The 10th Man

Stock-Picking Contests

January 11, 2018

This is a story I have never told before and will never tell again.

I actually got my start in investing in a stock-picking competition in middle school. I picked Wang Laboratories…

Because…

WANG

Thirteen-year-old humor. Anyway, Wang was a flop, and I lost money on it. Talk about dating yourself—the old-timers will recall that Wang was actually an AMEX stock, the old curb exchange. I do miss the AMEX.

I entered another stock-picking contest my senior year of high school, in my economics class. This one was a bit more involved—my team was competing against teams throughout the state, and every week we would get a printout of the results taped to the wall in the classroom.

The economics class was full of jocks, including most of the guys I was on the wrestling team with, along with lots of the popular girls. My team was the jocks and popular girls and me. I was under a lot of pressure to come up with an idea.

Someone had actually given me a tip earlier in the year. Novell, a software company, from Provo, Utah. I think the idea was that you were supposed to build a diversified portfolio of stocks, but I just put it all in Novell.

It worked. We were one of the top teams in the state.

I actually got invited to a Board of Directors meeting at my school to talk about how we did it. I made up some nonsense that must have sounded absolutely ridiculous. I had no idea what I was talking about.

Upon reflection, all of this took place in late 1991/early 1992, and the stock market wasn’t doing so hot. About 90% of the teams in this stock market contest lost money. Even being long Novell, we made only about 15% in a few months. That’s pretty crappy on an absolute basis, but great for the middle of a bear market.

Anyway, I had inadvertently stumbled across the number one way to get rich in America: put it all in one tech stock and hang on. That was a lesson I did not internalize. I was smart enough to understand that we won based on sheer luck. Then again, a lot of people in this country get rich on sheer luck.

But Is It Luck?

Take Jeff Bezos, or Mark Zuckerberg. Two of the richest people in the world. How did they get rich? They had one tech stock (in both cases, millions of shares) and never sold. Zuckerberg is selling now, which is smart—you have to turn it into food at some point. But basically these guys invested in themselves and compounded at a ridiculous rate. They put all their eggs in one basket.

If Zuckerberg had taken Peter Thiel’s $500,000 in 2004 and put it in the S&P 500, he would have a lot less than he has today. It still would have been a great investment—I think a lot of people would be happy holding the S&P 500 from 2004 to 2018. But if you are going to be one of the richest people in the world, you have to compound a lot faster than that.

I think about compounding a lot. There aren’t many businesses that compound at 100% a year. A food truck is not going to compound at 100%. A homebuilder is not going to compound at 100%. A car dealership is not going to compound at 100%.

Pretty much the only thing that does is tech. One of the reasons Facebook paid so much for WhatsApp was its explosive user growth. It ended up not being worth $19 billion, but it looked like it would be.

Thing is, not all of us can work in tech. The type of growth rates that pushed Bezos to $100 billion are an anomaly, and probably won’t exist again for a generation or two. Even Buffett, who has beaten the S&P handily since inception, has had a tough time doing it the last few years.

Our most private, exclusive club is now accepting a limited number of new members

Want in?

Find out more
-

Quick aside on the ad above—it’s your invite to join the Alpha Society, which is basically the highest level of membership Mauldin Economics offers. They’ve added a bunch of pretty cool stuff, like quarterly conference calls with the editors (including me), and a members-only forum which will be up and running soon.

You can find out more here (but you only have until Monday to decide whether you want in).

The One Piece of Advice

Back to Bezos and Zuckerberg and compounding at 100%. This is why I love entrepreneurship—I would never tell you to take $100,000 and put it in SPY instead of investing in yourself.

I don’t know if you’ve ever seen The Founder, about Ray Kroc, but the movie portrays his first wife as a bit of a suckapotamus, always throwing cold water on his ideas. Sure, starting a business is risky. It is also fun!

If you have an idea, you need to think big, and execute on it. There are people who think big but can’t execute. There are people who think small but can execute.

Few can do both.

Here’s the remarkable thing about both Bezos and Zuckerberg—they retained so much ownership in their companies through the fundraising process, through the IPO, and into maturity. People who think big, execute, and see it all the way through to the end are exceptionally rare.

Remember: diversification is for people who don’t know what they are doing. Which is most people. But if you have an edge, or you’re betting on yourself, put all your eggs in one basket in the stock-picking contest of life. For everyone else, there are target retirement date funds.

