Ever wanted an opportunity to play around with individual stocks with no risk, just to see how good your stockpicking skills are? CNBC is running a contest called the Million Dollar Portfolio Challenge which basically amounts to a fantasy stock market. You can spend one million fictitious dollars buying stocks, and the person with the most valuable portfolio at the end of the contest (mid-May) will win $1 million. Also, the person with the most valuable portfolio at the end of each week until then will win $10,000.
It’s a lot of fun, and I myself have entered the contest. However, if you enter it actually playing to win, it won’t teach you a thing about individual stock investing, and here’s why.
If you’re playing to win, you have to be absurdly risky. My portfolio in the game is made up of three stocks, two of which are in overlapping industries. They’re all small cap stocks, too. (Curious as to what they are? Here’s – it is obscene that this is under 4). I would never, ever invest this way in real life because of the risk factor. How so? First of all, all of my investments are in rather small-cap stocks, which can be really volatile. Second, my portfolio isn’t diversified at all. Third, I’m invested in these companies only because I suspect them to go really big in the next month or two and that’s it – I’m not even picking ones that I think will provide a great gain over the next six months or a year.
You’re not competing with the market. In reality, people do individual stock picking to try to beat the market, so they can make choices based on cycles and such. Here, you’re competing directly with other people: you don’t really care about anything other than this tiny timeframe, and you only really care about beating the people that are ahead of you. Thus, your choices aren’t really based on any normal fundamentals – you’re only looking for things that can go to the moon really quick – and that’s a complete crapshoot.
I’m not discouraging anyone from entering – by all means, get in, because it can be a lot of fun. I’m merely stating that if you’re playing to win, you can’t play as if you are investing real money (unless you’re absurdly rich and view it as a game). That’s because it is a game above all else.
That doesn’t mean you can’t use it as a learning experience. It can be a great opportunity to effectively practice simplified daytrading and get a taste for the fluctuations and speculation that goes into individual stock trading. Just remember that if you follow this contest and look at the leaderboard, those people are doing things that toss all fundamental stock investment logic out the window – using them as an example will do nothing more than bankrupt you if you attempt doing such things with real money.
Now go sign up and have some fun.