Are You Smarter Than a Seventh Grader?

When you think of someone who trades stocks, what comes to mind? Perhaps something like this:

Or maybe this:

Or possibly even this:

I bet you definitely didn’t picture this:

That’s right. Picking profitable stocks can be, well… child’s play! A perfect example of this comes out of the book Beat the Street by stock market wonder-boy Peter Lynch. In 1990 a class of Seventh graders at the St Agnes School in Arlington, MA sent him a sample portfolio they had put together as a class project. They invested an imaginary $250,000 in 14 stocks, and watched the growth over the entire school year. Here are the companies they picked:

1. Wal-Mart
2. Nike
3. Walt Disney
4. Limited
5. L.A. Gear
6. Pentech
7. Gap
8. PepsiCo
9. Food Lion
10. Topps
11. Savannah Foods
12. IBM
13. NYNEX
14. Mobil

Notice anything? For the most part, these are all companies you should be familiar with, or at the very least have heard of (If you don’t know what “Topps” is,  they make trading cards).

Invest in What You Know

And that makes sense. If you’re a 12 year old kid and someone asks you to invest money in stocks, the first places you are going to look into are the ones you already know of. As this class proves, this can be a very smart method. Over a two year period, this portfolio made a 70% gain, beating the S&P 500 and 99% of all mutual funds at the time! If they had invested an actual $250,000 they would have turned that into $425,000 in just two years.

But Follow Guidelines

Of course, like any smart investor, there were guidelines they followed when making these choices. The portfolio had to contain at least 10 stocks, and they were only allowed to buy stock in a company if they could describe what that company did. The lesson here is simple – don’t invest in any business you don’t understand!

They also learned to research each company before they bought into it. They looked at earnings, how much debt it held, previous stock price growth, if it paid dividends, and the company leadership. So no, for all you nay-sayers out there, they didn’t just get lucky. They put the time and effort into making smart choices.

Does that mean every company in the portfolio was a winner? No. And that’s usually not the case. But that’s why a smart portfolio includes a good number of stocks from different industries (we call this diversification).

You Can Do it Too!

So why share this story with you? So what if a bunch of kids managed to make an imaginary portfolio that hit it out of the park? Well, the answer is because it doesn’t have to be imaginary. The principles these children used to put this all together are the same principles we believe in at Stock Squirrel. Invest in what you know, do your research, and make sure you are in this for the long haul. You don’t have to have an MBA and a fancy suit to be successful with investing.