Investing Case Study: Skill or Luck?
Another day, another story of an investing wunderkind. From CNN:
At age 16, he put almost all of his life savings, $650, into three stocks: Citi (), GE ( ) and United Airlines ( ). That was back in 2009. No one calls him an idiot now.
Justin made a nearly 250% return on his initial stock investments before he graduated from Miami University last spring. To put that another way, while his friends were spending money, he was making about $1,600.
Later the article describes the success of one of his investments:
Summer of … 2009: Justin turned his homework into a real investment after convincing his dad to cosign a Scottrade account with him. Justin bought United for $4 a share in 2009, and sold in 2014 for $41, or 10 times higher.
With those two pieces of data, I thought it would be great to have students do a little work to understand what was driving his performance:
- Assuming that he invested an equal amount ($217) into GE, United and Citibank in 2009, what stock was the largest contributor to his success when he sold in 2014?
Answer: We know that he bought United at $4/share so he could buy about 54 shares if he bought an equal amount of each stock ($216). If he sold the stock at $41/share, that would have given him proceeds of about $2,200. We know that overall he invested $650 originally and “made” $1,600 so that would suggest that his total proceeds were about $2,250. This suggests that 1) He invested a much smaller amount in United. 2) His returns may have been much higher (you can have the students check to see how the price of Citibank and GE performed from 2009-14).
- What if he had instead invested $650 in an S&P500 fund in the summer of 2009 (use July 1st as date for purchase and sale). What would his return have been if he sold around July 2014?
Answer: S&P500 (from Yahoo Finance) on July 1, 2009 was $82.58. On July 1, 2014, the S&P500 stood at $195.04, a return of 236% vs. the 250% return quoted in the article for his “active management” strategy.
What am I hoping that students will get out of this exercise?
- The title “The Millenial Raking in a 250% Return” neglects to mention that in the time frame that the millenial was investing, the stock market (S&P500) rose about the same amount (remember that I chose arbitrary dates for purchase and sale of the S&P500; I could have found dates where the S&P500 rose by more than 250% by choosing different dates). It wouldn’t have gotten pageviews though if the headline read instead, “Millenial invests in index fund, earns 250%.”
- Based on the data provided, it looks like one stock (United) drove most of his investment returns. Owning three stocks is not a diversified portfolio.
- Research suggests that it takes about 15 years to determine whether the subject of the story was skilled in his stock picks or just lucky.
- If I was the reporter, I would have wanted to understand how much United stock so I could replicate his return (maybe that’s just me)!
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.