Stock Market Contest

States

Chapter One — The Contest

Monday, February 7, 1994 — San Marino, California

MISTER J. ARTHUR COLVIN HAD always kept his own counsel. He didn’t like attorneys, consultants, or physicians and he especially loathed money managers. Mismanagers, he retorted to his personal assistant Irving when the latter made the mistake of suggesting that the Colvin Real Estate Group might place some of its profits with one. Paid to squander. Make less on the upside, lose more on the down. Charge fees no matter what.

Mr. Colvin picked up the phone in his San Marino, California office and called his friend, Walt Pinkney, then Chair of the UCLA Anderson School of Business. Mr. Colvin had just returned from a week-long investment conference and ski trip in Aspen. He was angry.

Walt, he began, want to speak with your smartest student. Want an ambitious kid who knows how to do real stock market research.

What does that mean?

Means finding a way to invest in the stock market without getting clobbered. I’’m red as a beet. Furious. Just got back from Aspen. Talked with several guys rich as I am. Know how much they pay their stock brokers? Millions, Walt. Know how much they lose on bad ideas? Millions more. Never invested heavily enough when the market rises, never out in time before it falls. Sick of hearing about it. Don’t have a dime under so-called professional management and not one person should!

Art, you call me once a year on this. You know as well as I do that if there were a better way to get money from stocks, somebody would be doing it.

Don’t know that, Walt. You shouldn’t claim to know it, either. Matter of fact, that’s what I want to talk to that smart kid about. And no rich kids. Got my own to deal with. Already seen what free money does to a kid. Want a poor, ambitious genius with guts to try something different.

Walter knew better than to dismiss J. Arthur Colvin, a UCLA alumnus and one of the school’s most important benefactors. They’d once discussed construction of a Colvin building on campus. Walter had asked what they should call it and Art suggested The Colvin Center For Wealth Creation with no hint of a smile. He envisioned people studying nothing but ways to turn one dollar into two, then four, then eight. He loved making money. He hated losing it.

Art, I’m having dinner with Pete Merner from Harvard today. He’s in town lecturing on risk management. Would you like to join us?

I would.

Fine. We’ll see you downtown at 7:00.

He meant their usual restaurant in downtown Los Angeles. Mr. Colvin and Walter had met there so many times that they didn’t call it by name anymore. It was just downtown. The place had changed ownership, names, menus, and decor over the years, but not its regular customers.

Ten minutes before 7:00, Mr. Colvin sat with his back to the bar, eyeing the gold ceiling and chandeliers. He was halfway through his second Old Fashioned when Walter and Pete Merner walked up.

Long time, Pete, Mr. Colvin said with a pat on the professor’s shoulder. He lifted just the index finger from his glass to point around the room. Haberdasher used to own this. Still got a hat my dad bought here. Look at the place now. Times change.

Why don’t we sit? Walter suggested.

He and Professor Merner discussed the trade-offs between two appetizers. Walter leaned toward the phyllo wrapped scallop while Professor Merner was inclined to go with the Maine lobster crepe. When the waiter came to order, they asked for one of each, in addition to their entrees.

And for you, sir? the waiter asked Mr. Colvin.

Veal chop. He shook the ice in the bottom of his glass. And one more.

Old Fashioned? Walt asked after the waiter had left.

Mr. Colvin nodded, then explained to Professor Merner, Hard to find a good one anymore. Most places add soda. Make it a damned bourbon spritzer. This place doesn’t.

Good. I hear you have another intriguing idea to discuss, Professor Merner said. Something about making money in stocks with no risk.

Never said no risk. Said I’m tired of professionals getting it wrong at every turn or offering nothing useful. He pulled a folder from his bag. Some clips I took from financial papers over the years. Listen to some of this crap. ‘Market set to break out, either up or down.’ ‘If the Fed pauses markets will rejoice.’ ‘Short-term picture cloudy, long-term equally unclear.’ ‘A rally is in the cards but it’s anyone’s guess as to what will start it.’ He looked up. These are the pros?

Professor Merner chuckled. Yes, the gurus. They show up in every daily report on the market. There’s no getting around them. The reporter needs a quote, he dials up one of the talkers, they say something inane and it goes into the story.

Not just there. Got friends paying hundreds of thousands of dollars a year to big brokerage firms for so-called expert guidance. No better.

You told me this on the phone, Art, Walt said. You also mentioned you were looking for a smart kid. For what? To manage money better than the pros?

Mr. Colvin waved his hand in the air. What do you think all these pros began their lives as? Smart kids. But then they got into the system and the system got into them. Goldman, Bear, Lehman, SmithBarney, Citigroup, B of A, all the same. Bullish after price increases, bearish after declines. Bouncing here and there, no plan in sight. You know why?

They waited. Mr. Colvin set his glass on the table. He looked at Walt. He looked at Professor Merner. He inhaled through his nose.

