate the critical difference between a rational and prudent strategy for building wealth versus the optimal strategy for picking stocks in these all-or-nothing contests. And, although there are many such investment games in existence (e.g., the Wall Street JournaTs quarterly analyst versus dartboard contest) the national stature and exposure of the Globe and Mail contest makes this an ideal case study. …
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|---|---|---|
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