Two months ago my Foolish colleague Bill Barker laid out a 10-step strategy to win the CNBC Million Dollar Portfolio Giveaway. His strategy of concentrating on low-priced, very small cap stocks poised to announce earnings so as to capture their volatility was an admittedly risky approach to investing. We certainly don't advocate investing this way in real life. However, for a game giving away some big bucks, I figured it was worth a try.
Don't try this at home
As I originally noted, I screened for the smallest cap companies permissible ($500 million or more) whose stocks were trading below $10 a share and all showed relatively high levels of short interest. Bill suggested delving into biotechs since they often showed the greatest price fluctuations, but I opted to find companies where they lay.
Turns out I might have done better had I followed Bill's suggestions a little more closely because my average return of the five portfolios I created was a loss of 11%. Putting some of the worst stocks in the world like home builder Champion Enterprises (NYSE:CHB) and financial stocks like Citizens Republic Bancorp (NASDAQ:CRBC) might not have been the best option.
However, as the market rallied last week most of my portfolios improved so that I actually ended up with a slight gain in Portfolio No. 1. The rest of my portfolios were rather dismal with Portfolio No. 3 ending off more than 34%.
Perhaps had the contest gone on a little longer I might have had a better chance. For example, VeraSun Energy (NYSE:VSE) was upgraded on Friday by an analyst which pushed shares higher and they're trading an additional 10% higher today.
What I found this exercise to show was what Foolish pundits have been expressing for a long time which is trying to make short term profits by trading in and out of small caps is indeed a risky business. Even with larger companies, there's no need to trade them today. Playing the ups and downs of a volatile market can be hazardous to your financial health while buying for the long term can give your portfolio stability.
While some traders may occasionally make a mint on their trades -- and my hat's off to the winners of the CNBC challenge -- it's a much more difficult task to do it on a consistent basis. In the end, I'm glad I didn't invest this way, and CNBC -- you can keep your money!
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