Because the truth is too damned simple. Anybody who’s spent any time looking at the market knows you don’t make money guessing when it’s going up or down. That’s idiot work. All this earnings speculation and price charting is for the birds.

Some people are pretty good at it, Art, Professor Merner said. They continually come out ahead.

Where are they? I know the richest people in this country and not one of them has done better with an advisor than he could have done on his own. Occasionally, sure, a good call is made. But consistently? Over time? No way.

Reversion to the mean, Professor Merner said.

And you think a smart kid can find something that will work consistently over time? Walt asked.

I do, and I’ll pay the winner.

The winner of what?

The contest I’m sponsoring. That’s what we’re here to talk about.

The two professors glanced at each other.

Want to sponsor a contest with smart kids from every business school in America.

That’s a little hard to manage, Professor Merner said. How about just, say, ten top students from around the country?

Fine. You select the ten.

Why don’t we make it a little more interesting than that by putting word out to department heads? Each school can submit its top choice, selected however they want to do so, and we’ll whittle the list down to ten contestants. He pulled out a pocket calendar. It’s February now. We’ll have the schools submit by May, then Walt and I can look over the list and get it down to ten by August, before the new school year begins. Perfect timing.

I like it, Mr. Colvin said. Want to start the contest on the first trading day of next year. That’s January 3, 1995. Having contestants in place by August gives them four months to prepare.

Hold on, Walt said. I think we’re getting a little ahead of ourselves. What is the competition, exactly?

Long-term investment shoot-out, plain and simple, Mr. Colvin said. I set aside one hundred grand for each kid to manage over the next fifteen years. At the end of the contest, the person with the highest account value gets an extra five million bucks from the Colvin Real Estate Group. That’s the winner’s purse.

Professor Merner took a sip of wine. Five million dollars? That’s some contest.

Art, Walt began, do you really think this kind of Vegas approach to the market is going to produce anything more than a sideshow? You’ll get some hotshots that go for broke with penny stocks. Most will crash and burn, but some kid’s choice will return a million percent and he’ll win the contest. Your five million dollars won’t have done anything to advance knowledge of the market. It’ll just pay off a random winner in a dart-throwing shoot-out.

Why you think I called you? Mr. Colvin asked. I’m not one for details. See the big picture. Now you know the big picture, so fill in the details. How do we make this contest produce something to help regular folks do better in the market?

Professor Merner pulled out a pad of paper and a pen. For starters, he said, writing, the contestants must invest only in securities that anybody can buy at a regular brokerage firm. Nothing exotic.

Each contestant’s strategy must be simple and easily duplicated by other people, Walt added. Also, it must be based on reasonable, measurable criteria. That’s hard to define, so we’ll need to use judgment when looking over contestant applications. We don’t want somebody who uses lunar cycles, which are indeed measurable, to win the contest. Same with nonsensical approaches like buying stocks with symbols that produce anagrams. We have to keep the methods used in the contest legitimate.

Professor Merner nodded as he wrote. We have to think about risk, too. We don’t want the winner to spend fourteen years with sickening losses and then see a moonshot in the fifteenth year take him or her over the top.

That’s for damned sure, Mr. Colvin snorted.

Let’s create a relative risk parameter with the Dow, Walt suggested.

Exactly what I was thinking, Professor Merner replied. We’ll say that a contestant’s portfolio must never lose more than twice the loss of the Dow Jones Industrial Average in a calendar year. That gives some wiggle room to try non-mainstream ideas, but not so much that the strategy is too risky for all but the most ice-blooded investors.

Twice as much as the Dow? Mr. Colvin asked. Bit lenient, don’t you think? If I lost more than twice the Dow in a year I’d be fit to be tied. Make it no losses greater than the Dow’s.

That’ll just lead to indexing, Professor Merner said. Smart contestants will simply buy the Dow itself. Everybody knows indexing beats most active management, so the safe bet would be to hold the index for the fifteen years with maybe a few extra stocks picked on the side to goose performance. The core of the strategy would never lose more than the Dow in a calendar year. It would always return exactly what the Dow returns. That’s no revelation. It’s a waste of your contest. We have to give them some leeway, Art.

He’s right, Walt added. Besides, the winner will still be the contestant who made the most. Presumably, that person will have done considerably better than losing twice the Dow’s losses during down times.

Professor Merner peered over his glasses at Mr. Colvin, his pen paused at the end of the bullet point. So, can we leave it at twice the Dow’s loss in a calendar year?

What happens if a contestant exceeds it?

They’re immediately out of the contest, but keep their portfolio money as consolation.

What if a person loses when the Dow gains, or gains less than half the Dow?

Professor Merner thought a moment. I think that should be fine. Let’s give them some leeway. We’re going to need to use judgment anyway. If the Dow loses 1 percent, is it fair to kick someone out for losing only 2 percent? I don’t think so. Let’s leave as a line in the sand that contestants should not lose more than twice the Dow’s losses in any calendar year. In a positive Dow year, anything’s game. In any case, we should reserve final judgment.

