FOOL'S EYE VIEW
Are Fantasy Portfolios Worth The Trouble?

By Maynard Paton (TMFMayn)
April 12, 2002

The Internet has brought some wonderful developments to the world of stock market investment. Low-cost online brokers (check them out here) and easy access to company information have vastly improved the fortunes of the ordinary investor. However, less could be said of the online 'fantasy' share competition. Plenty of websites offer the chance of measuring your stock picking talents against other investors. Are such competitions, and paper portfolios in general, worth the trouble?

Manek investor

Any talk of fantasy portfolios must start with the story of Jayesh Manek. A pharmacist in West London, Manek won the Sunday Times Fantasy Fund Manager competition in 1995. During the contest's six-month time span, he turned a notional £10m into £500m and collected a real £100,000 for his efforts. The next year, he won the same competition (and another £100,000). With the backing of Sir John Templeton, Manek launched his own investment fund in late 1997. (Commendably, Manek shunned the City highlife. He chose to run his fund in an office above one of his pharmacies.)

Needless to say, Manek's real life performance has not been as successful as his fantasy portfolios. Mirroring most private investors over the past few years, these graphs show the Manek Growth Fund story. Over the four years since its inception, the fund has underperformed the FTSE All-Share index.

So why the drop-off in Manek's performance? There are many reasons.

For starters, fantasy portfolio competitions tend to ignore certain realities of stock market investing. A good example comes in the form of Shareleague, a virtual share-trading game that has caught the interest of a handful of regular Fools. In this particular contest, costs such as bid/offer spreads, dealing commissions, stamp duty and capital gains tax are all ignored. Furthermore, Shareleague allows you to deal in any share in any volume.

Obviously, the lack of realities and restrictions are primarily to keep the competition administration to a minimum. But it all creates scope to notably enhance your real life returns.

Be lucky

Of course, there's the possibility that Manek was just plain lucky. Like many other contestants, he entered numerous portfolios in the Sunday Times competitions. As any statistician will tell you, put forward enough combinations of shares and you're bound to have a portfolio that does exceptionally well. As the contest progressed, Manek undoubtedly focused his fantasy trading on the portfolios that had fortuitous head starts, and disregarded those selections that suffered early setbacks.

But probably the key point concerning fantasy portfolio games is this: your losses are imaginary. Without the worry of seeing your life savings go down the drain, fantasy portfolio players typically make bigger, bolder bets than they would in real life. If it all goes pear-shaped, they can always start afresh and re-enter another make-believe portfolio.

So, do fantasy portfolio competitions have any worth? In most cases, probably not. The relatively short timescales that are traditionally used, varying degrees of luck, a general lack of real life charges and plenty of boom-or-bust contestants all lead to a rather tenuous set of 'winners'.

In short, replicating your real life investing thoughts to the world of share competitions isn't going to get you on the victory podium. Your time would be better spent tending to your actual portfolio.

Notional portfolio

Of course, that doesn't mean a fantasy portfolio is of no genuine use.

Generally speaking, it probably takes between three and five years before a novice investor largely understands what he or she is doing. In fact, really good investors never stop learning (or stop making mistakes!). So for wannabe stock pickers, running a notional portfolio before you open a broker account can save a lot of early portfolio heartache.

Of course, a fair amount of discipline is needed with any notional portfolio. You have to run it in a realistic manner, accounting for all of the usual charges. And while investing on paper for one or two years may seem rather tame to some, it'll generally pay off in the long run. Initial enthusiasm mixed with inexperience is traditionally a recipe for stock market disappointment.

That said, a notional portfolio always lacks that key ingredient of real life investing: money. There's nothing that concentrates the mind more than seeing a hard-earned portfolio slide in value. Undoubtedly, the psychological affect of seeing your real portfolio fall 20%, as opposed to your notional portfolio falling 20%, is very different. After calmly making successful paper trades, will you panic unnecessarily at the first sign of a real-life loss? Difficult to say, until you've actually had that experience.