Gauging of interest: LW stock picking?

If more than a few LW'ers participate, the reliably best strategy to win $50 with play money would be to just invest in some very volatile option or other derivative, which'll either win over any conservative strategy or bomb out. Also the least amount of work, fire and forget.

full disclosure: due to earning money in two different currencies (local + remote job) I must engage in forex market to some degree. This lasts for over 2 years now so I think I have some experience now. (Yes, it's a bit different than stock market, but still)

Almost everyone wins with toy accounts, but not with real money. People usually don't understand fully why that is. Let's get the obvious out of the way: on a toy account you think: "I'm going to test this strategy!" With real money you think: "f###, f###, f###! If I don't sell now and it drops more, I'm going to loose 3 months of income!" - that's the usual risk aversion everyone knows about. It's only devastating at the beginning - after a while you'll train it away to acceptable degree.

Now consider not-so-obvious stuff that doesn't happen with toy accounts and never goes away:

• you crashed your car and you need to sell some stocks at whatever price they're currently at to buy yourself a new one
• you found a bargain sale (say, a house) that you'll be able to resell for twice as much next year
• you came up with an idea for a new cool product. If you don't invest in it now, someone else will

In summary - the hidden cost of freezing your assets until your prediction/strategy is profitable (even assuming it's correct) is often higher than you'd like, not to mention time you need to put in evaluating this mess. This is the reason why I currently use forex only for hedging strategies (buy/sell currencies ahead of time at good price - when I know I'll need it in the future). But that's not even possible for stock market.

My advice: forget this thing. Just do what what you love and what you're good at: learn a skill or language, change job, start a business - invest in yourself! If you're not inherently interested in finance then stock market will be a waste of your time - you could use this time better (but not easier!) in your own field. Market offers a false promise of effortless gain.

At the end of this contest (Dec 31, 2013?), I will commit to Paypal the winner (defined as the person with the highest market valuation of play assets as of midnight on that date) the equivalent of $50 CAD in their local currency.

Bad idea. That would reward risk-seeking behavior, which is the opposite of what we usually want.

It's almost irresponsible to discuss this without addressing Efficient Markets, which more or less suggests that this is a bad, no good, terrible, rotten idea.

I only half mean to be rude, and don't mean any personal offense.

I've only met a few professional stock-traders, but of the two that I asked, both were aware of the heuristics and bias literature.

A major problem with stock picking and other similar forms of investing is that transaction fees tend to eat up your profits. My brother, who works on finance, placed a bet on gold prices with some of his personal savings; his prediction was correct, but he lost money on the transaction fees.

To avoid the mentioned risk-seeking behaviour, you could split your $50 proportionally to the amount of virtual money made.

The problem is that you're setting up the goal of being #1 in a (presumably) large group, which creates wildly different incentives than actual investing. The proper strategy is to pick a single investment with volatility such that it has a (1/number of participants) chance of being utterly dominant at the end of the period, because a moderate return is no better than bankruptcy.

I've done well at stock market speculation over the past 12 years. It took me 20 years of doing it to become good at it. If I'd had LW available when I started I expect I could have become good in around 5 years.

One of the difficulties was that with most strategies, 1-year returns are sufficiently dominated by luck that the feedback is nearly useless.

The contest might be valuable if it lasted close to 5 years and wasn't a winner-take-all event. Would that attract any participants?

One of the troubles with stock contests is that the timescale becomes very relevant. I like that you've picked a year- most of the ones I've seen are only a few weeks, and so dramatically overreward luck and leverage. Even then, a year is not all that much time for the value investor (the brand that tends to make the most out of not sharing Mr. Market's crazes), and I suspect you're better off learning investing from investing professionals (either by getting an account with Motley Fool, or reading The Intelligent Investor, or so on).

I remember reading a few years ago about a fund that wanted to use data mining of investment newspapers for psychologically relevant words, to predict how Mr. Market would behave, and so make money off of anticipating his swings. I don't remember its name and don't seem to be able to find it now.

Have people put in real money. That way incentives are aligned. Anyone who can't afford to put in a few grant has more important things to be doing than studying the stock market anyway (exception: investment banking interns)

The source of that story is Benjamin Graham.

http://en.wikipedia.org/wiki/Benjamin_Graham

In general I suspect that a) EMH is wrong in some cases b) Good amount of instrumental rationality should give one some advantage (Warren Buffet and his partner Charlie Munger have studied rationality, including specifically Kahneman).

I'm not sure having a contest is the best way to go about this though. I've tried to convince some people (unsuccessfully) to engage in a group study of the area, my goal was to create a "portfolio team" where expertise may be shared and people can better control their biases.

Sounds interesting! My participation is primarily contingent on how easy the software platform you end up finding is to use.

Assume this guy is right. How long before the "low volatility" premium disappears?

If I actually had a good way of picking stocks, I would simply invest in those stocks. The $50 is hardly worth bothering with.

Better to go straight from mass humans feedback to algorithms surely? Interface is wrong with this: too complicated for some of those who might otherwise be interested; perhaps accessibility is equal with rightness; that's communications? Instead let trusted relationship develop by feedback from high sensitivity and select for a 'secure attachment style' otters holding hands etc? Should be able to see it catalyse intelligence develop around it.