The Share Challenge: Students show the professionals how it's done

The old adage "beginner's luck" just got a run for its money. After twelve months of playing the stock market, the team of 16-year-old students from Leicester have defied all odds to beat both a top City fund manager and a professional investment club in this year's Independent Share Challenge.

The students, who had no prior experience of investing, achieved a 4.8 per cent return for the year, well ahead of fund manager Sean O'Flanagan, who finished second with a loss of 4.4 per cent. Bringing up the rear was the Lexar Investment Club, who crash-landed with a devastating 34.6 per cent loss.

The students will travel to London later this month to receive their prize of £2,000, presented by Abbey, who sponsored the competition. "It's been a great year for us," said Claire Jackson, the students' business studies teacher at Moat Community College in Leicester. "They are only 16 years old, but they swiftly got the hang of share picking and developed a unique trading strategy that worked," she said.

The teens would get together once a week to trade shares and hunt for new stocks, relying on free information found on websites like Yahoo! and the Motley Fool and research resources such as www.bullbearings.co.uk. The team's strategy was at odds with what is taught in most textbooks, explains Jackson. "The key to their success was that they would go for short-term gains, rather than taking a long-term view," she says. Indeed, the boys spent the year flitting in and out of some of the City's hottest takeover targets, including Safeway, Manchester United, and Abbey National.

After a piece of takeover news would break, the boys would rush in and try to catch the tail-end of the stock's spurt, pulling out shortly after when the price had levelled off. The strategy, albeit risky and unconventional, worked.

As the months ticked by, the team kept clawing in small gains, like those from WH Smith, the troubled book retailer, which they bought and sold twice for a net gain of £75. Over the holidays, the boys took advantage of the high street sector's volatility to bank small gains. A two-week stake in Next yielded a £92 profit; a five-day punt on French Connection brought in £37. As their lead continued to grow, so too did the teens' confidence and discipline, says Jackson, who would come in during holidays to unlock the classroom so they could trade. The group even trudged in when a rare snow storm hit Leicester and normal classes were cancelled.

"The students have done really well to win, but I honestly could not call their stock selections a well-grounded portfolio," comments James Bevan, the chief investment officer of Abbey, who analysed the competitor's portfolios. "Their strategy of clipping small profits and moving on is more about avoiding disaster than long-term growth." Bevan is quick to point out that even the winning students, for all their hard work, still under-performed the FTSE All Share Index by nearly 8 per cent.

If each team had planted their initial sums of £5,000 into an All Share Index tracker at the start, they would now all be sitting on an 12.2 per cent profit, or £610 each.

The lesson sits heavily with fund expert Sean O'Flanagan, co-manager of the Unicorn Free Spirit Fund, who finished the Challenge with a 4.4 per cent loss. "The students have benefited from a strict stop-loss strategy," said O'Flanagan in a nod to the winners. As for his shares, he believes they are all solid selections unduly hit by general market sluggishness.

The situation briefly brightened in November, when the fund manager nearly clinched the lead. O'Flanagan's stake in Sportingbet, the online gambling site, surged on reports that the company had taken over rival Paradise Poker. When the share hit 152p O'Flanagan, who had bought it for 97p, sold out, pocketing a tidy 57 per cent profit. Yet losses from Acal and Morse Holdings more than wiped out that windfall, and the City expert's portfolio never had time to recover. "Although the fund manager finished with a loss, I honestly believe he had the best portfolio of all the teams," says Bevan.

In contrast to the students, he notes, the fund manager's shares hardly changed throughout the year. "O'Flanagan was the only one with a coherent strategy, with long-term views on some interesting under-performing shares, including Harvey Nash and Domino Printing, that stand to do well as the economy warms. It will be interesting to see how his stocks perform over a longer period" says Bevan.

It was a sore ending for the Lexar Investment Club, whose devastating losses of 34.6 per cent kept the team firmly in last place throughout the competition. The seven-strong club of retired professionals from Surrey, many of whom worked in the City, are followers of the Elliot Wave Theory, a technical system of analysis based on historic stock price movements, or 'waves'. Despite their hi-tech calculations, the team was never able to turn a profit. Two disastrous punts on Bookham Technologies left them £1,100 out-of-pocket, to be followed by further setbacks in Mowlem, UK Coal and Hardman Resources. "We were stunned by the drop in Bookham," admits Gerry De Lacey, the club's chief stock analyst.

"The investment club appear to have become emotionally attached to their shares which was value-destructive in the end," adds Bevan. Commenting on the virtual competition, Bevan said it was a great learning experience for all.

Moat Community College is willing to take on allcomers for this year's challenge. If you think you can beat them, call us on 0207 005 2032 or e-mail cash@independent.co.uk