Think you can take a fifth grader?
Today's Financial News - Posted June 12, 2009
As investors, we tend to make things too complicated. It makes us feel better about the choices we make. Sometimes it takes a little fifth-grade logic to knock us back into place. Think you can beat ‘em?
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): The local newspaper did it to me again. As I sat down to enjoy a delicious early-summer treat, a bowl of fresh, locally grown strawberries, the headline caught my attention.
It is not every day the local rag attempts to delve into the subject of finance and investing. Too often they are busy covering some downtown assault or the mayor’s latest political antics.
But today’s article was well worth reading, especially since it discussed a class of fifth graders taking their shot at Wall Street and beating the pants off the market.
These kids have literally only been potty trained for six, maybe seven years yet their “investments” – they only made fictional plays – proved wiser than most seasoned market veterans.
Their secret? They were too dumb to know any better.
Believe me, I mean that in the most polite, respectable manner.
Secrets of the newly potty trained
These young investors cannot tell you what a balance sheet is, let alone a debit or a credit.
And they certainly know little, if anything, about liquidity issues or free cash flow.
And I bet they never factored how a company prices its option-related compensation packages into their investing equation.
Instead, they made moves that would make Warren Buffet proud. They invested in what they use every day and know the best.
Their top-three picks: Texas Industries (NYSE:TXI), Humana (NYSE:HUM) and 99 Cents Only Stores (NYSE:NDN).
Let’s see, there school is probably under construction (around here they always are), their parents were probably searching for cheap health insurance and what fifth grader does not love to take a Lincoln or two to a dollar store.
These savvy students used a simple, yet highly effective, technique that can create an easy path towards profits for novice investors. Instead of getting caught up in hype-filled companies or far-flung investing strategies, they stuck with the basics.
The buy-what-you-use strategy works because it forces us to pay attention to absolute fundamentals without us ever even knowing we are doing the research.
Fifth graders knew construction was a strong industry because for the past six years, their entire schoolyard history, they had to deal with jackhammers and excavators ripping up their bus stops.
They knew a health insurer was a strong idea, especially one tied so strongly to government programs, because it has been a dinner-time topic at all of their homes.
Little Jimmy probably has no idea about underwriting algorithms, but he knows his old man is sick of seeing his premiums go up every other month.
As for the dollar store, well, these kids are probably spending much more time in the discount aisles than they were during their tenure as a third grader. Times are tough, even in the baseball-card trade.
These kids may have had no idea what kind of strategy they were following, but do most investors?
Unless you sat down, ran all the numbers, did the research and know your investments like you know the aisle of your local grocery store, let the advanced stuff up to us pros.
Beginners need to follow the advice of these pre-teens.
Buy what you know and you may just prove to be smarter than a fifth grader.
Next Article: TFN Reader Grapevine: Looking at penny stocks MLKNA, ENLU and SPNG
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