Jared Dillian
Jared Dillian

 

Get Thought-Provoking Contrarian
Insights from Jared Dillian

Discuss This

0 comments

We welcome your comments. Please comply with our Community Rules.

Comments

Robert Johnston 17533

Jan. 11, 10:06 a.m.

Jared, your paean to Bezos and Zuckerberg neglects to mention the principle of survivorship bias.  Sure, hard work, dedication, smarts—important.  But every mega-rich guy looks like a genius after the fact.  Can you identify principles or methodologies that ensure such success?  No, and you didn’t.  No more than you can use first principles to identify money managers who will ultimately prove most successful.

That said, I enjoy your writing and the portion of my portfolio allocated to your new newsletter’s ETF strategy is doing nicely, thanks.  (I’ll know in a few years if you are one of the geniuses too!  LOL).

msanna35@gmail.com

Jan. 11, 9:37 a.m.

An economist told me a long time ago one of the main reasons JP Morgan, Carnegie, and many other uber wealthy got that way in the late 1800’s and early 1900’s was that there was no income tax until 1913. Although Buffett complains wealthy don’t pay enough in taxes, he, Bezos, Zuckerberg and many others gaining exceptional wealth through stock ownership also have benefited tremendously from not paying any taxes on their paper gains per our current tax code. If for instance above some level of wealth someone was “assumed” to have earned the safest rate of return on their wealth for tax purposes (alternative wealth tax per se) - 10 year treasury rate, at an average of say 3.5% return, Bezos would be paying on $3.5B of earnings or $1.2B in tax at 35% rate. This would cause a distribution of their stock, which might not be a bad thing.


Use of this content, the Mauldin Economics website, and related sites and applications is provided under the Mauldin Economics Terms & Conditions of Use.

Unauthorized Disclosure Prohibited

The information provided in this publication is private, privileged, and confidential information, licensed for your sole individual use as a subscriber. Mauldin Economics reserves all rights to the content of this publication and related materials. Forwarding, copying, disseminating, or distributing this report in whole or in part, including substantial quotation of any portion the publication or any release of specific investment recommendations, is strictly prohibited.
Participation in such activity is grounds for immediate termination of all subscriptions of registered subscribers deemed to be involved at Mauldin Economics’ sole discretion, may violate the copyright laws of the United States, and may subject the violator to legal prosecution. Mauldin Economics reserves the right to monitor the use of this publication without disclosure by any electronic means it deems necessary and may change those means without notice at any time. If you have received this publication and are not the intended subscriber, please contact service@mauldineconomics.com.

Disclaimers

The Mauldin Economics website, Yield Shark, Thoughts from the Frontline, Patrick Cox’s Tech Digest, Outside the Box, Over My Shoulder, World Money Analyst, Street Freak, Just One Trade, Transformational Technology Alert, Rational Bear, The 10th Man, Connecting the Dots, This Week in Geopolitics, Stray Reflections, and Conversations are published by Mauldin Economics, LLC. Information contained in such publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and there is no obligation to update any such information. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments.
John Mauldin, Mauldin Economics, LLC and other entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications or web site. Corporate policies are in effect that attempt to avoid potential conflicts of interest and resolve conflicts of interest that do arise in a timely fashion.
Mauldin Economics, LLC reserves the right to cancel any subscription at any time, and if it does so it will promptly refund to the subscriber the amount of the subscription payment previously received relating to the remaining subscription period. Cancellation of a subscription may result from any unauthorized use or reproduction or rebroadcast of any Mauldin Economics publication or website, any infringement or misappropriation of Mauldin Economics, LLC’s proprietary rights, or any other reason determined in the sole discretion of Mauldin Economics, LLC.

Affiliate Notice

Mauldin Economics has affiliate agreements in place that may include fee sharing. If you have a website or newsletter and would like to be considered for inclusion in the Mauldin Economics affiliate program, please go to http://affiliates.ggcpublishing.com/. Likewise, from time to time Mauldin Economics may engage in affiliate programs offered by other companies, though corporate policy firmly dictates that such agreements will have no influence on any product or service recommendations, nor alter the pricing that would otherwise be available in absence of such an agreement. As always, it is important that you do your own due diligence before transacting any business with any firm, for any product or service.

© Copyright 2018 Mauldin Economics