Help on Econ Project?

Question

Rules:
1. Each person begins with $100,000
2. You are not permitted to own stock in more than ten companies at a time
3. You may not buy stocks priced under $5. (Their extreme volatility is dangerous and not representative of the general market)
4. You are not permitted to have more than $25,000 in cash at any time
5. Only shares of common stock may be purchased. Prefered stock may not be purchased
6. You must pay a $10 brokerage fee for each transaction, wether buying or selling stocks or mutual funds.
7. Purchasers of mutual funds must follow these special rules:
(a) An initial purchase of any mutual fundmust be for at least $3,000
(b) Most mutual funds change a fee for their services. For the purpose of this simulation you will be charged a 1 percent "exit fee" on your mutual fund account balance (that is, 1 percent of the number of shares x current NAV) when selling your shares.


Can anyone help my group win this contest?

Answer 1

There is a very similar site, that lets you see what the best traders are buying and selling - http://www.top10traders.com - this is a free site that lets you create a portfolio of stocks with $100,000 in "play" money. Each day the site ranks the best performing portfolios, so you can see how your picks perform compared to other investors. You can read posts on investing from the best traders, as well as share your own investing ideas. There is a charting feature, so you can see how your portfolio performs compared to the S&P 500. Also, you can create your own "group" so that you can see how you are doing compared to your friends.

Here are this month's best traders:

http://www.top10traders.com/Top10Standings.aspx

Hope this helps.

Answer 2

The problem with contests like this is that the stock market is extremely unpredictable over the short term. Any stock tips I could give you over the short term would just be guessing.

That said some general advice:

There is a relationship in investing between risk and return. The strategy that will make you the most money if it goes right will probably also result in you losing the most if it goes wrong. However since this is play money and you want to win:

Buy a lot of stock in a small number of companies. Small purchases of a large number of companies are likely to give you an average return while a couple of big bets are more likely to result in above (or below) average returns.

Smaller companies (and by that I mean stocks with small market capitalizations) tend to be more volatile so focus on them.

This requires even more homework, but try to look for stocks that have dropped significantly or gone up significantly for no good reason (ie there hasn't been any news out about it recently.) Often these turn around. A suggestion.

Make your life easy. Choose a basket of a couple of stocks and then sit back and don't worry. You're no likely to do any worse that someone who flips their money over constantly throughout the contest.

Note: Don't invest actual money based on the above advice. The fortune you lose could be your own.

Answer 3

We've seen these questions before on Investing class simulations.

It doesn't matter what stock you pick. Pick them at random if you wish. Use a coin or a dartboard. Cut up squares of paper and write every letter of that alphabet on them, put 'em in a hat and draw three or four and that is your ticker symbol. I don't care what method you use because this game boils down to LUCK.

Period.

This game runs the length of your class? Its March now so maybe 6 weeks? Any returns will be based on chance...IMO. The time frame is too short to verify whatever trading strategy is working or not. You might by GOOG and it, due to market risk, falls 1 dollar and doesn't recover for 6 weeks. Picked a loser didn't you for the game. Of course, in the seventh week, market conditions stabilize and it goes up 2 dollars. I am purposely omitting the fact that every stock market player completely eliminates market risk and plays only the unique risk of the stock in question (by hedging).

Forget the current stock guru or any of that crap. Study the fundamentals of a stock and look for exactly three things:

1) positive sales growth of X years
2) positive net income growth of same period
3) FCFs - positive FCFs to be exact

Nothing else matters. You find a stock that meets those 3 items for the past 5 or 7 years, you have a winner (most likely).

The time frame of this game boils down to luck. Any winners or losers are, IMO, solely due to luck. Buy spiders and do nothing else.

Answer 4

You are in luck. I train institutional investors.

First, own ten companies, I would really recommend 25 but since you are limited to ten stick with ten.

First, go to either Microsoft's screener or Morningstar's screener or both.

I am presuming you can read a financial statement, but I am also presuming you do not have a lot of skill or you would not be asking these questions. My criterion are to prevent you from getting in trouble and make you reasonably profitable. You should outperform the market, but you won't win a contest unless it is long term and the number of competitors are small. If it is long term then you should do very well. If it is short term like the CNBC contest then the winner will just be a lucky person, there won't be any skill involved. On a short term basis, you cannot acquire the skill in any short time to make real money.

Search for stocks that are low price to book, PE of no more than 15 and preferrably quite low, and/or low price to cash flow, either as low as possible or below industry averages. Search for firms that are more financially flexible, such as high interest coverage and/or low debt to equity ratios. You may also look at management effectiveness such as income per employee, turnover, roe etc. Also, it helps to exclude stocks priced below price to book>.3 as most of these are in bankruptcy. You may also set a minimum return on equity (using only operating income) of greater than 12%.

Outside the screener, reject any firm not profitable in any year in the last five years and reject any firm whose future income is likely bleak unless the discount is incredible.

Require a firm (given current market conditions) will provide you with an 11% return on investment over its life while assuming worst case scenario conditions for the company. If you cannot get at least 11% in the worst of times, avoid it.

Never hold mutual funds, but you may consider closed end funds trading well below their normal discount to market.
For a Morningstar screen use their letter ratings. Look for firms not in trouble.

What you are trying to do is underpay for a stock that is in great shape.

I won't help you with names as it would be unfair to other contestants and teach you nothing. I have never seen a stock tip on Yahoo Answers that made any sense, so ignore everyone who suggests a firm.

If you cannot read financial statements you cannot survive this. It is like driving a car or flying a plane, never having practiced or studied. It just cannot be done.

On the other hand, these criteria are generally sound in most markets (except the interest rate required) and you should do well over the long run with it.