Ethics, cheating and making a million

Bodie, Kane and Marcus wrote a wonderful textbook used in finance in universities around the world. I remember reading one of the “boxes” during a lecture at UCT many years ago. It described an ingenious money-making strategy:

Start 16 apparently independent investment advisory newsletters. In the first year, 8 of them forecast gold (or oil, or an individual share) to go up, and 8 of them predict the same security or indicator to fall. At the end of the first year, half of the 16 will have given the correct prediction. The incorrect 8 publications are discontinued.

Out of the 8 remaining, 4 predict a certain (maybe the same) security or indicator to go up, and the other 4 down. At the end of the second year 4 of those will have been right. By this method, at the end of 4 years (or 5 years if we start with 32 publications and so on) we will have a single publication with a perfect track record.

The money-making comes from then selling the next year’s publication at a huge price based on it’s apparent track record.

It’s pure genius, except that it’s illegal (very specifically¬†in the US and clearly fraudulent in general terms in any country I can think of). The strategy may even have a name.

I blogged previous about how the Make a Million competition has, IMHO, dubious merits. However, there is a new twist.

Possibly in response to my concerns around the risk-taking nature of the competition (ok, I doubt this was there motivation, but it’s a nice thought) they describe an alternative strategy that can be implemented to potentially win the competition without taking direct market risk.

The basic strategy involves creating two separate entries (allowed under the rules) and taking opposite positions (using single stock futures) in each account. The individuals total market risk is zero, but if the underlying security does move in either direction, one of the accountants could show a very positive balance and could thus win the competition.

It’s only a small step to consider creating 16 accounts, using half to make major, geared bets in one direction and the other 8 the same bet or “investment” in the opposite direction. Close out the 8 losers and proceed, as above, with the 8 winners. For a reasonably small entrance fee on each of multiple entries, investors can massively increase their chance of gaming the game, without any semblance of investment, trading or even speculative skill.

The winner becomes he most able to manipulate the rules.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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