We should have checkpoints, though, Walt said. At the end of ten years, the losing half of the remaining contestants are eliminated.

What if there’s an odd number of contestants left? asked Professor Merner.

We’ll eliminate the majority and keep the minority. A group of nine contestants would see the bottom five eliminated and the top four remain.

Like it, Mr. Colvin grunted.

We don’t want the contestants copying each other, Professor Merner said. For the first ten years, each contestant’s strategy will remain a secret until he or she is eliminated from the contest.

Can they change strategies during that time? Walt asked.

Professor Merner thought. Sure. Their minds are young and they’ll try different approaches. If they discover something new that works, they should be able to use it.

That might not lead to useful results, Walt said. What if, in the extreme case, a contestant tried fifteen different methods over fifteen years and won? Good for her, but how do we extract a strategy from that mess?

Good point. Alright, we’ll leave it open for the first ten years. At the beginning of the final five years, though, all remaining contestants must reveal their strategies and continue using them unchanged for the duration of the contest.

He finished writing and pushed the pad of paper to the center of the table. Here’s what I have, he said.

The list read:

The contest begins January 3, 1995 and ends at the market close December 31, 2009.

There will be ten contestants, each a student enrolled in a U.S. business school.

Each contestant will manage a portfolio of $100,000 donated by the Colvin Real Estate Group.

Each portfolio must be invested in securities that anybody can buy at a regular brokerage firm.

Each investment strategy must be simple, easily duplicated, and based on reasonable, measurable criteria.

Each portfolio should not lose more than twice the loss of the Dow Jones Industrial Average in a calendar year.

Any contestant losing more than twice the Dow in a calendar year will be out of the contest. Subject to review.

At the end of ten years, the lowest-performing half of the contestants will be eliminated. An odd number of contestants will see the majority eliminated and the minority remain.

For the first ten years, all contestants’ strategies will remain a secret until they are removed from the contest. The strategies may change during the first ten years.

At the beginning of the final five years, all contestants must reveal their strategies and continue using them unchanged for the duration of the contest.

The contestant with the highest portfolio value at the market close on December 31, 2009 will win a $5 million bonus from the Colvin Real Estate Group.

Mr. Colvin finished reading the list and looked up at his two dinner companions. He let show the rarest of his expressions, a broad smile.

Like it. Let’s find ten smart kids.

Chapter Two - The Contestants

Saturday, August 27, 1994 — San Marino, California

CATERERS CARRIED SILVER TRAYS AMONG the gathering. It was the last Saturday in August. After months of phone calls and interviews and reference checks, Walt and Professor Merner had succeeded in selecting their ten contestants. Each had received a letter of congratulation along with a contract. Upon receipt of the signed contract, Walt mailed each contestant four plane tickets and lodging details for the student, his or her sponsoring professor, and two guests.

The forty main guests had assembled at The Huntington in San Marino. Mr. Colvin sat on the library’s board of trustees and had become somewhat infamous for his oddly themed events held once or twice a year. One December, he invited 52 prize-winning economists to debate what could better be done with all the money spent on Christmas presents every year in America. His thesis had been that if put toward a goal other than temporary glee, the sea of money could effect change among the poor. The economists concluded that the poor would probably not gain traction from the extra money anyway, so the temporary glee of Christmas giving had more value than another social program. Mr. Colvin nonetheless gave no presents that year.

This August was different. Those gathered under the Colvin name had not won any prizes for their work. Most had not yet done any real work. They were young and smart and interested in stocks. Mr. Colvin’s idea to feature just poor kids proved impractical. Some of the most qualified students came from affluent families, and Professor Merner convinced Mr. Colvin that excluding them on the basis of family net worth was unfair. Selected from a field of more than 900 applicants, some of the ten contestants were poor, most were middle class, and some were rich, but each was highly likely to do well in the market. That part was a given. The question was, who would be the best? Beyond that, how?

Not about getting rich, Mr. Colvin announced to a Mr. and Mrs. Wallace from Pennsylvania. About finding knowledge. What works? What doesn’t? Can regular folks make it on Wall Street?

We’re thrilled that our son Eric is participating, Mr. Wallace replied. One thing we’ve never quite understood, though, is why you didn’t conduct this contest among established professionals in the field.

Misses the point, wouldn’t you say?  Field is filled with incompetents. Time to expose that. In fifteen years, our winner will have beaten Wall Street. Want to show how. Want to prove the tools needed to do it aren’t learned in the business. Want to find a simple way working families can tap the market. That’s what your kid’s going to find.

We certainly hope so, Mrs. Wallace said. Though it’s funny, isn’t it?

What?

They won’t be kids anymore when this is over. We keep talking about them as kids, but the winner’s purse won’t be handed out until these kids are over 35.

