Jason Kelly - Stock Market Contest

Stock Market Contest

by

Jason Kelly

Copyright 2012 by Jason Kelly

ISBN: 9780966438727

All rights reserved.

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Published by Jason Kelly Press.

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About The Author

Jason Kelly is the author of nine books including The Neatest Little Guide to Stock Market Investing, a BusinessWeek best seller, and Financially Stupid People Are Everywhere: Dont Be One Of Them. He also publishes The Kelly Letter, a curiously readable weekly investment advisory. Join his free email list at jasonkelly.com .

Table of Contents

Chapter One The Contest

Monday, February 7, 1994 San Marino, California

M ISTER J. A RTHUR C OLVIN HAD always kept his own counsel. He didnt like attorneys, consultants, or physicians and he especially loathed money managers. Mismanagers, he retorted to his personal assistant Irving when the latter made the mistake of suggesting that the Colvin Real Estate Group might place some of its profits with one. Paid to squander. Make less on the upside, lose more on the down. Charge fees no matter what.

Mr. Colvin picked up the phone in his San Marino, California office and called his friend, Walt Pinkney, then Chair of the UCLA Anderson School of Business. Mr. Colvin had just returned from a week-long investment conference and ski trip in Aspen. He was angry.

Walt, he began, want to speak with your smartest student. Want an ambitious kid who knows how to do real stock market research.

What does that mean?

Means finding a way to invest in the stock market without getting clobbered. Im red as a beet. Furious. Just got back from Aspen. Talked with several guys rich as I am. Know how much they pay their stock brokers? Millions, Walt. Know how much they lose on bad ideas? Millions more. Never invested heavily enough when the market rises, never out in time before it falls. Sick of hearing about it. Dont have a dime under so-called professional management and not one person should!

Art, you call me once a year on this. You know as well as I do that if there were a better way to get money from stocks, somebody would be doing it.

Dont know that, Walt. You shouldnt claim to know it, either. Matter of fact, thats what I want to talk to that smart kid about. And no rich kids. Got my own to deal with. Already seen what free money does to a kid. Want a poor, ambitious genius with guts to try something different.

Walter knew better than to dismiss J. Arthur Colvin, a UCLA alumnus and one of the schools most important benefactors. Theyd once discussed construction of a Colvin building on campus. Walter had asked what they should call it and Art suggested The Colvin Center For Wealth Creation with no hint of a smile. He envisioned people studying nothing but ways to turn one dollar into two, then four, then eight. He loved making money. He hated losing it.

Art, Im having dinner with Pete Merner from Harvard today. Hes in town lecturing on risk management. Would you like to join us?

I would.

Fine. Well see you downtown at 7:00.

He meant their usual restaurant in downtown Los Angeles. Mr. Colvin and Walter had met there so many times that they didnt call it by name anymore. It was just downtown. The place had changed ownership, names, menus, and decor over the years, but not its regular customers.

Ten minutes before 7:00, Mr. Colvin sat with his back to the bar, eyeing the gold ceiling and chandeliers. He was halfway through his second Old Fashioned when Walter and Pete Merner walked up.

Long time, Pete, Mr. Colvin said with a pat on the professors shoulder. He lifted just the index finger from his glass to point around the room. Haberdasher used to own this. Still got a hat my dad bought here. Look at the place now. Times change.

Why dont we sit? Walter suggested.

He and Professor Merner discussed the trade-offs between two appetizers. Walter leaned toward the phyllo wrapped scallop while Professor Merner was inclined to go with the Maine lobster crepe. When the waiter came to order, they asked for one of each, in addition to their entrees.

And for you, sir? the waiter asked Mr. Colvin.

Veal chop. He shook the ice in the bottom of his glass. And one more.

Old Fashioned? Walt asked after the waiter had left.

Mr. Colvin nodded, then explained to Professor Merner, Hard to find a good one anymore. Most places add soda. Make it a damned bourbon spritzer. This place doesnt.

Good. I hear you have another intriguing idea to discuss, Professor Merner said. Something about making money in stocks with no risk.

Never said no risk. Said Im tired of professionals getting it wrong at every turn or offering nothing useful. He pulled a folder from his bag. Some clips I took from financial papers over the years. Listen to some of this crap. Market set to break out, either up or down. If the Fed pauses markets will rejoice. Short-term picture cloudy, long-term equally unclear. A rally is in the cards but its anyones guess as to what will start it. He looked up. These are the pros?

Professor Merner chuckled. Yes, the gurus. They show up in every daily report on the market. Theres no getting around them. The reporter needs a quote, he dials up one of the talkers, they say something inane and it goes into the story.

Not just there. Got friends paying hundreds of thousands of dollars a year to big brokerage firms for so-called expert guidance. No better.

You told me this on the phone, Art, Walt said. You also mentioned you were looking for a smart kid. For what? To manage money better than the pros?

Mr. Colvin waved his hand in the air. What do you think all these pros began their lives as? Smart kids. But then they got into the system and the system got into them. Goldman, Bear, Lehman, SmithBarney, Citigroup, B of A, all the same. Bullish after price increases, bearish after declines. Bouncing here and there, no plan in sight. You know why?

They waited. Mr. Colvin set his glass on the table. He looked at Walt. He looked at Professor Merner. He inhaled through his nose.

Because the truth is too damned simple. Anybody whos spent any time looking at the market knows you dont make money guessing when its going up or down. Thats idiot work. All this earnings speculation and price charting is for the birds.

Some people are pretty good at it, Art, Professor Merner said. They continually come out ahead.

Where are they? I know the richest people in this country and not one of them has done better with an advisor than he could have done on his own. Occasionally, sure, a good call is made. But consistently? Over time? No way.

Reversion to the mean, Professor Merner said.

And you think a smart kid can find something that will work consistently over time? Walt asked.

I do, and Ill pay the winner.

The winner of what?

The contest Im sponsoring. Thats what were here to talk about.

The two professors glanced at each other.

Want to sponsor a contest with smart kids from every business school in America.

Thats a little hard to manage, Professor Merner said. How about just, say, ten top students from around the country?