Tuesday, December 11, 2007

"Investing" Competitions - Blessing or Bane ?

Interestingly, the topic of trading and investing competitions first came up on another investor's blog. He was commenting on the salient aspects of such competitions and how they did not create a very real-life scenario for people to learn investing. For myself, I have always felt that the term "investing" was too loosely used in such education "seminars" and "competitions". The reason for the quotation marks (") is because I feel such events are thinly veiled attempts at trying to get people hooked to the business of trading, rather than investing. I shall elaborate further.

There have been a number of such competitions and games organized by I-Cube, SMU, NTU and NUS, in which investment clubs or societies team up with brokerages to offer students and the general public some information on the stock market and investing. The reporting and coverage of such events has always been skewed towards winning a prize or obtaining some monetary reward or recognition for being able to generate the most cash out of a virtual portfolio. Normally, contestants are given about 8 weeks of real time to "invest" (I use the word loosely) their money and generate returns. The ones who can "grow" their portfolio the most during this period of time would qualify to be the winner, and he or she will win a cash prize from the sponsors. The game platform will be set up to simulate a real-life trading platform, with live prices obtained from direct SGX feed blinking on the screen. Anyone from students, retirees to housewives can spend 8 hours a day frantically buying and selling stocks in the hopes of churning up the best portfolio, and the contest here is to see who can "hit it big" by buying (or shorting) the right counter.

I must say all this frantic activity is the total opposite of investing ! When the organizers mention that such contests teach participants about the virtues of investing, they are indeed doing them a great disservice. By constantly confusing trading with investing, the poor contestants will think that the way to make money easily in the real world is through frantic trading ! Note that in the virtual world, there are no brokerage costs and no SGX clearing fees. Not only that, but one can even buy as much as they like even when there is no seller (thus distorting the actual concept of "queueing" for the shares of a company at a specific price). With such rules to "simplify" the game, it is no wonder that participants think that profits are so easily made in the real world, and their impression of proper investing may actually equate with the frantic buying and selling on the stock market. In value investing terms, this is a pure fallacy and it has been shown that frantic trading reduces gains in the long-term because of frictional costs, and constantly trying to second guess which are the best counters in terms of price will lead to at most average returns. Plus, some people risk a lot of capital in such games when they do a contra, which should NEVER be tried in public unless you wish to risk bankrupting yourself.

The strange thing is that the winners of such trading games (ok, I have quit using the word "investing" when referring to such games, as I think it's a farce) normally do not do very well in the real world. I remember reading some examples given where a winner of such games enjoyed a less than mediocre gain in the real stock market. This is because the element of emotions has been taken out of the game, and most contestants do not realize this. Trading within the game is "fun" and "stimulating" as it does not involve REAL money. Imagine putting your hard earned money on the block; suddenly the game seems a lot less fun. This is the sinister side of trading games which most organizers do not mention; the emotional aspect.

I had better stop here as I can go on and on about such games, which I feel are a complete waste of time as they are designed to teach people how to trade and enrich the brokerages, and do not impart any useful life lessons with regards to proper investing. Thus, to summarize, these are the reasons for my vehement dislike of such "game":-

1) Confusing "Trading" with "Investing" - This is of course done on purpose, for the primary motivation for a brokerage is to encourage churn; and what better way to increase churn rate than to educate a bunch of people that making money through trading is so easy ?

2) Unrealistic Trading Platforms - Virtual trading platforms are free of brokerage costs, which is like saying in physics that "please assume all surfaces are frictionless". In an ideal scenario created for an ideal world, the only imperfection is the human, right ? Cynicism aside, let's all get real and show people what the REAL world is like, instead of hyping up trading in a false and pretentious environment. Buying when there is no sell queue and selling when there is no buy queue is like saying you can create matter from nothing. In reality, illiquid stocks are hardly tradeable and their bid-ask spreads may be very wide.

3) The Psychology of Trading - The most gnawing difference between real-world trading and virtual trading is the absence of emotions such as stress, greed and fear. This distorts the true nature of trading and makes it look fun, easy and even entertaining. Nothing could be further from the truth. In forums where people trade shares, many people are constantly observed to be nervous, angry, disillusioned, fearful, greedy or euphoric. This cocktail of emotions can severely affect your ability to execute a proper trade.

4) Lack of Proper Education for Investing - There is virtually no proper method of teaching for value investing or even investing in general. No brokerage firm I know of talks about the virtues of buy and hold and most books in the bookstore (I would say 80-85%) talk about timing the markets and trading feverishly. For the uninitiated, this would seem like the "correct" way to make money from the markets. Singapore does not have a proper framework to educate the general public about investing, and everyone seems to go around in a half-dazed state wondering what investing is all about. Let's say it's an uphill task trying to explain to people about investing, let alone value investing !

I must say this post is quite a rant, but I had to get this topic off my chest for a while, and what better time than this, when there is little newsflow from the companies I own ?

Note: I will be travelling to Vietnam on a business trip from Wed Dec 12, 2007 till Friday Dec 14, 2007. My portfolio review will be done as usual on Friday.


TheKen said...

im glad you raised this topic, this has always been floating around somewhere in my mind too.

this so called "investment challenges" just breed Gambling among the ignorant.

like sheeps led to the slaughter house. this competitions are made in such a way so as to condition the participants to gamble on the stock market.

should the sheeps then decide to graduate to the real world. their risky gambling provides the high turn over that the sponsors of such competition, the brokerage firms, wants.

of course, naturally, all the risk that goes with gambling in the stock market is taken by the poor ignorant first timers, who probably thinks they are "investing" and that they have already cut their teeth on several such "investing challenges" !.

hope you dont mind if i copy and paste your post with my comment into my blog

musicwhiz said...

Hi theken,

Competitions are held periodically by the brokerages to "educate" the young and impressionable about the virtues of "investing". In reality, it is more like a recruitment process for a whole new batch of traders with which the brokerages can milk for profits. Subtle but very insidious.

Brokerages always have a vested interest for promoting such events, as they will not sponsor prizes for no rhyme or reason. Understanding the underlying motivation behind such "games" could certainly enlighten many a budding investor, and allow him to avoid the pitfalls of trading and the costs that come with it.

Actually, I would prefer it if you can give your own views on trading competitions and then have a link back to my blog, raher than suggesting copying and pasting my posting wholesale. Thanks for your understanding.

Regards, Musicwhiz

fishman said...

Hi Musicwhiz,

I totally agree with your statement "they are designed to teach people how to trade and enrich the brokerages, and do not impart any useful life lessons with regards to proper investing".

Glad that I didn't join in those competitions early on in my investing education, or my principles might be very different from it is now!


musicwhiz said...

Hi fishman,

Yes, I think those who joined the competitions early on in their investing journey and WON would have a skewed view of what investing was about. It would be harder to switch from punting to investing by then, so the brokerages are really NOT doing any of these young adults a favour.

Regards, Musicwhiz