Ma’am, that’s still a kid to me.

Walt and Professor Werner provided opening remarks, then introduced Mr. Colvin.

Not a game, were the first words out of his mouth. He stood with both hands on the lectern, eyes piercing the crowd. He thanked nobody for coming. He acknowledged nobody’s preparatory work. He offered no words of introduction.

Not a game, he repeated. "A quest. Who among you ten hopefuls will succeed? All, I hope, but one will succeed bigger than the rest. When I call your name, stand.

"Mister Don Carlson, Case Western Reserve University’s Weatherhead School of Management in Cleveland, Ohio.

"Mister Marcus Covington, the University of Virginia’s Darden School of Business in Charlottesville, Virginia.

"Miss Kathleen Kelderman, the UCLA Anderson School of Management in Los Angeles.

"Mister David Lacey, the Harvard Business School in Boston.

"Mister Ravi Patel, Northwestern University’s Kellogg School of Management in Evanston, Illinois.

"Mister Juntaro Sakamoto, the University of Hawaii’s College of Business Administration in Honolulu.

"Miss Rosita Sanbria, the University of Arizona’s Eller College of Management in Tucson.

"Mister Shen Tao, the Stanford Graduate School of Business in Stanford, California.

"Mister Greg Vallor, the University of Colorado’s Leeds School of Business in Boulder.

"Mister Eric Thompson Wallace, the University of Pennsylvania’s Wharton School in Philadelphia.

"Congratulations to all of you.

Oldest contestant is 25. Winner will be a multi-millionaire by age 40. Not bad. Will know what to do with that kind of money, too. So will the rest of us. That’s the point of all this. Good luck.

The caterers began changing the room from mingling and hors d’oeuvres to table cloths and lunch settings.

Greg Vallor stood at the window holding a champagne glass of orange juice. The Huntington’s magnificent lawns and flowers stretched to islands of palm trees and cactus terraces and Grecian architecture. He thought of how much his mother would have liked the scene. She’d been unable to join him for the trip because of her work schedule. She was a home health care provider and couldn’t find a replacement for one of her ailing clients. Greg promised to take pictures.

Beautiful, isn’t it? a woman asked.

Greg turned. Yes. Pleasure meeting you. Greg Vallor.

Kathy Kelderman. I’m the only one of us who didn’t have to take a plane to get here. I live in Westwood, on the other side of the city.

That’s a beautiful college town. I took a campus tour when I was deciding where to go to B-school.

You chose Colorado over UCLA? I mean, well, I don’t mean there’s anything wrong with — 

It’s OK. I know the reputation of the Anderson School. Colorado’s Leeds isn’t famous, but it’s solid and it’s close to home for me. I love the mountains, and my family needs my help. So I went to Boulder.

What kind of help does your family need?

We have a Christmas tree farm. He saw the usual surprised reaction that he was used to getting. Yeah, it’s not your normal nine to five. It’s a tough business, but a good one when it’s done right. One reason I’m going to B-school is to get better at management so I can do it right. My parents are getting old.

A Christmas tree farm. Spend a lot of time among the trees thinking about stocks, do you?

Yes, actually. You laugh, but you’d be surprised at how much thinking gets done in a row of spruce trees.

David Lacey and Shen Tao joined them.

What’s so funny over here? Shen asked.

We’re discussing the best place to think about stocks, Kathy said. I always thought the library was a good bet, but this guy prefers the forest.

Greg explained.

More on point, David said after the tree discussion faded, you guys ready for this? I assume we’re all going for tech stocks.

I’m targeting healthcare and biotech, Shen said. Cancer cures, AIDS treatments, artificial hearts, and such. That’s where the money’s at. Look at the demographics. People are getting older, a lot of them. What do old people buy? Healthcare products and services, and they have the money. Put that old money with insurance plans and deteriorating health and you have a money glut that’s going to last a long time.

Good points, Greg said.

Yeah, but tech grows faster, David said. I’m surprised you’re not onto that, Shen. You’re from Silicon Valley, after all.

I think tech is overdone, Shen said. What, the World Wide Web is going to be the next computing revolution? I doubt it. By the time this contest is over the Web won’t be any more interesting than radio. People flipped out over radio when it was young, too. Now how excited are you about a bunch of 30-second commercials between loudmouth sessions or the latest Boyz II Men song? Not very.

I disagree, David said. My mother hasn’t even sent an email yet and you think the Web is finished? It might be old news to us, but we hang out on campuses with hip friends. When grandmothers start telling their grandchildren to email them, then it might be close to saturation. But that’s a long ways off, pal. Anyway, I’m glad to see you chasing healthcare. Makes it easier for me to get the prize.

Shen turned to Kathy and Greg. What about you two? Tech or healthcare?

Is neither an option? Kathy asked.

Let me guess, David said. You’re going to run some kind of value screen. What’s the du jour measure now? Price to free cash flow? Maybe price to sales. Surely you’re not going to just run a plain vanilla low price to earnings screen are you?

I can’t say, and I don’t mean just right now, either. You should keep quiet about your strategy because we’re all competing. Did you forget that?

Look, we’re four months away from a 15-year contest. I think a little idea tossing is reasonable.

What about you, Vallor? Shen asked.

I’m with Kathy. I think loose lips sink ships. Everybody looked at him. You know, like they said in World War Two, except about stocks now.

Loose lips sink stocks? David tried.

Loose lips sink strategies.

At lunch, Greg sat between Kathy and Rosita Sanbria from Tucson. Both women were smart and well-spoken. They wore pant suits with their hair up. They talked about investing in a way that made him realize how hard it would be to win.

After lunch, caterers presented gold envelopes to the contestants, each person’s full name embossed on the front. Inside was a letter from Mr. Colvin, and a statement showing $100,000 in a custodial trading account in the contestant’s name, cleared for trading from January 3, 1995.

It’s real, Mr. Colvin said into the microphone. And it’s time. Let’s show the market how it’s done.

Chapter Three — 1995, Year One

First Week Of January, 1995 — United States

THE CHRISTMAS SEASON HAD BEEN busy at Vallor Farm. That was great news, but it left Greg exhausted. Between studying for finals, taking finals, and selling trees, he’d barely found enough energy to think about the contest. He rested with his family for the last week of the year, and then at last sat down at his desk to finalize his plans for Tuesday.

Vallor Farm is located near Estes Park, Colorado, deep in the Rocky Mountains, and far from any internet connection at that time. Greg was able to check email daily when he lived on campus, but from the farm it took an hour’s drive to get online. By the time he made the trip to Boulder on the last Sunday before the contest began, there were several notes waiting for him.

The group of ten contestants had already grown close during their four months of preparation. Friendships had formed and rivalries had escalated. Taunts had been issued, methods questioned, ideas tossed about, and jokes made. Don Carlson at Weatherhead suggested in November that they all sign a secret pact to split the eventual winnings ten ways so that they were each guaranteed well over half a million dollars. Nine declines came back, Ravi Patel’s with the quip, Whatsamatter, Don? Can’t find any good stocks in Cleveland?

On that last weekend before the opening bell, however, the tone was decidedly different. Not much joking anymore. People asked a few questions. The answers were short. It was almost time to put up.

Are you ready? Kathy wrote to Greg. I think I’m all set. I tried researching more to find something new in the four months of lead time, but the idea I proposed in my application is the best one I have. Nothing changed.

Same here, Greg replied. I think my approach is too simplistic. The rest of these stock jocks would laugh themselves silly if they knew what I’m up to. I’m probably going to get killed.

You and me both, came her reply in less than a minute. She too was online checking charts, testing measures, cracking knuckles.

We better be careful, wrote Juntaro Sakamoto from Honolulu. The Dow was over 3,900 in September and October but it’s around 3,800 now. We were supposed to go up at the end of the year, so why didn’t we? I’ll tell you why: the peso. It’s not getting better any time soon, either.

You’re worried about that? Marcus Covington replied from Darden. Who do you think has the most at stake in Mexican markets? Fat cat U.S. investors. Do you think they’re going to let a devalued peso take their money down with it? There’ll be a bailout. I read Wal-Mart and Price Club are looking to put new malls down there. Salomon has money down there. Goldman. Bankers Trust. Fidelity. That’s a lot of cigar clubs looking to keep smoking whether or not the peso’s worth anything.

So far, that hasn’t helped, Juntaro shot back. TELMEX is down almost 30 percent and CEMEX lost more than half of its value in December alone. Emerging markets are feeling it. This Tequila Effect is a problem.

Eric Thompson Wallace wrote in from Philadelphia. The peso thing will pass. The real problem is interest rates. They’ve been rising in the U.S. Remember the old saying, ‘Don’t fight the Fed.’ Maybe you guys shouldn’t.

I guess everybody’s staying in cash next week? Rosita asked simply enough.

I am, Kathy wrote, but that has nothing to do with the Tequila Effect or interest rates. I have a plan and I’m sticking with it.

Count me with Kathy, Greg typed in that day. This kind of stuff has always gone on and the same things that worked when the going got tough in the past will probably keep working. That’s my bet anyway.

Shen Tao clucked his tongue when he read Juntaro’s note. He checked a price chart on the Dow, and wrote, The Dow fell since September, you’re right about that. But did you notice it’s up since a month ago? That happened during the Tequila Effect. If you’re worried about Mexican stocks, don’t buy them. They don’t mean anything to U.S. stocks. You doubters surprise me. Look at the Dow so far this decade. People were excited when it touched 3,000 in summer 1990. Then it fell to 2,500 that fall but shot to almost 4,000 a year ago. It’s spent almost this whole past year in a 300-point range between about 3,600 and 3,900. That’s base-building, folks, and it’s about ready to take off again. Mexico doesn’t matter. Interest rates don’t matter. The chart matters, and the chart says shut up and buy something!

