A Random Walk and a Bite to Eat

Katherine Mangu-Ward | June 20, 2007

It's not quite the random walk hypothesis in action, but it looks like the winner of a stockpicking contest sponsored by CNBC might be a waitress who "never even paid much attention to the markets before signing up for the challenge."

Business Week reports that Mary Sue Williams "of the tiny Appalachia town of St. Clairsville, Ohio" is showing a 29 percent return so far in the two-week contest. The prize is $1 million. The story writes itself from there:

Williams has already bested thousands of financial professionals [375,000 entrants overall] who entered the contest with Ivy League degrees and complex trading models. "Part of this was luck," she says. "A lot of it was a gut feeling, some eenie-meenie-minie-moe, and common sense."...

To pick specific stocks, she used the Warren Buffett approach: Invest in what you know. "I was looking for companies that had something to do with my life," she says. That led to some of her most memorable picks, among them lubricant manufacturer WD-40 (WDFC) and Crocs (CROX), best known for its sandals.

For a little more random strolling down Wall Street, go here.

Comments

|6.20.07 @ 2:48PM|#

"...Arizona pulled their usual Peyton Manning..."

|6.20.07 @ 2:52PM|#

"I don't know what a Terp is, but there's nothing cuter thana bulldog.

Except a turtle."

|6.20.07 @ 2:58PM|#

If I bet my life savings on a hand of blackjack and won, would anyone think I was ingenious?

The problems of predicting future stock prices are compounded when you throw in factors like a time limit and take out factors like using your own money.

The Journal's been putting up professional stock pickers to compete against a dart board for years. ...embrace uncertainty and account for it--I don't think there's much more to learn from that.

|6.20.07 @ 3:05PM|#

I have a cunning plan. I'm going to buy a bunch of chimpanzees and employ them as stock pickers and mutual fund managers. Thus giving a whole new meaning to Monkey Tuesday.

At MonkeyPick.com, we'll beat other firms by our extremely low overhead.

|6.20.07 @ 3:06PM|#

What an idiotic post.

How is "investing in what you know" anything like a random walk?

Basically all you are doing Kathy is saying that waitresses that know less than you do about the stock market are idiots.

That hardly seems like a libertarian attitude.

|6.20.07 @ 3:06PM|#

Hmmm. I would have quoted this bit...

In a field of 375,000 contestants with 1.6 million portfolios, someone has to finish first. Lubos Pastor, a finance professor at the University of Chicago's Graduate School of Business, says that in a contest like CNBC's, with a short time horizon, there's no reason that the pros should have any advantage over novices armed with smart strategies and good fortune.

...and made it a story about how neither the media nor the public understands large numbers, statistics, or random processes at all.

But BusinessWeek apparently understands how to sell magazines.

|6.20.07 @ 3:07PM|#

Crox?

Yech. Bad pick.

Ryo|6.20.07 @ 3:08PM|#

There is one good piece of financial advice in this article.

Mark, who holds a degree in archaeology from the University of Arizona, is a cook at a nearby Denny's

Don't get a degree in archaeology.

|6.20.07 @ 3:12PM|#

I find the Ouija Board to be vastly superior to the Magic 8-Ball, for managing my vast private fund. And after your picks go tits up, and trundle off to that Great Stock Exchange in the Sky, you can still communicate with them from time to time.

|6.20.07 @ 3:24PM|#

Isn't this the same as winning the March Madness pool with your "my favorite colors" brackets?

|6.20.07 @ 3:26PM|#

How is "investing in what you know" anything like a random walk?

Because 375,000 people "investing in what they know" results in exactly one winner.

Basically all you are doing Kathy is saying that waitresses that know less than you do about the stock market are idiots.

Are you suggesting that one genius and 374,999 stupid people entered the contest and the genius won?

She did do one smart thing...

His wife followed a straightforward strategy, one suggested to her by her mother-in-law. She typically spent about an hour a day checking the financial Web site Earnings.com for companies that were about to announce their quarterly results. She figured that companies reporting earnings were the most likely to see big moves.

