Fifth Grader or Skilled Trader?

by Jim Stevens ([email protected])

Burlington, VT. (Oct. 5, 1998) -- My nephew, who is eleven years old, will be participating in the "Stock Market Game" this year. When my sister-in-law mentioned the game to me, I vaguely remembered playing some version this game in fifth grade myself. My recollection is the following: A guy in a suit was in our class one day. We were told to pick out stocks from the current newspaper stock tables... I don't remember how they told us to choose them.

Most of us picked the same one because somebody noticed it had gone up the most the day before we had to pick. After that, the stock sat in pretty much one spot or lost a little, if I remember correctly. Lots of us stopped filling out the graphs of our fictitious portfolios because a) It became obvious that we were not going to win, and b) The guy in the suit obviously had an extremely boring job! One classmate, whose portfolio was all in Polaroid, I think, stayed with it until the end. His graph had a very cool looking upward angle. We all knew he won and congratulated him on his gambling success.

Moral of the story: We all start out as emotional investors.

Remembering this experience reminds of why I like mechanical screens. When I think of choosing stocks based on my own fundamental research, I can honestly see myself going out and studying a bunch of companies in earnest, picking out and buying some that look like great stocks only to have my hopes dashed by a couple of big drawdowns in my portfolio. Licking my wounds, I'd go whimpering back to the index funds. I think I'd be unwilling to endure further personal anguish after such high expectations and time-consuming efforts produced disappointing results.

If it's smart to invest in the totally mechanical Standard & Poor's 500 for the long run, then moving away from that Foolish mechanical model shouldn't be done capriciously, in my view. For a lot of people, the historical 70 year return of the index, along with periodic investments of incremental percentages of pay, will pretty much get them where they want to go in life.

I think investors ought to know as much as possible about the companies they own and why they bought them. On the other hand, if there are proven mechanical ways to narrow the field of potential candidates for research from the 500 companies in the index down to thirty or ten or five with the Dow, BSP or Keystone methods, what could more Foolish?

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