That’s exactly what he did. When the market opened, he concentrated on biotechnology stocks. His largest position was Vical, which he picked up at $7.75, about half of what it traded at one year earlier. A recovery was certainly in the cards, he thought. The company was a leader in DNA research and much more exciting than the lumbering Genentech. Vical’s Allovectin-7 was already in Phase I clinical trials and was one of the most promising cancer therapies. When injected into a tumor, it boosted the body’s immune response. It might not have been the cure for cancer, exactly, but it was a darned good treatment for the disease, and that meant good business. The stock should at least double, Shen thought, to just above its previous high of $15.25. It could very well go higher than that. It could even be a ten-bagger.

Back in Boston, David Lacey remained true to his belief in technology. That opening week, he built a tech-focused portfolio. His largest position was Emulex, a network storage company. He told his older brother James, Any moron can see the growth of the World Wide Web will drive data storage needs. At the end of 1992, the stock had been around $10. Then it fell off a cliff, dropping 40 percent in a month to $6 by the end of January 1993. By March 1994, it cost less than $4. Then, just as David had been talking about in California the previous August, the World Wide Web started to take hold and the shares staged a steady comeback. Watching the stock rise during the autumn months ahead of the contest drove him mad, but he thought it still had room to run much higher by the time the contest began. He bought shares at $13 that opening week.

Rosita Sanbria’s family had immigrated from Mexico. Her grandfather toiled in farm fields for ten years before he could afford land of his own. He told his children and grandchildren that they needed land. All wealthy people have land. What they do with that land determines how wealthy they become. You can walk on land. You can build a house on land. You can grow food on land. Everything else in life comes and goes, but land stays with us. Buy it, keep it, buy more of it. That was the Sanbria family motto and it had served them well enough to send Rosita to college and graduate school. She hadn’t forgotten that lesson when her studies took her into equity investing. She looked at land companies, construction companies, farming companies, and others related in some way to the most reliable source of wealth. She considered it fitting that the contest was sponsored by a man who’d made his fortune in real estate. To Rosita, all signs pointed in that direction.

She built a portfolio of companies connected to land and its uses. Her leading position was homebuilder D.R. Horton. The stock almost reached $20 in January 1994, then spent the rest of the year moving steadily lower.

I can’t believe it, she told her father at Christmas. This is the main stock I want to own and it’s been getting cheaper all year. It’s like the contest was made for me.

She bought shares at $9 and felt confident that she would triple her money in it.

Off they all went during opening week, years of study and months of preparation finally being put to the test. Eric Thompson Wallace bought oil companies. Ravi Patel bought financial companies. Marcus Covington chose healthcare stocks. Juntaro Sakamoto stayed safely in cash and bonds. Don Carlson dropped hints about historical trends and Dow timing.

The basic theme pursued by all but two of them was known. The two quiet ones were Kathy Kelderman and Greg Vallor. They said they were sticking to their plans — and that’s all they said.

Monday, January 16, 1995 — Honolulu

Juntaro was better known as Jun to his friends. He’d grown up in Hawaii, but spent summer vacations with relatives in Japan. He was third generation Japanese-American, and his parents were determined that, unlike them, he would learn to speak native Japanese. Attending festivals in traditional Japanese clothing, watching fireworks over rivers, and helping his aunt make pork cutlets on rice had done the trick.

There was something else Jun learned: stock markets go down. Every relative in Japan came to talk of stocks the way flies talk of swatters.

They hadn’t always. When Jun visited in the 1980s, Japanese stocks were the dream. Most of his relatives started moving money from savings accounts to the market at around 10,000 on the Nikkei 225 index. By December 1989, it had reached nearly 39,000. Jun and his family were in Fukushima prefecture to celebrate New Year’s, and all the talk was of soaring real estate prices and a chance to buy more land because stocks were going up even faster than real estate.

Jun never forgot one conversation with his uncle about ways to borrow money to buy stocks on the rise, then sell those stocks later at a profit, pay off the loan, and keep the difference. Ma-jin, his uncle had said with a squint of his eyes.

Margin, indeed.

The Nikkei plunged below 30,000 by April 1990. Jun’s relatives didn’t sell. They borrowed more to make more on the recovery. It’s an opportunity, his uncle told everyone. By the end of September, the Nikkei traded below 24,000.

Opportunity became crisis. His uncle was forced to sell at losses to meet brokerage demands, but it didn’t raise enough cash. They eyed his house. He turned to banks to borrow more, but present circumstances disqualified him for any loans. That left only usurious money from the yakuza, Japanese mafia. Nobody knew how much Jun’s uncle borrowed but it was plenty, he’d promised, enough to get the family back in the green. Even with 18-percent monthly interest rates accompanied by collection phone calls at ten-minute intervals, he believed it was the way out.

