Go Short, Mildred -- the Kids Are Taking Over
By Susan Antilla
August 3, 2006
In the 1968 best-seller ``The Money Game,'' financial television host Adam Smith describes a whimsical fellow named the Great Winfield, a maturing money manager who has hired three new traders: Billy the Kid, Johnny the Kid and Sheldon the Kid.
In a scene that, 38 years later, is ominously familiar, the 20-something whiz kids buy stocks without regard for risk, and ridicule adults who fret about details like safety.
``The strength of my kids is that they are too young to remember anything bad,'' Winfield boasts. ``And they are making so much money, they feel invincible.''
Welcome to the Kids' Market.
Novices are all the rage these days in the financial world, making news for everything from stock-picking prowess to money- management wizardry. They're even penetrating the grown-up world of law-breaking, earning felony counts for fraud and doing time in Club Fed.
Most recently, the U.S. Securities and Exchange Commission on July 26 added three defendants to an action against a greenhorn insider-trading ring. Among those feeding illegal tips to the group: Stanislav Shpigelman, a 23-year-old former Merrill Lynch & Co. analyst. Merrill Lynch is a passive, minority investor of Bloomberg LP, the parent of Bloomberg News.
Shpigelman pleaded guilty on July 14 to passing on information about Adidas-Salomon AG's $3.67 billion purchase of Reebok International. Four other 20-somethings were part of the ring.
Not all the youthful headline-grabbers have run afoul of the law. Indeed, most are getting attention for their supposed financial genius.
Business Week on July 3 showcased the four-person team at Rebellion Research, a New York-based investment software company, under the headline ``Hedge Fund Toddlers.'' Alex Fleiss, the 23- year-old chief executive officer and co-chairman of Rebellion, said in a Bloomberg interview that ``everything can be brought to a formula.'' He and his colleagues (21, 23 and 23) assume the dispassionate statistics that make up their algorithmic software will lead to risk-proof investing.
That wouldn't be quite the view of the investors who banked on Long Term Capital Management, the hedge fund that got its algorithmic brainpower from Nobel laureates. The fund collapsed in 1998 when the devaluation of the Russian ruble turned out to be an item that hadn't quite made the LTCM algorithm. The Rebellion CEO, who at that point wasn't old enough to drive, said he loses no sleep over risk of the unforeseen. ``Cuba could invade America,'' he said. ``I don't think it's gonna happen.''
Equally optimistic is 23-year-old Chris Lahiji, ordained as a Whiz Kid in dozens of media reports from the time he turned 18. Lahiji became a financial celebrity in 2002, after having become ``the first person to ever read 12,000 annual reports,'' according to the biography on his Web page (www.dailytrends.com).
Lahiji said in an interview that his unaudited stock picks since January 2004 rose twice as much as the Standard & Poor's 500 Index. When he touted his top five stock picks to a national magazine in March 2004, though, Lahiji chose duds that spiked after his tout, then fell significantly within months.
Kids get encouragement to play the market. The Securities Industry Association sponsors a virtual trading contest for fourth-to-12th graders. CNBC has sponsored a CNBC Student Stock Tournament for the same age group. (Jonathan Lebed, who agreed to pay the SEC a $285,000 settlement for stock manipulation when he was 15 in 2000, was on a three-student CNBC team whose portfolio rose 51 percent on its first day of trading.) A Web page called Stocksquest.com sponsors a virtual trading game that lets minors in as long as they have mom and dad's permission.
Running Real Money
A teacher at the Mountain View Youth Correctional Facility in Annandale, New Jersey, is listed among endorsers of Stocksquest's game. ``Being that my classroom is in a state correctional facility, my students were extremely excited about playing the stock market game,'' he wrote. And no doubt they're pleased to have more free time to study than kids get in the Wall Street training programs.
Among youths outside the slammer, college students are increasingly demanding that schools let them run real money. Stuart Michelson, a professor of corporate finance at Stetson University in DeLand, Florida, says seniors can help manage an actual portfolio, something that's happening at 120 colleges and universities that are members of the Association of Student Managed Investment Programs.
``Interest in investing by students has grown tremendously,'' Michelson says. ``Professors are wanting to meet the demand.''
Kids in Charge
Of course, young stock pickers aren't always lacking in insight, and certainly don't always grow up to run phony hedge funds. The danger is when a heated market has grownups so hot and bothered about stocks that they'll hand over big bucks for the kids to run.
That's when novices like Hakan Yalincak, 22, the former New York University student who pleaded guilty to bank and wire fraud on June 6, can manage to persuade investors to entrust more than $7 million to him for what turned out to be a phony hedge fund.
Or when Cole Bartiromo, 21, who is doing time at the Taft Correctional Institution in Taft, California, can suck in more than 1,000 investors to a pump-and-dump scheme that promised to return between 125 percent and 2,500 percent. Bartiromo also made the mistake of defrauding EBay Inc. bidders and Wells Fargo & Co., the latter to the tune of $400,000. For those offenses, he was sentenced on June 14, 2004, to 33 months in prison.
Lahiji, the stock picker, gets irritated that ``People think there is a proportional tie between age and performance.''
Fleiss is downright stumped at a question of whether his inexperience ever leads him to doubt his abilities: ``Do I ever doubt myself? You mean this company? No, this is the greatest thing that has ever happened to me.''
Adam Smith's Billy the Kid couldn't have said it better.
(Susan Antilla is a Bloomberg News columnist. The opinions expressed are her own.)
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