It’s official; I’m not the “Ultimate green tech investor.” That’s according to www.GreenTechInvestor.com, who ran a fantasy stock trading game from mid June to mid August this year. I participated, and did end up being one of the winners (I turned my fictional $200,000 into an equally fictional $775,000 in the two months the contest ran.) I think I won a book.
For readers expecting a sour-grapes rant, yes, I would have liked to have won the electric car. What green-blooded techie wouldn’t? But that’s not what I want to talk about. I want to use this stock trading game as a cautionary tale:
Stock trading games are not the real world. They are games. Please, do not let success in trading games make you think that you know how to deal with the real, live, stock market. If you do, you are just begging to lose money.
Returns like mine, and the ultimate winner, Russ Michaud, are not achieved through investing skill. I achieved my returns by manipulating flaws in the trading game, and I believe he did as well. In the real world, the best investors may have returns of 20% to 100% in a single year, depending on how much risk they take on, but over the long term, this can never be sustained. The only person in Forbes top ten list of the wealthiest people in the world to have made his money by investing is Warren Buffett (number two), and his average returns over time have been around 20%. At 20% annual returns, it would have taken over seven years to turn $200K into $775K, which I did in 2 months in the trading game, and I wasn’t even in the top five players. Buffett, on the other hand, is the top player in the real investing world.
Stock trading games are not like the real stock market.
Here’s how they differ:
- In stock trading games, no matter how much of a stock you trade, it goes through at the most recent price. In the real world, you buy at the ask (which is higher) and sell at the bid (which is lower), and if you are making a big trade, the price will probably get worse for you (higher when you’re buying, lower when you’re selling) in the middle of your trade
- In the game, I was frequently trading over 1,000,000 shares of stocks with average daily volume of just a few thousand shares. I probably traded more shares of several stocks than had traded over the entire life of the company.
- Russ, who won the electric car, said in an interview “My winning strategy keyed on playing the smaller ‘penny stocks’”—penny stocks are very low volume, so it would have been impossible for him (as it was for me) to replicate his trades in the real world.
- The reason we were both trading penny stocks is that the lack of trading means that penny stocks are often mispriced by a large margin. Mispricings are what allow investors and traders to make excessive returns. The difficulty in trading these stocks means that it is not very profitable to try to trade on these mispricings in the real world.
- It’s not real money. The hardest part of investing successfully is the psychological element. Human nature is to get out when things look very bad, and pile in when they seem good. An investor who wants superior returns needs to get in when most people are (wrongly) too scared to invest, and get out when everyone else is euphoric. This is emotionally very hard to do, and it becomes much, much harder when getting it wrong means your child isn’t going to go to college, or you’re never going to be able to retire.
Take-home message: Stock trading games may be fun, and you may win an electric car (or a book) if you know how to manipulate the system, but it’s lousy training for the real world of investing.
9/19/06: My book showed up. This is it: