Why Nobody Should Have Believed the $72 Million High School Stock Trader Rumor
Now that high school senior Mohammed Islam has admitted to New York Observer editor (and former Money columnist) Ken Kurson that he completely made up that whole stock-trading boy-genius gazillionaire story, the Twittersphere is condemning New York magazine (and writer Jessica Pressler) for what's assumed to be sloppy fact-checking.
There's no doubt that the situation is embarrassing, and that the still-posted article -- a section of the magazine's "Reasons to Love New York" feature that already went through a headline revision Monday ("Because a Stuyvesant Senior Made $72 Million Trading Stocks ..." became "Because a Stuyvesant Senior Made Millions Picking Stocks ...") -- will need to be corrected further.
It now appears that there are no millions. Not the rumored 72. None.
Still, there's an argument that Pressler and New York are not solely culpable for yesterday's media circus. Let's be honest: Many in the media who covered and disseminated this story (including, albeit very skeptically, Money) are New York-based media types, proud of our city and its if-you-can-make-it-here-you-can-make-it-anywhere mythology.
Taken at its word, the story felt like an ode to free markets and the American Dream. From hobbyists to professionals, investors are thrilled by the idea that with enough smarts and hard work anyone can go from rags to riches, no matter where they start. If an industrious first-generation American can build a massive fortune between the age of 9 and 17, you can too, right?
There's a term for this impulse, in fact: "confirmation bias," which is what experts call the common human tendency to seek out only information that confirms what we already think -- or want to think.
The fact is, we should have done the math, as the graph and explanation below show.
In New York and other publications, Islam claimed he started trading using money from tutoring while he was in middle school. His starting age was given as either 9 or 11. Lets assume he had started at 9, in 2006. Then let's assume he was exceptionally industrious with his tutoring, allowing him to start with $10,000 in savings. In order to end up with $72 million dollars by his senior year, Islam would have had to post average annual returns of 168% from age 9 to 17. That's staggeringly unlikely.
But let's take it further: Imagine that someone had spotted Islam's prodigious talent and given him $100,000 to play with in the markets. Even then he would have had to return an average of 108% annually. That's more than five times Warren Buffett's average returns of 20%. And he would have had to do it every year for nearly a decade.
In other words, Islam's story was preposterously unlikely even if we'd given him all of the benefits of all of our doubts.
Other stories of investing prodigies have come out recently, including one about a New Jersey teen who claims he turned $10,000 into $300,000 trading penny stocks, a feat that would require a one-year return of nearly 3,000% (which is improbable though not impossible). The reporter on that story seems more confident in his fact checking.
Bottom line: $72 million is an insane amount of money to make from scratch while day trading. Pressler originally did call it "unbelievable," and that's what it should have been, for all of us.