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HOW DO YOU COMPETE in an investment contest when you’re a firm believer that investors can’t consistently beat the market averages? That was my dilemma several years ago.
A school not far from where I taught was given money by an alumnus to endow the St. Louis Area Collegiate Investment Contest. All colleges and universities in the area are invited to participate in the competition, which is held regularly. Each is given a hypothetical $1 million and asked to select 20 value stocks. An outside investment firm oversees the contest. They “invest” $50,000 in each of the 20 stocks. Whoever’s portfolio is worth the most two years later wins $10,000—real dollars, that is.
How do we select the 20 stocks for our entry? When I explain the contest to students, I also discuss the evidence that most investors don’t outperform the market. I suggest we could tape the stock pages of The Wall Street Journal to the wall and literally throw darts at it. Several students like this option.
But instead, I distribute Value Line’s current list of 100 stocks most likely to outperform the stock market over the next year. To focus on value stocks, I take these 100 stocks deemed most likely to outperform, circle the 40 or so companies with the lowest price-earnings ratios and ask students to select stocks from this list.
Value Line Investment Survey, which is often available at larger libraries, evaluates approximately 1,700 stocks. Value Line gives each stock a timeliness rating from one to five, indicating its belief that the stock will outperform the market over the next year. My initial list for the students draws on those stocks rated one for timeliness.
Rating Number of Stocks Meaning
1 100 Most likely to outperform
2 300
3 900
4 300
5 100 Least likely to outperform
Value Line has a full-page analysis of each of these 1,700 stocks. Each stock gets a full review every 13 weeks, which means each week it updates this detailed analysis for about 130 stocks. But each week, all 1,700 stocks are evaluated for timeliness.
Some 30 or 40 years ago, there were a few academic studies indicating that Value Line could outperform the market averages. I have seen no recent independent studies of Value Line. My guess is that any advantage Value Line might have had decades ago no longer exists.
While I don’t believe Value Line will outperform the market, it’s one way to narrow down the list of potential stocks. It’s definitely safer than letting college students throw darts in a classroom.
Six schools entered the first contest. We won, receiving $10,000 and an oversized check. I took the check to our next faculty meeting and bragged about our business students. Most faculty assumed I had superior stock-picking skills, and I did not disabuse them of that view. But in my heart, I firmly believed it was just luck.
Six years later, we won again. If six schools enter each year, we ought to win about every six years. I didn’t point out that obvious fact when I went to the faculty meeting with that oversized check.
The very next year, we won again. Did that indicate we had a winning method? No. If six schools enter, and if the winner is completely random, the chance of this year’s winner winning again next year is one out of six. While my method of picking stocks might be superior, I believe two wins in a row is simply a random occurrence.
Recently, the contest was modified. Instead of starting just once a year, it now starts every semester. The payoff for winning was reduced from $10,000 once a year to $5,000 each semester. The number of participating schools has dropped to just four or five, increasing our odds of winning each contest.
Although I’m now retired, our school continues to follow the above method. Over the years, we have won $35,000. We call it our slush fund. Our department has used that money for additional faculty enrichment opportunities, student awards, end-of-the-year catered dinners for graduates and their families, and a host of other good causes. Perhaps most important, our finance students have learned some important lessons about how the stock market works.
Larry Sayler is the only person with a Wharton MBA who also graduated from Ringling Bros. and Barnum & Bailey’s Clown College. Earlier in his career, he served as CFO for three manufacturing and service organizations. For 16 years before his retirement, Larry taught accounting at a small Christian college in the Midwest. His brother Kenyon also writes for HumbleDollar. Check out Larry’s earlier articles.
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“ It’s definitely safer than letting college students throw darts in a classroom.”—- !!!
UPDATE – About 12 hours after this article was published, I received an email from the school that sponsors this competition that all future contests are cancelled. Contests in progress will continue and prize money will be awarded. They gave no reason for the cancellation.
Oh no! Due to this article, you think?
I don’t believe the two events are connected. The number of schools that participate has been slowly decreasing, which is too bad. The contest has been useful for teaching some lessons. Students seem to pay attention more when real money is involved. My guess – the sponsoring school decided they had better things to do with the money.
Investing via Value Line may be safer physically, but not fiscally. Good luck!
Pretty cool! I’ve always wanted one of those big checks.
In 1998 in my high school business course we did something similar where we had to pick a stock and track its performance in the newspaper. Having no idea what it was I selected Amazon because (as a geography buff) I liked the name. Would but I have had any money or foresight to have actually bought it then!!
Did you also compare your results to investing in a total market index fund? This contest appears designed to teach exactly the wrong message.
Just doing a very rough comparison via google pricing for the Value Line 100 index vs VTI (Vanguard total stock market index) shows the Value Line 100 getting trounced.
(Several caveats: only goes back to 2007, does not account for dividends, it might be argued this is not the most comparable index, etc.) I would have used my preferred Portfolio Visualizer, but I couldn’t find the Value Line 100 index in it’s list to compare.
I agree that the contest teaches the wrong lessons. But I can’t control what another school does, or what the donor to that school does. All I can do is react to what they have done. I really had to think about how to respond to the contest.
I don’t measure how our portfolio has done vs. the index. I imagine that once in a while we beat the index, thanks to luck, but most times we underperform. It is a two-year time contest. All the students who chose stocks have graduated and moved on.