Beardstown Ladies Move Over!!!!
Patroller, here's a story about a bunch of 16 year old kids
who turned $10,000 on paper into over $200,000. (wonder if
his parents would let me adopt him?)
April 22, 1998
He Was a Teen Trader, Turning
A $10,000 Portfolio Into $212,109
By DEBORAH LOHSE
Worried about your teenager smoking or drinking?
Well, at least your kid isn't like Aaron Siegel, "day trading" in
risky small stocks. The 16-year-old group leader recently won a
mock stock-investing tournament for students.
Adviser Jennie Lyons with team leader Aaron Siegel whose
group made huge profits -- on paper at least -- jumping in
and out of risky small stocks. Classmates are Neil Sanchala,
David Russcol, Adam Wald and Eric Berry.
Investing doesn't quite describe Mr. Siegel's activity. Extreme
trading is more like it. Mr. Siegel's group took the top prize among
some 4,300 teams in the CNBC/MCI tournament not by rigorous
analysis of stock fundamentals or buy-and-hold investing. Instead,
the group turned "$10,000" of play money into "$212,109" by
darting in and out of dozens of small stocks, holding many of
them less than a day.
This is known as day trading among Wall Street pros. The team
made 198 of these rapid-fire trades, an average of more than three
daily during the 61 trading days of the contest. By contrast, other
teams averaged just seven trades during the entire contest,
according to CNBC. (The Wall Street Journal recently began a
U.S.-programming partnership with CNBC but wasn't involved in
the contest.)
One lesson of the young team's success: Rapid trading can
sometimes work, especially in a runaway bull market and in a
mock situation. Of course, the speculative approach can also get
you kicked in the teeth; just ask some pros who have played the
game with real money.
That said, Mr. Siegel's team, which hails from private Hackley
School in Tarrytown, N.Y., bested the next closest competitor by
1,834 percentage points, with the No. 2 team from Sparta, Wis.,
turning in a 187% gain. The Dow Jones Industrial Average,
meanwhile, rose 10.5% during the contest, a stellar gain by normal
measures. The teams among the top 10 in the contest each
increased their portfolios by more than 114%, but the average
team gained just 3.4%.
Mr. Siegel's group decided to make bold bets on small stocks after
coming in second in a previous contest by focusing on
large-capitalization stocks. Their strategy this time was to bet their
whole portfolio, more than "$200,000" by the end of the contest,
moving in and out of small stocks that had proved likely to swing
without huge changes in volume. That suggested, says Mr. Siegel,
that any time such stocks fell as much as 10% or so, they stood a
good chance for a quick rebound.
"We paid an enormous amount of attention to daily volume," says
Mr. Siegel. "If a stock was down 10% on normal daily volume, we
could be reasonably sure that there wasn't some terrible
fundamental shift in the company," he reasons.
To make sure big moves weren't being driven by bad news, the
kids looked for news on the stocks and statistics on the
Internet-directory service Yahoo! They used two on-line services,
Infospace and Datek Online, for real-time stock quotes. The
contest rules charged them only $10 per trade, a price team
members figure they could beat by using some of the cut-rate
on-line services that charge as little as $8 a trade.
Their strategy landed them in and out of such little-known names
as Foodarama Supermarket, a central New Jersey food-store
operator; Paul-Son Gaming, a casino-equipment operator; Reno
Airlines; software developer Wiztec Solutions, and Mothers
Work, a maternity-clothing chain in Philadelphia.
Their biggest success came with Foodarama Supermarket, an
American Stock Exchange stock that traded barely a few times a
month during most of the contest. In mid-March, the company
reported earnings of 70 cents a share, compared with 13 cents in
the year-earlier quarter. The team immediately put their entire
mock portfolio -- about "$100,000" at that time -- into the stock as
it started a meteoric rise from the low 20s to 43, only to rapidly
reverse course. The teens sold at around 38 for a 60% gain. "That
earnings report was unreal," says Mr. Siegel.
With 360 Communications, a wireless-communications company,
the group learned why day-traders like to end the day "flat," that
is, not holding any stocks. They bought 360 Communications on a
Friday after it had run up five points on rumors it would merge
with Alltel Corp. Following the classic "buy-the-rumor,
sell-the-news" strategy, the team figured they would hold the
stock until the merger was announced. "We thought we were
looking at easy money. We'd be arbitrageurs," says Mr. Siegel.
"Sure enough, over the weekend the deal was announced, but
what happened was, it was a take-under," meaning the terms were
for a lower price than investors were then willing to pay, says Mr.
Siegel. The group lost about 15% in that encounter, he says.
At one point, Mr. Siegel showed up to find that one team member
had put the group into Berkshire Hathaway, the $70,000-a-share
holding company run by legendary buy-and-hold investor Warren
Buffett. Mr. Siegel was appalled, and immediately sold the shares.
"I have nothing against Warren Buffett -- he's the greatest guy --
but that wasn't going to help us win the contest."
Now, the teens get the chance to practice day trading with real
money. Their prize for winning the contest was 250 shares of
CNBC parent company General Electric, currently valued at
about $21,500. Although GE has been a solid blue-chip stock, the
school plans to sell half the shares in hopes that Mr. Siegel can day
trade the proceeds into a respectable scholarship fund.
That might be more difficult than it sounds. Mr. Siegel shouldn't
expect to match his play-money results with the real thing, says
Josh Levine, a former day-trader and vice president of Island
private trading system in New York. Investors who paper trade
assume they can get the exact price they want, when in reality if
they have spotted an opportunity for a quick profit -- no matter
how small the stock -- chances are others are competing for that
same price. In such cases, unless you're first out of the box, you
don't get the price you want, says Mr. Levine.
Mr. Siegel thinks he'd be a good professional day-trader but
recognizes the game might not be for him. "I would walk in some
days and we would open the day down 10%," he says. "I can't
imagine running a mutual fund and having people call me up and
say, 'Why on this day is our fund down 10%?' "
Indeed, some of his partners sound like they are ready for more
staid investing. "In real life, I think I might not be comfortable
putting all my money into small-cap stocks," says team member
David Russcol. "It's an awful risk to take." |
