Wednesday, 10 October 2007

Lessons from Who Wants To Be a Millionaire

I love watching the Who Wants To Be a Millionaire quiz show on TV. I have lots of fun trying to do better answering the questions than the contestants.

It is perhaps inevitable that I should make comparisons between WWTBAM and investing. Brace yourselves....

  1. Everyone wants to be rich but almost no one expects to be rich. When asked at the beginning of their turn in the hot seat, no one I have ever seen say they expect to win a million. Most only say they will try their best. Most only desire a sum that will make their present life more comfortable and most only aim for a figure that is achievable, like £32,000.
  2. Almost no one actually wins the million and gets rich. It's hard to find actual statistics on the amounts actually won by contestants on average but of all the scores of watched, in only one episode did someone win the £million. Apparently, it took 264 contestants from the launch of the show before the first person won the jackpot in the UK. The same source says only 1-2% end up winning the big one. My guess from watching the show is that the average take home must be around £16,000 (incidentally, game show prizes are not subject to tax in the UK, so that's one difference with investing).
  3. Success depends mostly on skill but luck counts. Obviously, the more you know, the more success you will have but it is impossible to know everything so the exact questions that come up can make a big difference to the outcome. Perhaps you know Shakespeare but do you know who won the 2002 World Snooker championship? People who tend to do well take educated guesses and take a chance. During the tech boom there were lots of high fliers but even then you had to guess right ... let's see, Nortel or Cisco?
  4. Knowing when to stop and take the money (sell) is critical - e.g. the tech boom and Nortel and Cisco again a good example.
  5. People who are over-confident, which group also tend to be smart, do less well than cautious people who admit the limits of their knowledge.
  6. A very few foolish but extremely lucky people can do extremely well. Most foolish guessers get shot down. But ... there was one very flaky lady who announced at the beginning in the hot seat that she was going to make the most of her chance on the show and intended to win a lot of money. She guessed correctly on about three questions when she admitted not knowing the answer. She did not use her lifelines in situations where she was uncertain, saying that she wanted to save them for later. She walked away with £250,000! Not fair, huh? But that happens on WWTBAM and in the stock market. She is probably claiming today that she knows how to win big on the show. Maybe she has become a stock market commentator.
  7. Neither being a celebrity nor being highly educated makes you better. Versions of the show with celebrities as contestants (I saw a pair of entertasiners get a movie question wrong) and versions with university professors and students ( a team of a student plus a prof) don't seem to do any better than the average guy, just as being a good doctor or engineer doesn't make you a good investor. The fellow who put up the excellent Gummy Stuff website is a retired math professor and he admits in there that all those sophisticated financial tools haven't made him a hugely successful investor. Which is the reason I wonder about celebrities becoming politicians, or are those noble occupations one and the same?
  8. Certain people are more naturally gifted and better trained for the task than others. Some people absorb the trivia required for WWTBAM more easily and some, recognizing their talent, work to develop it to a high degree. There's another show here called Eggheads, in which trivia pros take on amateur challengers. Guess who wins 99% of the time? And so it is in investing. There are not many Warren Buffetts around, who not only has talent but also spends full-time doing what you and I do part-time.
It will not surprise you that taking the comparison a bit further confirms, to me at least, the wisdom of the course I have decided to follow with my investing, whose purpose is to support me since I don't have a pension.

I want and need to play the game but, unlike the show I cannot afford to lose so it would be a big gamble for me to come up against questions I couldn't answer beyond the first two or three really simple ones that are giveaways (though even then, occasionally a stumper comes up). In addition, in the stock market you don't reach minimum take home milestones like on the show. What is the strategy, then?

Unlike the show, there exists in the stock market the equivalent of buying a piece of all the contestants who come on the show, in effect taking the average of their winnings. You will never get the million, nor will you go home with a big fat zero (yes, indeed some poor sods manage to pick the wrong answer before reaching the first guaranteed level of £1,000). If my guess is right that the average is around £16,000 then that's what I'll get, minus a small annual fee for the person who syndicates the investment. Some years when the contestants are stupid or unlucky, I'll make less, others years when they are better, or the questions are made easier to raise ratings (no, not possible! ... though recent game show scandals here make one wonder what kind of manipulations can occur), I'll make more.

Can you guess what I'm referring to? Of the four possible answers, only one is the correct answer. You have three lifelines - ask the audience, phone a friend, or 50/50.
A - Actively- managed equity mutual funds
B - Options
C - Index ETFs or low cost mutual funds, or index tracker funds in the UK
D - GICs

Good luck. The answer will be worth thousands and thousands of $ or £ in your pocket.

And for those who may not have noticed, you can try an online version of the quiz show based on USA culture at the bottom of tis blog page. See if you can win a million. I haven't managed yet ... good thing I'm in ETFs huh?


Anonymous said...

Very interesting and creative post!

Maybe she has become a stock market commentator.

She has the right qualifications.


Unknown said...
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