He was right...for a while. At the end of March 1991, the Nikkei traded above 27,000, and it’s climbing! he said. This was his chance to get it all back and more. He paid off the yakuza and became a preferred customer. They had more money if he needed it. Nothing ventured, nothing gained. He dipped his hand right back into the seething lending pot to get back on top.

But that was the top.

In August, the Nikkei fell below 23,000. The family stopped answering the phone. Men in black cars paid visits. Sometimes they didn’t even get out of the cars. They parked in the driveway and sat smoking for hours, watching the house.

A year later, the Nikkei slipped below 15,000. The family’s money had disappeared long ago. At last, Jun’s uncle disappeared, too. He went to work and never came home again. That’s all they knew. Men came for the house. Jun’s aunt and cousins moved to an apartment in her hometown of Kobe where they tried to forget the tragic rise and fall of their family’s fortune. Jun saw them for the last time in January 1993. They couldn’t have known it then, but like the Nikkei they were down and still falling. The declining cycle was not finished.

After that, the Nikkei traded in a range. It got back above 20,000 in 1993, then fell again, rose above 21,000 in 1994, then fell again. By the time the contest began, the Nikkei still headed lower and Jun was more convinced than ever that the most important prerogative in stocks is to protect one’s capital.

He spent the morning of Monday, January 16, 1995 reviewing his portfolio of cash and bonds, wondering if he needed just a slightly higher exposure to stocks. His email inbox overflowed with cheerful notes bragging about early gains in the contest.

Loudmouth Lacey wouldn’t shut up about Emulex. It’s already over $14. That’s more than 8 percent in less than two weeks. Let’s see, annualized, this baby’s cranking out 200 percent a year.

Familiar enthusiasm, Jun muttered.

He returned home for lunch.

His mother sat at the table staring out the window. She held a wadded up tissue in one hand. Sit down, she said. Jun sat across from her. She kept looking out the window. We got a call from Kobe, she told him. There’s been an earthquake.

Jun held his mother. He thought of his poor aunt and cousins. Just five years before, they’d all been together with his uncle in Fukushima for New Year’s, partying on a pile of money. The money was gone, and now the people were gone, too. His uncle had been devoured by the market; his aunt and cousins by the Earth. This is how it goes, he thought.

Including Jun’s aunt and cousins, the Great Hanshin quake killed more than 6,000 people and cost Japan 2.5 percent of its gross domestic product. It sent the Nikkei 225 plunging yet again, this time to less than 15,000 by June. Even that wouldn’t prove to be the bottom.

David Lacey could go to hell, Jun thought. His day will come.

We’re safe, Jun told his sobbing mother.

From cracks in the Earth to cracks in the market, he swore to keep them that way.

Monday, March 20, 1995 — Philadelphia

Eric Thompson Wallace had always liked sitting alone with a pad of paper, thinking. Current news and editorials nearby made it even better. A comfortable room in dark wood with warm light made it ideal. That described the lounge inside Lippincott Library, where he’d set up shop toward the end of March to reflect on the first quarter.

Eric was an oilman. Not by trade, mind you. He didn’t come from a string of wildcatter ancestors from Texas. He didn’t grow up with crude under his nails. He just believed that oil was the most important commodity in the world, that it shaped nearly every decision a government makes, and that its profitability was the reason no other forms of energy had achieved widespread use.

He worked summers in a lumberyard when he was in high school. He drove a forklift powered by electricity and marveled at how long it could go on a single charge. That led him to research the practicality of electric vehicles to find out why there weren’t any on the roads. What he found was that they are quite practical, in fact, and that the technology to mass-produce them already existed, and had for years. The only reason they weren’t on roads is that they threatened the oil business, and the oil business owned politics. Connect those dots and — poof! — electric vehicles were a no-go.

He told a friend of his to mark his words. The very day after the last barrel of oil is burned, electric cars or something better will go up for sale en masse. People will realize it could have happened decades earlier and the only reason they’d been smoking up the sky to go buy a bag of groceries is that somebody wanted to sell them the oil to do it.

That was back when he thought he could change things. Then he realized he couldn’t. Then he thought maybe he shouldn’t, anyway. Then he got hooked on the business side of oil.

He found an old book appropriately called This Fascinating Oil Business and started tracking all the major oil companies and peripheral firms. The more he studied, the more convinced he became. The hot theme of the moment comes and goes, but oil stays. Eric expected that for the rest of his lifetime, oil would be the defining factor of business around the world. As undeveloped nations became more advanced, they would demand more oil. That would come just as the amount available started going down, if it hadn’t already. Wars would be fought. He didn’t know how it would shake out, he just knew oil would be the economic theme of his lifetime and that he could make a lot of money by understanding it and investing wisely.

