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No matter how sophisticated the world of investing becomes, it is hard to beat the allure of stock picking.
The idea of testing your mettle against the market is deeply ingrained in the popular consciousness of investment, as any Financial Times journalist who has ever introduced themselves to someone new at a party can attest.
Upon learning your profession, the question almost invariably follows: “What stocks should I invest in?” I find it hard not to share the sense of disappointment after I explain that I mainly write about something called the corporate bond market.
But to capture some of this thrill in a safe setting, and hopefully make us all better conversationalists at parties, the FT team has for the past few years held a charity stock picking contest. Excitingly, for the first time this year, readers can join in.
The rules are simple. Contestants have to choose five stocks listed anywhere in the world that they think will achieve the highest percentage return that year. They can take either a long or short position — betting that the shares will either rise, or fall.
The portfolios are equally weighted and have no base currency (meaning foreign exchange movements have no effect on the end result) and dividends do not contribute to the returns. To enter, the journalists have to donate to the FT Seasonal Appeal — this year, we are supporting the charity Habitat for Humanity the largest non-profit housebuilder in the world.
The FT’s Miles Johnson, who usually oversees the contest, has recently left the frantic and fickle world of market reporting behind for the relative tranquility of covering Italian politics. And so this year, the task of administering proceedings has fallen to me.
Before setting out how you can enter the 2019 competition, let me reveal the results of last year’s contest. Are there any lessons we can learn?
Charity stock picking tends to bring out the punter in everyone. A one-year horizon flies against advice to invest for the long term. And with no real money at stake, other than wounded pride, there is no real downside to doing badly. As there is little glory in a mid-table finish, players tend to try to shoot for the moon with all-or-nothing bets.
Rather than the sleep-at-night names typically held by mainstream fund managers, the portfolios of the 20 FT scribes who took part in 2018 were chock full of high octane picks such as Greek banks, oilfield services companies and the occasional obscure penny stock.
There are still some lessons to be learnt in these punts, however. The first is that just because a stock has gone down a lot, it doesn’t mean it will bounce back.
Mean reversion might be a great concept to bear in mind when examining markets as a whole, but if a company is in deep trouble, the fact its stock has dropped 90 per cent doesn’t mean it cannot fall a further 100 per cent to zero. The (nameless) FT stock picker who went long Carillion learnt this lesson the hard way.
It is also unsurprising that in a year that saw most major bourses finish in the red, most of the top-performing portfolios were powered by clever short picks. The seemingly hapless Carillion punter actually ended up as one of the nine out of 20 contestants that finished the year with positive returns, powered by several shrewd short calls, including UK retailers Carpetright and Sports Direct.
I suspect that this year’s entries will be dominated by short selling doomsayers. Our contestants, of course, do not have to contend with the tricky and often costly mechanics that short sellers face when having to borrow shares. Dividends, another cost the shorter has to bear in the real world, are not factored in.
This ability to take advantage of loopholes in the simplified rules of our competition strongly aided last year’s winning entry.
Johannesburg-based FT correspondent Joseph Cotterill was confident that a hyperinflation scare in Zimbabwe would push locals to panic buy certain stocks. This powered large listed brewer Delta Corporation to rise more than 87 per cent. Trying to replicate this in the real world would be a pretty fruitless endeavour, however, due to the extreme difficulty of repatriating cash from the African country.
The best real world investment advice is almost certainly to steadily drip your money into simple and low-cost index funds, whilst ignoring the daily gyrations of markets. But taking this approach would make for rather a boring competition. As such, ETFs and other listed instruments that provide exposure to a diversified basket of assets have always been outlawed for our stock pickers.
That’s not to say that all exchange-traded instruments are safe and straightforward. Last year, one spoilsport refused to take part unless they could pick a few exchange traded funds. Out of their five picks, two were complicated inverse-volatility products that blew up barely one month into the contest.
The US markets editor involved shall remain nameless to avoid embarrassment (ahem).
More than 20 FT reporters have made their picks for the 2019 contest, but to make things more exciting this year we’re offering FT readers a chance to best us.
Following this link ft.com/stockpicker will take you to our website where you can enter with your own five picks. For readers, the deadline is Monday January 15, which will be counted as the “start date”. If you’d like to join us and make a donation to Habitat for Humanity, the link is on the form.
The three best reader entries of 2019 will be invited into the FT’s new offices in Bracken House next year for a reward that no real investment can provide: the opportunity to lord it over all of the FT writers they have beaten. Good luck!
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