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Sykes: Contest Mentality vs. Real World

Thursday, 19 Apr 2007 | 3:42 PM ET

Wow--we've gotten posts from all three guest bloggers today as this one from Timothy Sykes wraps it up. You certainly have some food for thought. Here's Timothy: Many contestants have been asking why I advocate such a seemingly risky strategy by focusing on chart plays with upcoming earnings. The answer, like my strategy, is rather simple.

In the real world, the possibility of large drawdowns prevents you from taking large bets on long shots. Even though one large gain from one long shot would probably make you rich enough to not have to worry about money any time soon, reason prevents you from risking your hard earned capital on such fantasies. For these types of bets are the ones that can wipe your entire account away in a heartbeat. Considering that the odds of winning big are probably two or three out of ten, you dare not risk the majority or, worse, your entire account into such madness. This is because you understand that if you take great care protecting your wealth, you will probably be rewarded with steady returns and healthy savings over time. The risks on bets like these definitely do not justify the rewards, especially since the odds are against you.

In this contest, you need not be concerned with such real world limitations. There are so many contestants competing to win the top weekly spot that all conservative returns and strategies must be thrown out the window. You are not playing with any real money so you shouldn’t focus on nurturing your accounts over time. Instead, you must maximize your account’s potential by taking risky bets that could easily falter but also possibly send you into the finals. Although many contestants will likely whine about being in the top 5% or 10% and not winning, nobody will pay them much attention because they didn’t get into the finals, let alone make it into the top 1% or 2%. I know it’s very counterintuitive, but it doesn’t matter if your portfolio is up or down 5%, 10%, or even 20% in any given week in this contest. Those returns are good or even great for the real world, but in this contest, those kinds of returns are meaningless. The weekly winners have been posting gains in the 40%, 50%, and even 60% range. In order to reach these impressive plateaus, you must take large bets on long shots.

Now that you better understand my reasoning for making such bold bets, let’s take a look at some of my past picks. I picked RIMM right before earnings as the stock was at an all-time high with a perfect looking chart and was featured positively in several analysts’ notes. The stock dropped 10% on lackluster earnings and the disclosure of a new SEC probe. Afterwards, many of you rubbed it in my face that I was wrong, but I’d pick that stock again if I had the choice because I was simply playing to win this contest. Following the above reasoning, I knew it didn’t matter if the stock dropped 5, 10 or even 50 points; there was still an impressive chance that the stock could’ve gone up by 10, 20, or 30 points and then whoever bought the stock would have a solid gain.

I used the same reasoning to pick PPDI as an earnings play for this week. Like RIMM, the chart was near all-time highs and had been positively mentioned in several analysts’ notes. There was a risk that it could drop by 5%, 10%, or even 20% on lackluster earnings and the possibility of an SEC probe. When earnings came in flat and the stock opened down 5%, it seemed as though I’d be getting a few more people letting me know how wrong I’d been. But lo and behold, the stock rebounded on strong volume and is now up over 7% from where I picked it. Not a huge gain, but solid nonetheless.

I’ll let you know my picks for next week on air tomorrow (Friday) night (CNBC's "On The Money" program). They will not be any blue chip companies held by Warren Buffett or be trading at or below book value. I truly respect Warren Buffet, but I’m not even sure if he’ll even be around by the end of this contest. Many CNBC guests pick fundamentally sound companies to not allow for the possibility of looking like an idiot on national TV. They might keep their dignity, but their picks won’t help you win this contest. I am not one of those guests for I gladly risk embarrassing strikeouts by trying to go for home runs. Watch my reality show Wall Street Warriors and you’ll see that I don’t care about making a fool of myself of national TV. I guarantee you that might picks will be risky. They could each fall by 10%+ next week, but more importantly, they could each gain 20%+, too and this is why you should buy them.

Timothy Sykes is a hedge fund manager and star of the reality show Wall Street Warriors. He can be reached at www.timothysykes.com.

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