Assembling a profitable portfolio of stocks is part science, part art, and part luck. Anyone of the three ingredients may be enough to enrich your bank account; however, for sustained success, all three components are most advisable.
There are a wide variety of investment strategies that professional money managers rely on to select individual stocks and assemble winning portfolios. There is no general consensus on the “best” approach to stock picking.
Here are some of the most popular rules that professionals follow. The list is by no means complete.
Invest in what you know or find fascinating
For teenagers, this might include companies that produce video games and other types of entertainment; web apps; popular high-tech gear, including smartphones; educational products, and the like.
As a general rule, if you don’t understand the products a company makes or the services it provides, it’s best to avoid buying shares in that company.
Diversify your portfolio
You’ve probably heard the expression, “Don’t put all your eggs in one basket.”
For The Richtol Exchange: Israel Student Stock-Picking Challenge you need to select five different companies. Selecting five stocks, all of which make web apps, might be a risky bet. Why? Because the stocks of companies with similar products or services tend to rise and fall in sync. Which is great if their shares all rise in value at the same time; but lousy if they all drop simultaneously.
Most professional investors aim to bring some balance to their portfolios, so that even when some stocks fall sharply in price, others remain steady or rise.
Be On the Lookout for Stocks that are Trending
Stocks that are rising in price tend to keep rising (until they don’t). Likewise, stocks that are declining tend to keep falling (until they don’t).
Some professional investors don’t much care what a company makes or what industry it is in. Instead, they place their bets primarily on the trends of the companies’ stock prices. For each of the stocks listed on The Richtol Exchange, we’ve included two charts: one for the stock’s most recent trading range (one year) and the other for its historic range.
While every trend, eventually, comes to an end – and typically reverses itself – most stocks tend to continue on their current trajectory until some major development causes them to change (or reverse) course.
Act Like a Monkey
No, not at the dinner table, but when selecting stocks for your portfolio. To the embarrassment of many professional investors, researchers have given darts to chimpanzees, who in turn throw them at a listing of possible stock investments. Quite often, the companies targeted by the chimps, taken collectively, do as well or better than companies selected by full-time, professional stock pickers.
What the dart experiment proves is that luck is a genuine factor in successful stock picking. Sometimes, you’re better off being lucky than smart.
Don’t Take Our Word for It
We only list the most basic details about each of the companies on The Richtol Exchange. There’s lots more available on the Internet and you should do your investing homework.
Obviously, a great place to start is on each company’s own website. But don’t stop there. Companies, by law, must tell you the truth about themselves. But it is rarely “the truth, the whole truth, and nothing but the truth.”
Before you invest in a company, you’ll want to see what other credible sites, such as The Wall Street Journal, Bloomberg, and The Financial Times have reported on the company. And keep your eyes open for critics of the companies you’re considering.
Some professional investors who are big fans of a company will actually pay researchers to dig up as much criticism as possible on the company. These investors want to know the worst-case scenario before they put their money at risk.
Many times professional investors make the right decision to buy or sell a stock. They just act at the wrong time.
Very, very few stocks are unaffected by how the stock market – the assembly of all stocks – is behaving. At times, investors as a group are optimistic, which drives up the price of almost all stocks – even lousy ones. At other times, investors as a group become fearful of the stock market, which drives down the price of almost all stocks – even great ones.
Wall Street has a term for upbeat investors – Bulls, and for pessimists – Bears. When the Bulls are running – meaning almost all stock prices are rising, it’s generally best to join the pack. Likewise, when the Bears are in charge, it’s usually not the best time to be buying stocks aggressively. Except…
Be a Contrarian
The very nature of a market in stocks is that investors seldom see eye-to-eye. For everyone who buys 100 shares of stock in an Israeli company – thinking it is a good use of their money, someone else must be willing to sell those same 100 shares – thinking the price their getting is at or near the best possible price.
There is an entire breed of investor who regularly bets against conventional wisdom. They are heavy buyers when most people are sellers and vice versa.
Some of the greatest fortunes on Wall Street have been earned by contrarians, who saw where most of their peers were headed, and then went in the opposite direction.
In the real world, an investor is allowed to do his or her own homework and reach a unique conclusion. Investors are NOT allowed to receive special tips or advance notice of important news that will soon impact a stock’s price, and then buy or sell that stock before the news reaches everyone else.
On The Richtol Exchange, so-called “insider trading” is permitted. If you have family who live in Israel – maybe they even work for one of the companies listed on The Richtol Exchange – it’s okay to ask them about what they know and what they recommend.
Learn what you can about each company that you select. Just know that if you were actually buying these stocks, some of the information might be off limits.
Like Fantasy Football or other games of knowledge and chance, The Richtol Exchange is both educational and entertaining. We offer a new challenge every three months. So if you don’t do well on the current challenge, remember there is another coming very soon.
The Richtol Exchange will make you more aware of many of Israel’s finest companies. It will also give you some basic insights into how the stock market works.
If you take the challenge and have fun regularly checking on how your portfolio is performing, you’ll be a winner regardless of whether at the end your stocks skyrocketed or tanked.
That is one investment we know will pay off.