By Mike Zaccardi
For those of you who are in the UNF Finance and Investment Society and are participating in the up-down stock market game, I thought I would take time out to provide some general trading advice for novice traders looking to make a big score and how to get rich from trading the market – I can’t guarantee you will make money trading.
The fact is most traders lose money trading individual stocks, and most investment managers underperform their respective benchmark.
Only about 20 percent of actively managed funds outperform the index of funds against which they are measured. What’s more, the 20 percent changes every year, meaning it’s a different minority of managers beating the market each year. Pure luck explains that.
Of course, there are investors such as Peter Lynch and Warren Buffet who have a history of outperforming, but stock pickers like those legends are quite rare.
I just told you even professionals consistently underperform the market. OK, so what chance do we students have to outperform? Here is something to consider: Student-managed investment funds tend to beat the professional investors by a decent margin.
Take UNF’s Osprey Financial Group for example. The UNF Fund, managed by both undergraduates and MBA students, has beaten its benchmark since inception in 2002. In the last year, it has beaten its bench by about 3 percent. During the period of the financial crisis, it was beat by 9 percent, despite underperforming in the rally of 2009.
For the average student at UNF who is just trying to win the $100 prize for being the best performing trader for the fall semester, I have some advice that might help you get there.
First, it is not real money, so who cares if you lose a lot of it? If you just try to play it safe, you will not win since some student traders will be very bullish and some very bearish. Some will think the market will go up and will choose securities that will increase substantially in a rally, and some students will bet on a market downturn and will short stocks or buy short exchange traded funds (ETFs).
You must take a lot of risk in this game. In that respect, it is not like real-world portfolio management where you would have to weigh the risks the client is willing to take.
For you bulls out there, I recommend choosing stocks that are highly cyclical, or dependant on a strong economy to do well. These cyclical stocks will go up much faster than the market in a move higher. Stocks like BUCY, FCX, F, CAT, HD, YUM, APC, CHK, JDSU, X, NUE. These are ticker symbols for more risky stocks.
You may want to take a look at small and international companies, as well. Tickers such as SLXP, MFA, EVVV, ABK, MCZ. On the international side, SMSN, TSM, ITUB, VALE, CHL, PBR and STD are a few to get long if you think the market will rip higher until Nov. 20.
If you are a bear, just go short those stocks. You could also trade the 300 percent leveraged ETFs such as FAS (FAZ), BGU (BGZ), TNA (TZA), ERX (ERY). I recommend you do not hold these positions for the entire semester, as they have a tendency to decay due to the negative compounding effect of daily leveraged securities. An interesting strategy could be to short both the three times long ETF (FAS) and three times short ETF (FAZ).
I cannot promise strong returns, but I can give you advice on what to buy given your view on the overall market. Some stocks simply move more than others. A volatile stock like Whole Foods (WFMI) will move more than a steady stock like Kroger (KR), for example.
You may say that these are individual companies that will move independently based on their fundamentals, but take a look at an index known as JCJ. This index measures correlation in the market. It is near all-time highs.
Good luck on your trading. As always, shoot me an e-mail at mikeczaccardi@gmail.com with questions regarding trading or how the financial markets function. Learn more at our FIS meetings, as well. Happy trading!