...if you can't increase your average, increase your variance.

|6.20.07 @ 3:28PM|#

There is a poker analogy here too. Sit an amateur down at a final table against Daniel
Negreanu and there a damn good change they'll win. Sit them down at 100 final tables and I'll make money every time betting on Negreanu. Contests like these do very little to prove that professional stock market players are no better than amateurs. They simply provide a feel good moment for us amateurs and illustrate the danger of overinterpreting short term fluctuations. On the other hand, it may very well be that pros don't outperform amateurs; this contest simply has nothing to say about it.
-K

|6.20.07 @ 3:41PM|#

375,000 people "investing in what they know"

First, 375,000 people did not invest in what they know. That's a Buffett strategy. I am sure many used astrology or technical analysis or whatever.

Second, if say, Warren Buffett had played the game and won, would the headline still be about random processes or would the headline now be about how expert Warren Buffett is?

Thirdly, 375,000 people investing in what they know IS NOT A RANDOM WALK, 375,000 people picking random stocks is a random walk.

Fourthly, your "smart move" comment again shows she did not follow a random walk.

Fifthly, how did an actual random walk do in this contest?

All Mangu is doing is demeaning this woman because she is just Jane Random and saying Jane Random.

Tym|6.20.07 @ 3:42PM|#

Crox?

Yech. Bad pick.


Not exactly:

But at this boint it looks like a short candidate?

|6.20.07 @ 3:50PM|#

Three things every mother should drum into their children's heads:
1 look both ways before you cross the street
2 don't talk to strangers
3 diversify your investments

The problem with contests like this is they tend to reward foolish but lucky investors who put it all on a long-shot.

ed|6.20.07 @ 3:52PM|#

Up 29% after two weeks?
Let me know how she's doing after 30 years.

Gilbert Martin|6.20.07 @ 4:05PM|#

"The problems of predicting future stock prices are compounded when you throw in factors like a time limit and take out factors like using your own money."

Yeah - especially the using your own money part.

Taking a flyer on some stock in a contest using play money where one has nothing to lose is a hell of a lot different than making stock picking decisions where one's own money is on the line.

Ellie|6.20.07 @ 4:06PM|#

Meaningfulness aside, I think it's nifty. She must be so excited. And hey, if she does win the million, she'll probably invest it well!

VM|6.20.07 @ 4:10PM|#

Cool, Ellie.

(Jerry seems a little bitter today. Maybe he lost?)

|6.20.07 @ 4:12PM|#

I can attest to the "your own money" aspect to this. I keep two portfolios in my account; my "real money" one and my "fake one".
YTD:
"Real Money". Up 6.5%
"Fake Money". Up 23.6%

Now that's just my money. Compound that if you're a fund manager where it's somebody else's money...

|6.20.07 @ 4:15PM|#

Not just lost! Worse than a random walk!

|6.20.07 @ 4:24PM|#

Wow. Two whole weeks.

The test - does she know when to sell?

Minion of URKOBOLD|6.20.07 @ 4:26PM|#

The URKOBOLD willed her to win. It's NOT RANDOM.

NOW TAKE A WALK.

|6.20.07 @ 4:55PM|#

Thirdly, 375,000 people investing in what they know IS NOT A RANDOM WALK, 375,000 people picking random stocks is a random walk.

No, I think it is. It's a random walk within a specific distribution. Which is interesting in itself. Now, if they were clever about how they chose the 375K folks, they could produce a truly unbiased random walk across the entire market, even though the contestants were choosing familiar stocks. But I figure it would be impractical.

|6.20.07 @ 5:01PM|#

"Random Walk" refers to the changes in the price of the stock, not the actions of the people investing. 375,000 people investing in what they know or just throwing darts or reading tea leaves produces a random walk. The point is that changes in stock prices are largely indiscernible from a drunk wandering through a field.

|6.20.07 @ 5:20PM|#

changes in stock prices are largely indiscernible from a drunk wandering through a field.

Not just 'from'. Also 'to'.

Bitter, Table for One|6.20.07 @ 5:26PM|#

Jerry. Jerry. Your table is open.

Walk this way.