January 18th, 2011

Random Stock Selection Again Beats the Index

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.

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  • Anonymous

    do you like AFOP here?earning is good.

  • Joe

    Thanks for reminding me; I just bought it after a pullback to the breakout level.

  • Anonymous

    jdsu, ezch, fnsr, afop..

    I have hard time to pick the best one from 5 yrs chart?

  • Joe

    You're right, they all have about the same looking long-term chart as well.

    I think I'd go with either FNSR or AFOP strictly because of their greater beta and that's what you want when the market is going up which, if you believe in the continuation of this bull market, you should go with.

  • Anonymous

    thx! guru,

    I picked up some AFOP today, filled the gap..

  • Anonymous

    Guru, do you like your previous pick : MIPS chart here?

  • Joe

    MIPS was a pick in January 2010 not this year. Actually, the chart looks a little toppy here; I'd want to see a move above its old high of 19 before making any new commitments and even then it would be highly risky at this point.

    As an alternative, look at the Random Stock List for this year; I've since bought a couple of them in my personal account and wish I'd bought more.