Beating the market by trading like a sociopath (part 3)

There's nothing special or sophisticated about my system.  It could be luck.  It's impossible to tell.  But if you're interested in what I've done to manage to beat the market so soundly, all of my stock picks have general brand name recognition among what traders call “stupid money.” Stupid money is a derogatory term for unsophisticated individual investors.  These investors frequently buy high and sell low, endlessly chasing stocks rather than profiting from them.  If you think of a stock trade as a zero sum game (someone wins and someone loses), playing against stupid money will be more profitable on average than playing against smart money.  I want to make sure my stocks are already on the radar of stupid money because the companies are household names—stocks like Google, Apple, Disney, and Amazon.  My thought is that for stocks like that, there is a much higher proportion of stupid money to smart money than for a more esoteric stock like United Technologies Corp.

I like to choose stocks that have been out of the news for a while.  Before I buy a stock, I look at Yahoo Finance to see if there have been recent upgrades or downgrades by analysts or any recent news about the stock or coverage from financial bloggers.  My ideal stock has not seen any movement from an analyst for at least 5 years and no real news for the past year.  I need that stock to seem new and fresh to stupid money (and even some smart money).  It’s the same technique as the marketers who peddle their wares as being “an ancient Japanese formula” or “what doctors don’t want you to know about . . . ginseng.”  There is a sensation of newness (it isn’t currently zeitgeisty) with all of the benefits of pedigree (it has an established history).

To hedge my risk, I choose stocks in a particular sector that I believe is stable while retaining enormous growth potential and then choose the best stock out of the bunch.  I choose these stocks because I know that when people get spooked, they will pull their money out of oil futures or other high-risk securities and dump them into my blue chips—stocks like Coca Cola, McDonalds, and Johnson & Johnson.

I also have to be intimately familiar and impressed with the business model, but in a way that most people are, or can quickly be made aware.  I have little relatives and frequently watch their movies.  Disney movies are always popular, but I tend to prefer Pixar.  Luckily I know that Disney owns Pixar and Disney has a nearly a century full of intellectual property in their stable.  I’ve seen my little relatives flip upon receiving a Minnie Mouse doll and know how powerful that brand is for youngsters, but so have millions of other parents, uncles, aunts, and grandparents.  While they may not think immediately about exploiting their children’s joy, I do.  But I also know that when those parents are sitting down to pick some stocks and are thinking about Disney, they’ll remember that moment and buy.