January 18th, 2011
For the past couple of years, I have played an imaginary game called “Perpetual Options”. The game involves selecting a hypothetical portfolio of 15 low priced stocks at random, pretending to invest $2000 in each and seeing how the portfolio performed over the next 12 months.
I started the game at the depths of the Financial Crisis in February 2009 because a friend, who is extremely conservative, rattled off all the reasons why individual investors shouldn’t be in the stock market. While the market, as measured by the S&P 500, increased by 28% (February 1, 2009 to December 31, 2009), that first grab bag of 15 low-priced stocks increased by nearly 100%. The original $3000 invested on February 1, 2009 would have grown to $5954 in 11 months.
On January 4, 2010, I repeated the exercise by selecting another 15 stocks at random (see “My Top-15 List of Low-Priced Stocks“). The results through last Friday follow:
As the market advanced 14.1%, the hypothetical portfolio grew 33.7%. To a much greater degree than in the prior test, the performance among the 15 stocks varied:
- The star performers were MIPS and AXAS, both of more than doubled
- Two of the group declined (IVAN and SB) and two underperformed the market (CNU and SMI)
- One was acquired by another company in November and delivered a 37.6% profit
- ALD is no longer traded.
The rules for picking these stocks were:
- $200 (or any other arbitrary amount) equally invested in
- stocks selling less than $10 that
- appear to be on the verge of completing a reversal chart pattern
- appear to be showing some upward momentum (favorable moving averages trends) and
- are fairly actively traded.
Shall we go for a third year? Because the market has advanced so far from the March 2009 low, I need to expand the universe of candidates to stocks between $10 and $20. This year’s list comes from the nearly 300 stocks making up the Watchlist I provided to my subscribers (that is, the list from which I expect to find stocks to buy over the next six months):
My objective with this exercise is to eliminate some of the mystique surrounding stock investing by proving that all you need is 1) a bull market, 2) some elementary chart reading skills, 3) diversifying your money in a number of stocks and 4) an appetite for a little bit of risk.