The stock market is not so much driven on company performance anymore. It’s mostly based on perception. If a lot of people perceive that a company is good they’ll buy the stock and the stock will go up.
So I’ve devised a stock picking method I call “Betting on the Herd.” The first step is to identify which stocks closed up yesterday. Those are the stocks people will be looking at today. The theory is that yesterday’s herd is going to continue running today for some amount of time.
It turns out, checking stock history data, that 100% of a sample of stocks priced between $5 and $20 that closed up two days ago hit a high the next day greater than the opening price. 60% hit a high greater than 1%.
The trick of course, is recognizing a herd and knowing when to break from it. Most people want to ride a wave until it hits its mythical peak. I prefer to pick a percentage and take my money when it’s met. Let’s say stock A closed up yesterday. I buy it. The herd continues and I make 1% so I sell. Turns out it was a stampede and the stock closes up. The next day I can buy it again and collect another 1%. In two days I earned and pocketed a 2% gain. Even if on average the stock is going down.
It’s a rare stock that gains 300% in a year. Every day there are stocks gaining a percent. By taking those small daily gains from a wide variety of random stocks, I’m far more likely to end up with a larger return than trying to find a few stocks that go up 10 or 20% for the year.
The other issue with betting on the herd is that you need a lot of money to start. With a $9.99 transaction fee through TD Ameritrade you need to invest around $4000 just to be able to break even on a 0.5% gain. The lowest next day gain after closing up the prior day.