Since the day Eric was born, Exxon stock had been climbing higher and paying steady quarterly dividends all the way. The stock even went up in the god-awful 1970s market, by almost 300 percent. In the 1980s, it went up another 550 percent. In the first five years of the 1990s leading up to the contest, it rose another 64 percent. It split two-for-one in 1976, 1981, and 1987. There was a definite pattern in place, and it added up to lots of money. He bought shares at $60.50 in January as the centerpiece of his oil-themed portfolio.

Exxon traced its roots back to the 1880s when John D. Rockefeller started his Standard Oil Trust. The Jersey Standard refinery division began in kerosene, then later switched to gasoline. It helped the allies in World War II. In 1972, it changed its name to Exxon. The Arab oil embargo sent the company and its competitors scrambling for new oil sources. They found them in Africa, Asia, the Gulf of Mexico, and the North Sea. They found so much new oil that it flooded the market, and prices and profit margins fell. Despite that, Exxon flourished. Eric was convinced that it would keep flourishing for the rest of his life come hell or high water. More accurately, come less supply and more demand.

He settled into his favorite seat in the lounge on Monday, March 20, 1995. In two weeks, the first quarterly reports would be sent out by the market study team headed by Professor Pinkney at UCLA. They tracked the contest’s activity. Without revealing holdings, they were to provide quarterly performance updates for each contestant.

So far, Eric was up 5 percent. Exxon closed the previous Friday at $65.25, putting his lead position up 8 percent.

He flipped the pages of his notebook back to January to see what had been on people’s minds. He saw the peso discussion and chuckled. That turned into nothing, of course. President Clinton had scraped together $50 billion in loan guarantees to bail Mexico out. Big surprise there. The only thing surprising to Eric was that others were surprised by it.

He’d tried to keep his fellow contestants out of the market with a warning about interest rates, but they saw through it. There were two things Eric always kept firmly in mind: The market goes up over time, and oil companies go up faster than the market. Against those fixtures, all news was just so much entertainment.

To wit, this peso thing. The end of the world in December became the Dow closing above 4,000 for the first time ever on February 23. Thanks for the warning, Sakamoto, Eric had scribbled in his notebook that day, with a reference back to Jun’s peso fretting.

One of Eric’s Delta Sigma Pi brothers walked over. Did you read about these nuts in Japan? he asked.

Eric shook his head, annoyed at the interruption.

They sprayed sarin gas in Tokyo’s subways. Bunch of religious loonies. In Tokyo! We’re not talking about the Middle East. Terror in Tokyo.

It’s a weird world, Eric replied.

How’s your contest thing going?

Fine.

Better be careful. Something like this could rattle markets. Japan’s important, you know.

Thank you, I hadn’t realized that. Eric looked up from his notebook. Let me tell you something. It wouldn’t matter if they’d blown up half of Tokyo. Almost nothing ever matters in the long term. Some gas in a Tokyo subway is important to police in Tokyo. It’s not the least bit necessary for me to know about.

His friend nodded and walked away.

Eric hated being interrupted.

Wednesday, April 19, 1995 — Charlottesville, Virginia

Damned terrorists! Mr. Covington yelled and turned off the TV. There was big news. His wife brought sandwiches to the table. Their son Marcus came in the front door holding a briefcase with corners of papers sticking out the sides. He set it down and hurried over.

Sorry I’m late, he said. The family’s schedule worked out to meet for lunch at home on Wednesdays.

That’s all right, his father replied. I’m just glad you don’t go to school in Oklahoma.

It’s a cryin’ shame, Mrs. Covington said, shaking her head. She poured three glasses of milk.

The Alfred P. Murrah federal building in Oklahoma City had been destroyed that morning. Early reports estimated that hundreds were dead.

Let us pray, Mr. Covington began. After they prayed, he took a bite of a sandwich and swallowed it with a drink of milk. I tell you what. This Clinton administration needed to get on these terrorists two years ago when they tried blowing up the World Trade Center. Does anybody else remember that? Knowing that they have designs on us doesn’t get any easier than them outright trying to blow up one of our buildings. It didn’t work that time, but it sure as hell worked this time, didn’t it?

It sure did, his wife replied. There’s going to be a war now, I guess. More poor babies are going to die getting back for all the people killed today. It’s nothing but a shame.

We can’t let this go unpunished, though. You know that. I’d feel differently if Marcus here was heading off to catch these terrorists, but the fact is somebody has to do it. Look at that mess in Oklahoma!

They’re not sure who did it yet, Marcus said. They think it was terrorists from the Middle East, but they aren’t sure yet.

They can take their time, but what are the odds? Of course it was some Palestinian group. They hate us.

Do you think this will affect the stock market? Mrs. Covington asked Marcus.

Of course it will, Mr. Covington said.

I’m not sure, Marcus answered. "This is a terrible event and it’s going to hurt Oklahoma City, but it doesn’t have much of an economic impact on the country. Even if the market dips