How to Win the CNBC Million Dollar Challenge
May 13, 2008
|
|
|
|
|
|
I know many “experts” are writing on this very subject, but how many of them won one of the prizes last year? My guess is none. Well, except me. I won the very first week of the challenge last year, churning out a solid 73% gain in the week. Here’s how you should play this challenge, and it’s how I won last year.
It’s important to note that last year was slightly different; you could go “all-in” on one stock in your portfolio. This year, you cannot put more than 25% of your money in a single stock. This makes it a little bit more difficult, but still not impossible.
What many players don’t understand about this game is that it has absolutely nothing to do with investing, and everything to do with trading. For those of you who don’t understand the difference, let me try to explain. Investing is buying a portion of a company because you believe that it is currently undervalued, based on its prospects in the next few years/decades. Trading, however, has a much shorter time-frame associated with it and it has nothing to do with future prospects. Traders look for short term profits and that’s all.
The market is a fickle mistress, and stocks can fluctuate wildly in the short-term. This is what traders look for - volatility. Since the CNBC Million Dollar Portfolio Challenge awards winners based on highest returns in a weeks time - 5 trading days - you cannot possibly win without picking stocks with significant volatility. That’s why a trader’s frame of mind is how you need to approach this challenge. If you take the investing route, you will lose, because thousands are taking the trading route and at least one will outperform you.
So, how does one look for volatility? To understand the answer to this question, you must understand what creates volatility in a stock. There are two things that create volatility in a stock, but one stands head and shoulders above the other: news. But how do you find stocks that will be in the news in the near future? Are you a psychic?
In a one word answer, no. I am not a psychic. There are is only one way to make sure your stock will attract reporters; check out the list of companies that are reporting earnings on that day. These will likely be the most volatile. Of course there are other news stories that might generate massive volatility, such as mergers, buyouts, or other significant developments, but we cannot possibly predict those will occur in the next 5 days.
When looking for potential candidates, and to maximize volatility, you must narrow your search to those that have the following attributes:
- Between $500 million and $1 billion market capitalization
- Price per share under $15, preferably under $10; the lower the better
- Reporting earnings (be sure you time it correctly - if they report before the market opens, you want to own it the day before, if they report after the market closes, you can buy it that day)
Now, there’s some other factors to look for, but these are not requirements:
- High short interest (shares short divided by shares in float) as a percentage; the higher the better
- Ultra-volatile stocks that are heavily covered in the news (for example, bond insurers such as Ambac (ABK), MBI (MBI) etc…)
- Alternative energy or biotechnology stocks - these are especially volatile
So, get a list of all companies reporting earnings during the week you want to win. Develop a schedule for which you’ll buy at the beginning of the week and which you’ll buy for each day. What, you didn’t think you could win this without some work, did you?
For proof that this strategy works, check out Candadian Solar (CSIQ). It was up nearly 20% today because it met the criteria: it is an alternative energy company, it released earnings today, it’s market capitalization fell within the defined range, and it’s short interest is nearly 36%. That’s a recipe for extreme volatility.
These stocks will either fly high or crash to the ground. That’s the name of the game. You have 5 portfolios, so try out different combinations of each. Roll the dice and have some fun.
I’m sure you all will ask me about the currency portion of the contest, but unfortunately I do not know enough about forex to write anything intelligible. My suggestion is just go all in on one currency pair and see what happens.
If you are interested in learning more about how to invest rather than trade, I suggest you take a look at the Investment Advisor Newsletter Service we provide. We utilize a long-term approach that blows trading away over the long haul.
More investing goodness:
- Beware of the Financial Value Trap
- Merrill Lynch Level III Assets Jump 68%
- Morgan Stanley: Sell the Rally in Financials
FreundInvesting.com contributor, Ryan Freund, is ranked 84 out of over 100,000 investors in the Motley Fool CAPS game. He does not own any shares in any of the companies mentioned. You can track him on CAPS under the username FreundInvesting. FreundInvesting.com has a million dollar Disclosure Policy.
Comments
One Response to “How to Win the CNBC Million Dollar Challenge”
Got something to say?
You must be logged in to post a comment.
-
Advertisement
[…] How to Win the CNBC Million Dollar Challenge […]