The Best Stock-Picking Strategy

Unorthodox and novelty stock-picking theories abound. For instance, the "catchy symbol theory" posits that companies with subjectively clever ticker symbols, like Flextronics (Nasdaq: FLEX  ) , CDC (Nasdaq: CHINA  ) , and Avis Budget Group (NYSE: CAR  ) will outperform, because people have an easier time remembering and identifying the stock.

But my favorite might be the "CEO handicap theory," which supposes that stocks whose CEOs have low golf handicaps will outperform the market. (Note to non-golfers: Lower is better).

Yeah, they did it in Superman III
Back in May 1998, The New York Times looked at Golf Digest's list of top-golfing CEOs, and found that "executives whose companies delivered the best stock market performance over the past three years also had the best average handicap index."

At first glance, this could make a little sense. After all, golf is a game of focus and self-discipline, certainly two skills you'd like your company's CEO to possess.

But at some point, you have to wonder how much time your CEO is spending on his or her short game relative to increasing long-term shareholder value -- which should be the top professional priority.

For instance, two of the top CEO golfers in 1998, Scott McNealy of Sun Microsystems and William Dillard II of Dillard's, could boast an impressive combination of single-digit handicaps and companies with a lot of growth potential.

Unfortunately, while both executives may still shoot in the 70s, neither stock has done much for shareholders. Since June 1998, Sun Microsystems is down 25% and Dillard's is down 58%. Other tech stocks of the era, like Cisco Systems (Nasdaq: CSCO  ) and Taiwan Semiconductor (NYSE: TSM  ) , as well as retailers like Chico's FAS (NYSE: CHS  ) and American Eagle Outfitters (NYSE: AEO  ) , have been much better investments.  

For what it's worth, back in 1998, Bill Gates and Warren Buffett posted 23 and 22 handicaps, respectively, which means they're like most of us -- weekend hackers trying to break 100.

Take a mulligan
Instead of following stock-picking strategies based on catchy ticker symbols, golfing CEOs, or Beatles' lyrics played backward, fall back on the timeless stock-picking methods that have worked for great investors like Buffett and Peter Lynch.

Among other things, look for stocks that are:

  1. Built to last 100 years or more.
  2. Dominating growing industries.
  3. Helmed by committed and proven management teams.
  4. Governed by the highest corporate values.
  5. Consistently increasing shareholder value.

These are the kind of companies that Motley Fool co-founders Tom and David Gardner use to pick stocks in Motley Fool Stock Advisor. They don't rely on gimmicks or superstition (although David does have a 12-sided die); they focus on great companies whose stocks are trading at attractive prices.

Those stock recommendations are up 59% since the newsletter's inception in 2002, versus 22% for like amounts invested in the S&P 500. If you'd like to learn more about the Stock Advisor service, a 30-day free trial is on us. To take advantage of the offer, click here.

This article was originally published on Sept. 4, 2007. It has been updated.

Fool contributor Todd Wenning's last golf outing resulted in 10 lost golf balls and a dented Honda Pilot. He does not own shares of any company mentioned. The Motley Fool owns shares of American Eagle, which is also a Stock Advisor choice. The Fool's disclosure policy has total consciousness going for it, which is nice.


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